SERVISFIRST BANCSHARES, INC.
2500 Woodcrest Place
Birmingham, Alabama 35209
April 2, 2018
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 company’s corporate headquarters, located at 2500 Woodcrest Place, Birmingham, Alabama 35209,
on May 15, 2018, at 9:00 a.m., Central Daylight Time.
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, 2017.
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) the ratification of the appointment of Dixon Hughes Goodman LLP as our independent registered
public accounting firm for the year ending December 31, 2018; and (4) 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; and “FOR” the ratification of the appointment of Dixon
Hughes Goodman LLP as our independent registered public accounting firm for the year ending December 31, 2018.
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.
The proxy materials are first being made available to stockholders on April 2, 2018.
Sincerely,
Thomas A. Broughton III
Director, President and Chief Executive Officer
SERVISFIRST BANCSHARES, INC.
2500 Woodcrest Place
Birmingham, Alabama 35209
NOTICE OF 2018 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 15, 2018
To Our Stockholders:
Notice is hereby given that our Annual Meeting of Stockholders will be held at the company’s corporate headquarters, located at
2500 Woodcrest Place, Birmingham, Alabama 35209, on Tuesday, May 15, 2018, at 9:00 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 ratify the appointment of Dixon Hughes Goodman LLP as our independent registered public accounting firm for the year
ending December 31, 2018; and
4. 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, and “FOR” the ratification of the appointment of Dixon Hughes Goodman LLP as our
independent registered public accounting firm for the year ending December 31, 2018. 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 company’s corporate headquarters, are available at
www.edocumentview.com/SFBS.
Stockholders of record as of the close of business on March 16, 2018 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 April 2, 2018.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE STOCKHOLDER MEETING TO BE HELD MAY 15, 2018:
Our Proxy Statement, form of proxy and 2017 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
April 2, 2018
This Page Intentionally Left Blank
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 qualifications may be found on page 1.
Name
Age
Director
Since
Primary Occupation
Independent AC CC CGNC
Committee
Memberships
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
63
2007
President of Double Oak Water Reclamation
James J. Filler
73
2007
Retired Chief Executive Officer of Jefferson Iron & Metal
Brokerage, Inc.
J. Richard Cashio
59
2007
Retired Chief Executive Officer of TASSCO, LLC
Hatton C. V. Smith
AC: Audit Committee CC: Compensation Committee CGNC: Corporate Governance & Nominations Committee
President of National Accounts, Royal Cup Coffee
66
2007
✓
✓
✓
✓
✓
Committee Chair Committee Member
Financial Expert
Proposal 2:
Advisory Vote on Executive
Compensation
2
3
Proposal 3:
Ratify Appointment of the
Independent Registered Public
Accounting Firm
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 FOR
the resolution.
Additional information about the independent registered
public accounting firm may be found on page 26.
TABLE OF CONTENTS
PROPOSAL 1: ELECTION OF DIRECTORS ...............................................................................................................
CORPORATE GOVERNANCE ......................................................................................................................................
Recent Corporate Governance Initiatives .............................................................................................................................
Other Governance Practices .................................................................................................................................................
Board Independence .............................................................................................................................................................
The Role of Our Board of Directors .....................................................................................................................................
Board Committees and Their Functions ...............................................................................................................................
Certain Relationships and Related Transactions ..................................................................................................................
Code of Conduct for Directors and Employees ....................................................................................................................
Communications with the Board ..........................................................................................................................................
DIRECTOR COMPENSATION ......................................................................................................................................
Director Compensation for Fiscal 2017 ...............................................................................................................................
OWNERSHIP OF SERVISFIRST COMMON STOCK BY DIRECTORS, OFFICERS AND CERTAIN
BENEFICIAL OWNERS ..................................................................................................................................................
Section 16(a) Beneficial Ownership Reporting Compliance................................................................................................
PROPOSAL 2: ADVISORY VOTE ON EXECUTIVE COMPENSATION ................................................................
EXECUTIVE COMPENSATION ....................................................................................................................................
Compensation Discussion and Analysis ...............................................................................................................................
Compensation Committee Report ........................................................................................................................................
Summary Compensation Table ............................................................................................................................................
Grants of Plan-Based Awards for Fiscal 2017 .....................................................................................................................
Outstanding Equity Awards at 2017 Fiscal Year-End ..........................................................................................................
Option Exercises and Stock Vested for Fiscal 2017 .............................................................................................................
Pension Benefits ...................................................................................................................................................................
Nonqualified Deferred Compensation ..................................................................................................................................
Effect of Compensation Policies and Practices on Risk Management and Risk-Taking Incentives ....................................
Potential Payments Upon Termination or Change in Control ..............................................................................................
PROPOSAL 3: RATIFY APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ...................................................................................................................................................................................
Independent Registered Public Accounting Firm Fees ........................................................................................................
Audit Committee Report ......................................................................................................................................................
GENERAL INFORMATION ...........................................................................................................................................
Other Business .....................................................................................................................................................................
Questions and Answers About the 2018 Annual Meeting and Voting .................................................................................
Stockholder Proposals ..........................................................................................................................................................
Solicitation of Proxies ..........................................................................................................................................................
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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 2019 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
2018 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:
Primary Occupation
Independent AC
Committee Memberships
CGNC
CC
Name
Thomas A. Broughton III
Age
62
Stanley M. Brock
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C. V. Smith
67
64
74
60
67
Director
Since
2007
2007
President, Chief Executive Officer and Director of
ServisFirst Bancshares, Inc. and ServisFirst Bank
Chairman of ServisFirst Bancshares, Inc. and
ServisFirst Bank; President of Brock Investment Company, Ltd.
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]
[C][M]
[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.
Thomas A. Broughton III
Age: 62
Committees: None
Position: President, CEO and Director
Director Since: 2007
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.
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 1
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: 67
Committees: Audit; Corporate Governance and
Nominations (Chair)
Position: Chairman of the Board and
Director
Director Since: 2007
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 currently serves on the Company’s Audit Committee and Corporate
Governance and Nominations Committee. 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, commercial and real estate 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 an
attorney 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: 64
Committees: Audit (Chair); Corporate
Governance and Nominations
Position: Director
Director Since: 2007
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: 60
Committees: Audit; Compensation; Corporate
Governance and Nominations
Position: Director
Director Since: 2007
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.
James J. Filler
Age: 74
Committees: Compensation
Position: Director
Director Since: 2007
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.
2 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
Hatton C. V. Smith
Age: 67
Committees: Compensation (Chair)
Position: Director
Director Since: 2007
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.
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 2016 we adopted a director resignation policy. We did not make any changes
to our corporate governance policies and procedures in 2017.
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.
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 3
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 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.
4 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
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, 2017, 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 over 90 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 40 times his annual base salary. Mr. Owens retired from his position as Chief Credit
Officer of the company and the bank, effective March 31, 2018.
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 that 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 own 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.
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.
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 5
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 and 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 (see “Certain Relationships and Related Transactions” for a list of other relationships the Board considered
when determining independence).
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
While 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.
In addition, our audit committee assists the board in overseeing and monitoring management’s conduct of our financial reporting
process and system of internal accounting and financial controls, and our compensation committee oversees the management of
risks relating to executive and non-executive compensation.
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 2018 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.
Audit Committee
Compensation Committee
Corporate Governance &
Nominations Committee
Name(1)
Stanley M. Brock
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C. V. Smith
Committee Chair
Committee Member
Financial Expert
(1) Mr. Broughton is not independent and therefore does not serve on any committee.
Audit Committee
Number of meetings in 2017: 5
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.
Compensation Committee
Number of meetings in 2017: 4
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
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 7
• 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 2017: 2
Functions:
•
Identifies individuals believed to be qualified to become board members, and selects or recommends to the board, the
nominees to stand for election as directors;
• 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 considers candidates for director who are recommended by its members, by other board members, and
by management. 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. The CG&N Committee will evaluate candidates recommended by shareholders using the same criteria as
for other candidates recommended by its members, other members of the board, or management. No stockholder nominations or
recommendations 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.
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:
8 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
Atlanta Region
J. Paul Austin, III
Jeffrey B. Baker
Mike Casey
Paul Conley
John Loud
Zach Parker
Brent Reid
Charleston Region
Peter McKellar
Chris Mettler
Weesie Newton
Skip Sawin
Daniel Vallini
Dothan Region
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 Mathis
David J. Slyman, Jr.
Irma Tuder
Sidney R. White
Danny J. Windham
Thomas J. Young
Steve Crawford
Lowell Friedman
Barry Gritter
Dr. James M. Harrison, Jr.
James Henderson
Richard D. Inge
Kenneth S. Johnson
John H. Lewis, Jr.
Nashville Region
Pensacola Region
Dr. John A. Jernigan
Ray B. Petty
Edward M. Stivers III
G.L. Pete Taylor
W. Ken Upchurch, III
Alan E. Weil, Jr.
Charles Robert Bone
Joe Cashia
Ryan Chapman
Brent Clements
Todd Robinson
Thomas M. Bizzell
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.”
Director Attendance
Our board of directors held 12 meetings in 2017. 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 2017 Annual Meeting other than Messrs. Cashio 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, and the two lease
arrangements described below. 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.
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 9
The aggregate amount of indebtedness from our directors and executive officers (including their affiliates) to the bank as of
December 31, 2017 was approximately $8.4 million, which equaled 1.38% of our total equity capital as of that date. 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.
In addition to banking transactions made in the ordinary course of business, the company leased office space in its corporate
headquarters to two separate related parties in 2017. Prior to entering into each such lease, the company obtained, and the Board
considered, a market reasonableness study, and the Board, other than the related parties, approved such leases on terms consistent
with the results of the market reasonableness study.
Pursuant to one such lease, the company agreed to lease approximately 662 square feet in its headquarters to Brock Investment
Company, Ltd., a company controlled by Mr. Stanley M. Brock, Chairman of the company, for five years at $26.00 per square
foot, subject to a 1.5% annual escalation, plus a utilities and overhead fee equal to 10% of the rental rate. The lease additionally
includes a tenant improvement allowance of $75 per square foot. The approximate dollar value of the amount involved in the
transaction, and the amount of the related person’s interest in the transaction, is estimated to be $147,150, approximately $97,500
of which is equal to the amount of all payments due under such lease on or after January 1, 2017, and $49,650, the aggregate
amount of the tenant improvement allowance. The amount of the related person’s interest in the transaction is estimated to be
approximately $72,500. Under the terms of the second lease, the company agreed to lease an office of approximately 120 square
feet to Mr. Michael D. Fuller, a director of the Company, on a month-to-month basis at $26.00 per square foot, subject to 1.5%
annual escalations, plus a utilities and overhead fee equal to 10% of the rental rate.
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., 2500 Woodcrest Place, 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.
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 16, 2018, our five non-employee directors
beneficially owned, collectively, approximately 8.9% of our outstanding common stock. As a result of the substantial ownership
of our common stock by each of our directors, we did not grant any stock options or other equity-based incentive compensation
for our directors in 2017. We seek 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. Effective July 1, 2017, directors are paid $600
for each board meeting or board event attended, $500 for each committee meeting attended, and $250 for each committee meeting
attended that occurs on the same day as a full board meeting. Mr. Broughton is a named executive officer, and his compensation
is reflected in the Summary Compensation Table.
10 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
Director Compensation for Fiscal 2017
The following table sets forth information regarding the compensation of our non-employee directors for the year ended
December 31, 2017.
Name
(a)
Stanley M. Brock, Chairman of the Board
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C. V. Smith
Fees earned
or paid in
cash
(b)
($)
29,200(1)
28,950(1)
22,700
23,600(1)
22,700
Option
Awards
(d)
($)
0
0
0
0
0
Total
(h)
($)
29,200 (1)
28,950 (1)
22,700
23,600 (1)
22,700
(1)
Includes $500 that will be paid to each audit committee member in 2018 for an audit committee meeting that took place in 2017.
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 16, 2018 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.(3)
55 East 52nd Street
New York, NY 10055
The Vanguard Group(5)
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
Percentage of Outstanding
Common Stock (%)(2)
5,709,244 (4)
10.8%
4,244,087 (4)
8.01%
1,068,830 (6)(7)
861,322 (6)(8)
1,350,040 (6)(9)
1,353,152 (6)(10)
728,899 (6)(11)
422,994 (6)(12)
373,502 (13)
719,116 (14)
451,700 (15)
6,000
7,335,555 (16)
1.98%
1.60%
2.51%
2.51%
1.35%
*
*
1.34%
*
*
13.62%
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 11
___________________
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Indicates ownership of less than 1% of outstanding common stock.
The address for all directors and executive officers is 2500 Woodcrest Place, Birmingham, Alabama 35209.
Except as otherwise noted herein, the percentage is determined on the basis of 53,136,419 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/A filed January 19, 2018, Blackrock, Inc. reported having sole power to vote or to direct the vote of 5,606,743 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 5,709,244 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/A filed by Blackrock, Inc.
Reflects shares reported on Schedule 13G/A as beneficially owned as of December 31, 2017.
In a Schedule 13G/A filed February 9, 2018, The Vanguard Group reported having sole power to vote or direct the vote of 89,661 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 4,154,748 shares of
common stock and shared power to dispose or to direct the disposition of 89,339 shares of common stock. All information in this footnote was
obtained from the Schedule 13G/A filed by The Vanguard Group.
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 of common stock owned by his spouse and 14,290 shares of common stock owned by his two stepchildren. Includes an option
granted to Mr. Broughton on November 28, 2011 to purchase 40,000 shares of common stock for $5.00 per share which vested 100% after five years.
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 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 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.
Includes an option granted to Mr. Brock on November 28, 2011 to purchase 30,000 shares of common stock for $5.00 per share which vested 100%
after five years.
Includes 91,500 shares of common stock held by Mr. Fuller’s spouse, and 849,936 shares of common stock 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 to ServisFirst Bank.
Includes an option granted to Mr. Filler on November 28, 2011 to purchase 40,000 shares of common stock for $5.00 per share which vested 100%
after five years.
Does not include 28,752 shares owned by Mr. Cashio’s adult daughter. Includes 184,000 shares of common stock held by Mr. Cashio’s spouse. Mr.
Cashio disclaims beneficial ownership of all shares not directly owned by him.
Includes an option granted to Mr. Smith on November 28, 2011 to purchase 60,000 shares of common stock for $5.00 per share which vested 100%
after five years. Mr. Smith has pledged 96,999 shares to ServisFirst Bank, as security for a line of credit.
12 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
(13)
(14)
(15)
(16)
Includes 24,000 share 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 Lincoln Financial and 53,468 shares to Morgan Stanley.
Includes 19,114 shares of common stock 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 the common stock held by the trust except to the extent of his pecuniary
interest therein.
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. Includes an option to purchase 112,500 shares of common stock for $5.00 per share granted on March 21, 2011, which vested
100% on March 21, 2016.
Includes 312,500 shares obtainable within 60 days pursuant to the exercise of outstanding options or warrants.
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. Kenneth L. Barber amended his Form 3 filing on March 9, 2017,
disclosing the receipt by Mr. Barber’s spouse of 18,172 previously undisclosed shares of common stock issued in connection
with the acquisition of Metro Bank in 2015, and disclosing the receipt by a joint tenancy in which Mr. Barber’s spouse is a
member of 1,038 previously undisclosed shares of common stock issued in connection with the acquisition of Metro Bank in
2015; (ii) Mr. Stanley M. Brock had a late Form 4 filing on June 9, 2017 with respect to the exercise of 30,000 stock options at
an exercise price of $5 on June 1, 2017; (iii) Mr. Clarence C. Pouncey III had a late Form 4 filing on March 13, 2017 with respect
to the disposition of common stock by LeCroy Properties, Ltd., an entity in which Mr. Pouncey’s spouse owns a 33 1/3% interest,
on February 14, 2017; and (iv) Mr. Kenneth L. Barber had a late Form 4 filing on March 9, 2017 with respect to the disposition
of 21,073 shares of common stock of the Company that occurred on March 1, 2017.
SERVISFIRST BANCSHARES, INC. – Notice of 2018 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. In 2017, our stockholders approved an annual advisory vote. At the 2017 Annual
Meeting, approximately 98% of the votes cast (which excludes broker non-votes) were in approval of 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. See “Compensation Discussion and Analysis” for a detailed discussion of our
executive compensation practices, philosophy and objectives.
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 2018 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.
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 2017. Our “named executive officers” in 2017 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 20 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 five 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 $41.6 million in 2013 to approximately $93.1 million in 2017 —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.
14 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
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.
The Compensation Committee believes that executive compensation packages should include cash, annual short-term cash
incentives and, when appropriate, 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.
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 15
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 2017, but it plans to consider
retaining 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.
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:
16 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
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 2017, an average of 41.54% 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 2017. 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:
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 17
Named Executive Officer
Percentage of Total Compensation
(Fiscal Year 2017)
Annual
Base
Salary
Annual
Short Term
Cash
Incentives
Equity-
Based
Incentives
Perquisites
and
Benefits
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
38.25% 56.25%
59.40% 34.10%
59.15% 35.49%
58.21% 35.00%
72.75% 18.36%
0%
0%
0%
0%
0%
5.50%
6.49%
5.36%
6.79%
8.89%
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 2017 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.
Chief Executive Officer Pay Ratio
Rules adopted by the SEC following passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act require us to
provide a reasonable estimate of the ratio of the annual total compensation of our Chief Executive Officer to the median annual
total compensation of our employees. We identified our median employee by comparison of all salary, matching contributions
to our 401(k) plan, annual incentive compensation, long-term incentive awards vested in 2017 and the Company’s payment of
insurance premiums and provision of other perquisites, as reported to the Internal Revenue Service on Form W-2 for 2017 for
all of our employees (excluding our Chief Executive Officer) as of December 31, 2017. As further detailed in the paragraphs and
Summary Compensation Table below, Mr. Broughton’s total annual compensation in fiscal 2017 was $1,111,113. The company
has determined that the median annual compensation for all company employees, excluding Mr. Broughton, as of the same date
was approximately $59,971. Accordingly, we believe that the ratio of the annual total compensation of Mr. Broughton, our Chief
Executive Officer, to the median of the annual total compensation of all our employees in 2017 was 18.53 to 1.
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, 2017, the Compensation Committee increased the base salaries of our named executive officers
as follows:
• CEO: To $425,000 from $400,000, an increase of 6.25%;
• CFO: To $270,000 from $255,000, an increase of 5.88%;
• COO: To $300,000 from $286,000, an increase of 4.90%;
• Executive for Correspondent Banking: To $286,000 from $273,000, an increase of 4.76%; and
• CCO: To $210,000, from $203,000, an increase of 3.45%.
18 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
None of our named executive officers have employment agreements, although two of our named executive officers have change
in control 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, 2017, the Compensation Committee relied on various performance measurements for
determining 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 2017, 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.
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 2017. Accordingly, for the year ended December 31, 2017 and based
upon the attainment of the specific objective numerical targets, our overall performance and such officers’ individual performance
for 2017, 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 2017 performance.
Name
Thomas A. Broughton III
William M. Foshee
Clarence C. Pouncey III
Rodney E. Rushing
Don G. Owens
2017 Incentive
Range (%)
None
0%-60%
0%-60%
0%-60%
0%-30%
2017 Incentive as
a Percentage of
Base Salary (%)
147.06%
57.41%
60.00%
60.14%
25.24%
2017 Incentive
Paid ($)
$625,000
$155,000
$180,000
$172,000
$ 53,000
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 19
Equity-Based Incentive Compensation
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, 2017. 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, 2017.
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.
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, such director 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, and it
reflects our board’s strong commitment to the company’s success. For more information, see “Corporate 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, 2017 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 2018 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 2018 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)
Year
(b)
Salary
(c)
($)
Bonus
(d)
($)
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
___________________
425,000 625,000
2017
400,000 500,000
2016
375,000 475,000
2015
2017
300,000 180,000
2016 286,000 180,000
2015 275,000 165,000
2017
270,000 155,000
2016 255,000 165,000
2015 245,000 150,000
2017
286,000 172,000
2016 273,000 164,000
2015 260,000 130,000
210,000 53,000
2017
2016 203,000 60,000
2015 194,688 58,000
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)
($)
61,113(2)
61,076
59,486
27,177(3)
26,517
26,358
29,510(4)
29,510
29,355
33,361(5)
33,274
29,291
25,649 (6)
25,603
24,755
Total
(j)
($)
1,111,113
961,076
1,045,811
507,177
492,517
466,358
454,510
449,510
424,355
491,361
470,274
419,291
288,649
288,603
277,443
(1)
(2)
(3)
(4)
(5)
(6)
The amount in this column reflects the aggregate grant date fair value under FASB ASC Topic 718 of awards made during the applicable year.
All Other Compensation for 2017 includes car allowance ($9,000), director’s fees ($22,200), country club allowance ($8,180), 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.
All Other Compensation for 2017 includes car allowance ($9,000), country club allowance ($8,518), group life and long-term disability insurance
premiums ($1,421) and healthcare premiums ($8,598).
All Other Compensation for 2017 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).
All Other Compensation for 2017 includes car allowance ($9,000), healthcare premiums ($9,663), matching contributions to 401(k) plan ($9,902),
group life and long-term disability insurance premiums ($1,376) and club dues ($3,420).
All Other Compensation for 2017 includes car allowance ($5,400), healthcare premiums ($8,598), matching contributions to 401(k) plan ($10,600)
and group life and long-term disability insurance premiums ($1,052).
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 21
Grants of Plan-Based Awards for Fiscal 2017
The company did not make any grants of plan-based awards to our named executive officers during 2017.
Outstanding Equity Awards at 2017 Fiscal Year-End
The below table details all outstanding equity awards as of December 31, 2017. Equity awards identified below that were issued
prior to March 22, 2011 were granted under our 2005 Stock Incentive Plan and all other equity awards identified below were
granted under our 2009 Amended and Restated Stock Incentive Plan.
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have
Not
Vested
($)
(j)
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
(i)
Number of
securities
underlying
unexercised
options (#)
Exercisable
(b)
40,000
-
-
30,000
15,000
15,000
-
112,500
-
-
Number of
Securities
underlying
unexercised
options (#)
Unexercisable
(c)
-
20,000
13,000
-
-
-
-
-
15,000
-
Name
(a)
Thomas A. Broughton III (CEO) (1)
William M. Foshee (CFO) (2)
Clarence C. Pouncey III
Rodney E. Rushing (3)
Don G. Owens
___________________
Number
of
Shares or
Units of
Stock
That
Have Not
Vested
(#)
(g)
Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
($)
(h)
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
(d)
-
-
-
Option
exercise
price
($)
(e)
5.00
15.085
18.57
Option
expiration
date
(f)
$
11/28/2021
01/20/2025
$
06/15/2023
$
$ 4.165 2/16/2020
$ 4.165 1/19/2021
$ 5.00 2/21/2022
-
5.00
$
6.915
$
-
-
03/21/2021
02/10/2024
-
-
-
-
-
-
-
-
(1)
(2)
(3)
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 20,000 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. Mr. Rushing
exercised his option to acquire 37,500 of such shares on January 31, 2018. The option to purchase 15,000 shares at $6.915 per share granted to Mr.
Rushing on February 10, 2014 vests 100% on February 10, 2021. Share numbers and exercise price reflect 3-for-1 stock split that occurred on July
16, 2014 and 2-for-1 stock split that occurred on December 20, 2016.
22 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
Option Exercises and Stock Vested for Fiscal 2017
The following table sets forth information regarding option exercises by and restricted stock vesting for our named executive
officers during 2017:
Name
(a)
Thomas A. Broughton III(1)
William M. Foshee
Clarence C. Pouncey III
Rodney E. Rushing
Don G. Owens
___________________
Option Awards
Stock Awards
Number of
Shares Acquired
on Exercise (#)
(b)
Value Realized
on Exercise ($)
(c)
Number of Shares
Acquired
on Vesting (#)
(d)
Value Realized
on Vesting ($)
(e)
10,000
-
-
-
-
$
369,500
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1)
Mr. Broughton exercised options for 10,000 shares at a price of $5.00 per share. Based upon a value of $41.95 per share, the closing price of the
company’s common stock on the date of exercise, the value realized by Mr. Broughton on the exercise of such options was $369,500.
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.
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 23
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.
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.
24 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
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.
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, 2017, 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
Foshee
$
286,000 $
510,000
Furthermore, assuming we had a change in control as of December 31, 2017, as defined in either of our stock incentive plans,
and further assuming that the value of the stock as of that date was $41.50 per share (the closing price on December 29, 2017,
the last day in 2017 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
$41.50 per share and their respective exercise prices per share:
Name
Broughton
Pouncey
Foshee
Rushing
Owens
Shares Represented by
Unvested Options
(#)
33,000
-
-
15,000
-
Value of
Unvested Options
($)
692,410
-
-
457,875
-
$
$
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 25
PROPOSAL 3: 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, 2018.
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 affords stockholders an opportunity 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, 2018.
Independent Registered Public Accounting Firm
Our consolidated balance sheet as of December 31, 2017, and the related consolidated statements of income, comprehensive
income, stockholders’ equity and cash flows for the year ended December 31, 2017 have been audited by Dixon Hughes
Goodman LLP, our independent registered public accounting firm, as stated in their report appearing in our 2017 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, 2017. 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
___________________
2017
2016
$ 376,300 (1)
52,800 (2)
$
30,300 (3)
$
50,900 (4)
$
$ 409,325 (1)
8,700 (5)
$
55,250 (6)
$
38,650 (4)
$
(1) Consists of fees incurred in connection with the audit of the company’s financial statements, audit of real estate investment trusts, with the review of
quarterly financial statements, and SEC filings.
(2) Consists of fees incurred in connection with the audit of the company’s FHA lending program, 401(k) plan, and certain Tennessee public fund
pledging.
(3) Consists of fees incurred in connection with tax return filings for the year ended 2016, review of accounting for deferred income taxes, state income
tax carryforwards, investments in tax credit partnerships and tax withholdings and ordinary income treatment for stock option recipients.
26 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
(4) Consists of fees incurred in connection with an assessment of loan operations process and workflow (2016 and 2017), a cost segregation study of the
company’s new headquarters building in Birmingham, Alabama and agreed upon procedures performed for a special project related to a specific
client (2017).
(5) 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.
(6) 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.
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, 2017.
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, 2017 be included in the company’s Annual Report on Form
10-K for the year ended December 31, 2017.
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
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 27
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 2018 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 2018 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) the ratification of Dixon Hughes Goodman LLP as our independent public accounting firm for the year ending
December 31, 2017; and (4) such other business as may properly come before the Annual Meeting. Our board of directors is not
aware of any matters that will be brought before the Annual Meeting, other than procedural matters, that are not listed above.
However, if any other matters properly come before the Annual Meeting, the individuals named on the proxy card, or their
substitutes, will be authorized to vote on those matters in their own judgment.
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 16, 2018, 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, 53,136,419 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 2018 Annual Meeting, but you must request a legal proxy from your broker or
nominee and bring it to the Annual Meeting.
28 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
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 1-800-652-8683 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 2018 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 received 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 11, 2018.
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 2018 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 2018 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 2018 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 11, 2018.
How many shares must be present to hold the 2018 Annual Meeting?
More than one-half of the Company’s outstanding common stock as of the record date must be represented at the 2018 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;
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 29
• 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.
As of the record date, 53,136,419 shares of our common stock, $0.001 par value per share, held by 543 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.
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. The election of directors and
the advisory vote on executive compensation are considered “non-routine” matters on which a broker may not 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 April 2, 2018, 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; and (3) “FOR” the ratification of Dixon Hughes Goodman LLP as our
independent registered public accounting firm for 2018, as more fully described in Proposal 3.
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 3.
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.
30 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
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, 2017, as well as handling and tabulating the proxies returned. 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, 2500 Woodcrest Place,
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, 2017 (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 16, 2018, 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 2019
Annual Meeting of Stockholders must provide the company with a written copy of that proposal by no later than December 3,
2018, which is 120 days before the first anniversary of the date on which the company’s proxy materials for the 2018 Annual
Meeting were first made available to stockholders. However, if the date of our Annual Meeting in 2019 changes by more than
30 days from the date of our 2018 Annual Meeting, then the deadline would be a reasonable time before we begin distributing
our proxy materials for our 2019 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 2019 Annual Meeting without including such proposal in the company’s
proxy statement, the stockholder must notify the company in writing on or before February 16, 2019.
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.
SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement 31
Solicitation of Proxies
Our board of directors solicits the accompanying proxy for use at our Annual Meeting of Stockholders to be held on Tuesday,
May 15, 2018, at 9:00 a.m., Central Daylight Time, at 2500 Woodcrest Place, Birmingham, Alabama 35209. The Notice of
Annual Meeting of Stockholders and this Proxy Statement are being made available on or about April 2, 2018 to our stockholders
of record as of the close of business on March 16, 2018, the record date for the Annual Meeting.
Our corporate headquarters is located at 2500 Woodcrest Place, 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
April 2, 2018
32 SERVISFIRST BANCSHARES, INC. – Notice of 2018 Annual Meeting of Stockholders and Proxy Statement
Our Name is Our Mission
2017 Annual Report
ServisFirst Bank
www.servisfirstbank.com
ServisFirst Bancshares
http://servisfirstbancshares.investorroom.com/
Atlanta ▪ Birmingham ▪ Charleston ▪ Dothan ▪ Huntsville ▪ Mobile ▪ Montgomery ▪ Nashville ▪ Pensacola ▪ Tampa
April 2, 2018
Dear Fellow Shareholder,
We are pleased to report a year of record growth in net income per share, loans and deposits, while
maintaining excellent credit quality. Results were reduced in the fourth quarter due to the change in federal tax rates, and
our Chief Financial Officer, Bud Foshee, and his team worked hard to reduce the amount of the deferred tax asset write-off.
We were also able to announce a 120% increase in our quarterly cash dividend. We are working to continue to support
growth through internally generated funds without the need for additional debt or equity issuances.
Based on historical performance, our stock is valued at the higher levels of price to earnings and price to book in
our industry. This prompts the question from investors as to why we don’t make acquisitions, and our answer has been that
our organic growth has been excellent and consistent, eliminating the need or desire to make acquisitions.
We have only made one acquisition, with the acquisition of the bank in the Atlanta market, which was less than
$200 Million in assets at the time, so the balance of our $7 Billion in assets is from organic growth. Historically, acquisitions
were made where the thought was that a merger of two banks would lead to greater growth than the two banks on a
standalone basis. Today, many of the acquisitions appear to be financial engineering rather than a good strategic fit. We
think that organic growth is less risky than growth through acquisitions, but we continue to evaluate and assess potential
acquisitions. The criteria would be that the bank must be a good cultural fit and have greater growth prospects than our
bank. Those two criteria eliminate most of the banks we evaluate.
Our goal is not to grow for growth’s sake, but to focus on increasing shareholder value. We appreciate your
investment in our Company and we welcome any feedback or comments. As always, we value your support and appreciate
customer referrals.
Sincerely,
Thomas A. Broughton III
President & CEO
W‐2
Total Return Performance
800
700
600
ServisFirst Bancshares,
Inc.
NASDAQ Composite
NASDAQ Bank
500
400
e
u
l
a
V
x
e
d
n
I
300
200
100
0
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
Index:
ServisFirst Bancshares, Inc.
NASDAQ Composite
NASDAQ Bank
Date
12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017
756.93
228.63
212.88
100.00
100.00
100.00
126.87
138.32
138.90
300.21
156.85
142.85
432.84
165.84
152.31
680.63
178.28
205.66
W‐3
SELECTED FINANCIAL DATA
$
$
2017
7,082,384
5,851,261
5,791,855
538,080
250
86,213
151,849
239,524
4,459
1,034
58,900
6,091,674
301,797
64,832
16,477
607,604
262,756
35,333
227,423
23,225
204,198
19,046
85,894
137,350
44,258
93,092
93,030
$
$
2016
As of and for the years ended December 31,
2014
2015
(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
13,577
73,996
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
10,966
57,335
73,978
21,601
52,377
51,946
$
1.76
1.72
11.47
1.55
1.52
9.93
$
$
$
1.23
1.20
8.65
$
$
$
1.09
1.05
7.40
$
$
$
2013
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
9,833
47,312
61,975
20,358
41,617
41,201
1.00
0.95
5.83
52,887,359
54,123,957
52,992,586
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
1.43 %
16.38 %
11.64 %
3.68 %
34.85 %
$
96,304
1.82
1.78
1.48 %
16.96 %
16.95 %
34.71 %
0.29 %
0.19 %
0.25 %
$
1.42 %
16.64 %
10.53 %
3.42 %
39.47 %
81,432
1.55
1.52
1.42 %
16.64 %
16.63 %
39.47 %
0.11 %
0.34 %
0.34 %
W‐4
$
1.38 %
14.56 %
10.04 %
3.75 %
42.63 %
65,027
1.27
1.23
1.42 %
14.96 %
15.73 %
40.60 %
0.13 %
0.18 %
0.26 %
$
1.39 %
14.43 %
9.57 %
3.68 %
40.51 %
53,558
1.12
1.08
1.43 %
14.88 %
16.74 %
38.75 %
0.17 %
0.30 %
0.41 %
1.32 %
15.70 %
8.79 %
3.80 %
38.69 %
41,201
1.00
0.95
1.32 %
15.70 %
15.69 %
38.69 %
0.33 %
0.34 %
0.64 %
$
$
$
$
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
Federal funds sold
Mortgage loans held for sale
Equity securities
Premises and equipment, net
Deposits
Federal funds purchased
Other borrowings
Other liabilities
Stockholders' Equity
Selected income Statement
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after
for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes expenses
Net income
Net income available to
stockholders
Per common Share Data:
Net income, basic
Net income, diluted
Book value
Weighted average shares
Basic
Diluted
Actual shares outstanding
Selected Performance Ratios:
Return on average assets
Return on average stockholders'
Dividend payout ratio
Net interest margin (1)
Efficiency ratio (2)
Core Performance Data (3)
Core net income available to
stockholders
Core earnings per share, basic
Core earnings per share, diluted
Core return on average assets
Core return on average
equity
Core return on average
stockholders' equity
Core efficiency ratio
Asset Quality ratios:
Net charge-offs to average
loans outstanding
Non-performing loans to total
Non-performing assets to total
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
1.02 %
1.06 %
1.03 %
1.06 %
1.07 %
548.79 %
307.30 %
559.02 %
354.52 %
314.94 %
95.08 %
89.66 %
98.79 %
97.82 %
93.66 %
84.93 %
80.44 %
86.24 %
83.94 %
84.65 %
23.64 %
23.64 %
24.94 %
23.85 %
21.54 %
8.58 %
9.51 %
9.52 %
11.52 %
8.51 %
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 %
14.25 %
28.23 %
21.31 %
25.85 %
20.82 %
13.16 %
11.18 %
19.18 %
12.39 %
16.20 %
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 %
(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 2017 exclude the impact of non-routine expenses attributable to our net deferred tax asset revaluation due to lower corporate income tax rates
provided by the Tax Cuts and Jobs Act passed into law in December 2017, and lease termination and moving expenses associated with our move to our new
headquarters building in 2017. 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 $3.1 million of additional tax expense as a result of revaluing our net deferred tax assets at December 31, 2017 due to
lower corporate income tax rates provided by the Tax Cuts and Jobs Act passed into law in December 2017. The revaluation adjustment
of our net deferred tax asset position was impacted by a number of factors, including increased loan charge-offs, in the fourth quarter of
2017, increases in deferred tax liabilities relating to depreciation expense on our new headquarters building, and dividends from our
captive real estate investment trusts. We also recorded expenses of $347,000 related to terminating the lease agreement on our previous
headquarters building in Birmingham, Alabama and expenses of moving into our new headquarters building. 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 expenses of $703,000 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
expenses 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. We consider all of the expenses in 2017, 2015 and 2014
discussed above to be non-core expenses. The non-GAAP financial measures included in this annual report on Form 10-K results for
the year ended December 31, 2017 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 revaluing of our net deferred tax assets, lease termination, moving expenses, 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.
W‐5
“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, 2017, 2015 and 2014. All amounts are in thousands, except share and per share data.
Provision for income taxes - GAAP
Adjustments:
Tax (benefit) of adjustments
Core income tax expense - non-GAAP
Net income available to common stockholders - GAAP
Adjustments:
Adjustment for nonemployee stock compensation correction
Adjustment for nonemployee stock vesting acceleration
Adjustment for merger expenses
Adjustment for reserve for unfunded loan commitments
Adjustment for revaluing net deferred tax assets
Adjustment for lease termination and moving expenses
Tax (benefit) of adjustments
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 nonemployee stock compensation correction
Adjustment for nonemployee stock vesting acceleration
Adjustment for merger expenses
Adjustment for reserve for unfunded loan commitments
Adjustment for revaluing net deferred tax assets
Adjustment for lease termination and moving expenses
Tax (benefit) of adjustments
Core net income - non-GAAP
Average assets
Core return on average assets - non-GAAP
Return on average stockholders' equity - GAAP
Average stockholders' equity
2017
$
44,258
$
$
(132)
44,126
93,030
3,059
347
(132)
96,304
1.76
52,887,359
1.82
1.72
54,123,957
1.78
1.43 %
93,092
3,059
347
(132)
96,366
6,495,067
1.48 %
16.38 %
568,228
$
$
$
$
$
$
$
$
$
W‐6
2015
25,465
829
26,294
63,260
2,096
500
829
65,027
1.23
51,426,466
1.27
1.20
52,885,108
1.23
1.38 %
63,540
2,096
500
829
65,307
4,591,861
1.42 %
14.56 %
436,544
2014
21,601
865
22,466
51,946
703
1,774
865
53,558
1.09
47,710,002
1.12
1.05
49,636,442
1.09
1.39 %
52,377
703
1,774
865
53,989
3,758,184
1.43 %
14.43 %
359,963
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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 nonemployee stock compensation correction
Adjustment for nonemployee stock vesting acceleration
Adjustment for merger expenses
Adjustment for reserve for unfunded loan commitments
Adjustment for lease termination and moving expenses
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
$
$
$
$
16.96 %
16.37 %
568,228
16.95 %
34.85 %
85,894
347
85,547
227,423
19,046
246,469
$
$
$
$
14.96 %
15.30 %
413,445
15.73 %
42.08 %
73,996
2,096
500
71,400
162,271
13,577
175,848
$
$
$
$
34.71 %
40.60 %
14.88 %
16.23 %
320,005
15.73 %
42.08 %
57,335
703
1,774
54,858
130,606
10,966
141,572
38.75 %
W‐7
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
J. Hal Clemmer
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
Bradford Vieira
Executive Vice President, Nashville
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 Mathis
David Slyman
Irma Tuder
Sidney White
Danny Windham
Tom Young
W‐8
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
Edward M Stivers III
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
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
2500 Woodcrest Place
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
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
W‐9
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
Company’s Corporate Headquarters, 2500
Woodcrest Place, Birmingham, Alabama 35209
on Tuesday, May 15, 2018, at 9:00 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, 2500 Woodcrest Place,
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.com/. We have direct
links on this website to our Code of Ethics and the
charters for our Audit, Compensation and
and Nominating
Corporate Governance
Committees by clicking on
the “Investor
Relations” tab. We also have direct links to our
filings with
the Securities and Exchange
Commission (SEC), including, but not limited to,
our first annual report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form
8-K, proxy statements and any amendments to
these reports. You may also obtain a copy of any
such report free of charge by requesting such copy
in writing to 2500 Woodcrest Place, 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.
W‐10
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to_______
Commission file number 001-36452
SERVISFIRST BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
2500 Woodcrest Place, Birmingham, Alabama
(Address of Principal Executive Offices)
26-0734029
(I.R.S. Employer
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. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “small reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2017, the aggregate market value of the voting common stock held by non-affiliates of the registrant, based on a stock price of $36.89
per share of Common Stock, was $1,648,680,000.
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 21, 2018
53,082,445
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 2018 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, 2017
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS ..........................................................
PART I. ..............................................................................................................................................................................
ITEM 1. BUSINESS .................................................................................................................................................
ITEM 1A. RISK FACTORS .........................................................................................................................................
ITEM 1B. UNRESOLVED STAFF COMMENTS ......................................................................................................
ITEM 2. PROPERTIES .............................................................................................................................................
ITEM 3. LEGAL PROCEEDINGS ...........................................................................................................................
ITEM 4. MINE SAFETY DISCLOSURES ..............................................................................................................
PART II. .............................................................................................................................................................................
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES ......................................................................
ITEM 6. SELECTED FINANCIAL DATA ..............................................................................................................
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ...................................................................................................................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...........................
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...........................................................
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES ................................................................................................................
ITEM 9A. CONTROLS AND PROCEDURES ...........................................................................................................
ITEM 9B. OTHER INFORMATION ..........................................................................................................................
PART III. ...........................................................................................................................................................................
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ....................................
ITEM 11. EXECUTIVE COMPENSATION ..............................................................................................................
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS ..............................................................................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ...................................................................................................................................
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ............................................................................
PART IV. ...........................................................................................................................................................................
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ..................................................................
ITEM 16. FORM 10-K SUMMARY ..........................................................................................................................
SIGNATURES ...................................................................................................................................................................
EXHIBIT INDEX ..............................................................................................................................................................
4
5
5
24
34
34
35
35
36
36
37
40
59
61
101
101
102
102
102
102
102
102
102
102
102
104
105
105
3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K and other publicly available documents, including the documents incorporated by reference
herein, contain 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 impact on us and our customers of the Tax Cuts and Jobs
Act;
the effects of hazardous weather in our markets;
the effects of competition from other financial institutions and financial service providers;
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;
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
PART I
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,” “our bank” or “the Bank,” and its other subsidiaries. References herein to
the fiscal years 2013, 2014, 2015, 2016 and 2017 mean our fiscal years ended December 31, 2013, 2014, 2015, 2016 and 2017,
respectively.
ITEM 1. BUSINESS
Overview
We are a bank holding company within the meaning of the Bank Holding Company Act of 1956 and are headquartered in
Birmingham, Alabama. Through our wholly-owned subsidiary bank, we operate 20 full-service banking offices located in
Jefferson, Shelby, Madison, Montgomery, Houston, Mobile and Baldwin 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, 2017, we had total assets of approximately $7.1 billion, total
loans of approximately $5.9 billion, total deposits of approximately $6.1 billion and total stockholders’ equity of approximately
$607.6 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, Bradford A. Vieira – Nashville 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 our 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 generally 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 330 community
banks located in 15 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, 2017, our branches averaged approximately $304.6 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 39% of our total loan
portfolio as of December 31, 2017.
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, 2017, 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:
•
•
the availability of successful, experienced bankers with strong reputations in the market; and
the economic attributes of the market necessary to drive quality lending opportunities coupled with deposit-related
characteristics of the potential market.
6
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 members 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, Atlanta and Charleston 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 2007 to 2017 (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 ...........................................................................
Compound
Annual Growth
Rate
2017
2007
(Dollars in Billions)
21.1
5.0
4.8
1.8
5.5
3.8
17.4
9.9
1.5
7.1
16.4
35.0 $
7.1
6.6
2.6
7.2
4.2
31.7
10.6
1.5
10.6
33.2
5.19%
3.57%
3.24%
3.75%
2.73%
1.01%
6.18%
0.69%
-%
4.09%
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, 2017 (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
2,360.2 $
758.6
550.0
484.1
236.6
37,863.7
7,815.3
8,116.1
3,207.6
7,232.5
330.1
40.9
5,590.2
81,937.6
247.8
166,887.7
104.7
13,248.8
286.9
57,393.3
3 $
2
2
2
2
2
1
3
1
1
7
4
3
6
2
8
7
55
39
18
29
6.23%
9.71%
6.78%
15.09%
3.27%
5.91%
0.05%
0.15%
0.79%
0.50%
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, 2017, as reported by the FDIC:
Alabama .........................................
Florida ............................................
Georgia ..........................................
South Carolina ...............................
Tennessee .......................................
58.3%
6.4%
5.0%
12.5%
22.5%
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 markets, 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.
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 markets for the purpose of
upgrading plant and equipment, buying inventory and for general working capital. Typically, targeted business borrowers have
annual sales generally 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.
8
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.
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 $245.8 million in 2017. Our allocation of loan loss reserve for these loans
decreased $0.1 million to $5.0 million at December 31, 2017 compared to $5.1 million at the end 2016. Charge-offs decreased
from $0.8 million for 2016 to $0.1 million for 2017, and the overall quality of the construction loan portfolio has improved with
$1.5 million rated as substandard at December 31, 2017 compared to $4.3 million at December 31, 2016.
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
9
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, 2017, we had commitments to extend credit beyond current fundings of approximately $1.9 billion, had
issued standby letters of credit in the amount of approximately $41.7 million, and had commitments for credit card arrangements
of approximately $128.1 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:
•
•
•
•
•
•
•
•
•
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.
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
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only as received. If a loan will not be collected in full, we increase the allowance for loan losses to reflect our management’s
estimate of any potential exposure or loss.
Our net loan losses to average total loans increased to 0.29% for the year ended December 31, 2017 from 0.11% for the year
ended December 31, 2016, which was down from 0.13% for the year ended December 31, 2015. Historical performance,
however, is not an indicator of future performance, and our future results could differ materially. As of December 31, 2017, we
had $10.8 million of non-accrual loans. We have allocated approximately $5.0 million of our allowance for loan losses to real
estate construction, acquisition and development, and lot loans, $32.9 million to commercial and industrial loans, $21.0 million
to real estate mortgage loans and $0.5 million to consumer loans and have a total loan loss reserve as of December 31, 2017 of
$59.4 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,
2017.
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.
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, 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
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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 434 employees as of December 31, 2017. 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 Board of Governors of the Federal Reserve System (the “Federal
Reserve”).
Acquisition of Banks
The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval before:
•
•
•
acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the
bank holding company will, directly or indirectly, own or control more than 5% of the bank’s voting shares;
acquiring all or substantially all of the assets of any bank; or
merging or consolidating with any other bank holding company.
Additionally, the BHC Act provides that the Federal Reserve may not approve any of these transactions if such transaction would
result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the
anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and
needs of the community to be served. The Federal Reserve 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.”
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
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company. In addition, any person or group of persons must obtain the approval of the Federal Reserve 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:
•
•
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.
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
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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 2017, the
bank’s assessment rate was set at $0.0134, or $0.0536 annually, per $100 of assessment base.
In addition to its risk-based insurance assessments, the FDIC also imposes Financing Corporation (“FICO”) assessments to help
pay the $780 million in annual interest payments on the $8 billion of bonds issued in the late 1980s as part of the government
rescue of the savings and loan industry. For the fourth quarter of 2017, the bank’s FICO assessment was equal to $0.0012, or
$0.0048 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.
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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:
•
•
•
•
•
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;
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;
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•
•
•
•
the Fair Debt Collection Practices Act, as implemented in part by Regulation F issued by the CFPB, 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.
The Basel III Capital Rules provide for the following minimum capital to risk-weighted assets ratios:
•
•
•
4.5% based upon CET1;
6.0% based upon tier 1 capital; and
8.0% based upon total regulatory capital.
A minimum leverage ratio (tier 1 capital as a percentage of total assets) of 4.0% is also required under the Basel III Capital Rules.
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.
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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.
The Basel Committee, the U.S. federal banking regulators, and other interested parties may propose changes to the Basel III
Capital Rules from time to time based on a number of factors, including prevailing economic conditions and policy initiatives.
For example, in September 2017 the U.S. federal banking regulators proposed revisions to the Basel III Capital Rules to simplify
the capital treatment of certain types of assets, including certain types of mortgage servicing rights, tax deferred assets, and
commercial real estate loans. If adopted, those revisions could provide regulatory relief to all but the largest and most
internationally active U.S. banks and bank holding companies. Similarly, in December 2017, the Basel Committee published
revisions to its regulatory framework in an effort to strengthen credibility in the calculation of risk-weighted assets and otherwise
improve existing capital rules in certain respects. At this time, it is unknown whether proposals and revisions such as these will
become final rules binding upon U.S. bank holding companies and banks, and it is unclear how they may affect us and the bank.
We will continue to monitor these and similar proposals and revisions for adoption and implementation.
In December 2017, the Basel Committee published revisions to its regulatory framework that it described as the finalization of
the Basel III post-crisis regulatory reforms. Among other things, these revisions are meant to strengthen credibility in the
calculation of risk-weighted assets by enhancing the robustness and risk sensitivity of the standardized approaches for credit risk
and operational risk and to add new capital requirements for certain “unconditional cancellable commitments,” such as credit
card lines. These revisions will be generally effective on January 1, 2022, with an aggregate output floor phasing in through
January 1, 2027. Operational risk capital requirements and a capital floor only apply to advanced approaches institutions under
current U.S. 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, 2017, 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 2000’s 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
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institution’s assets, as well as the potential for contingent liquidity needs arising from off-balance sheet commitments, over a
one-year horizon.
In the Basel III Capital Rules, the federal banking regulators did not address either the Liquidity Coverage Ratio or the Net Stable
Funding Ratio. However, 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
$239.0 million in dividends as of December 31, 2017, subject to maintaining certain required capital levels. 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.
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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.
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
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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.
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
Regulation E imposes 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 a 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
In December 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 entities that do not engage in any of the activities covered by the Volcker Rule (other than with respect to certain U.S.
government, agency, and/or municipal obligations) are not required to adopt any formal compliance program specific to the
Volcker Rule. We have concluded that we do not engage in the activities covered by the Volcker Rule and that the Volcker Rule
does not impact our operations.
The Dodd-Frank Act
The Dodd-Frank Act was signed into law in July 2010 and has significantly changed the bank regulatory environment and the
lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-
Frank Act required 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 were given significant discretion in drafting the implementing
rules and regulations. Although many of the final rules and regulations called for by the Dodd-Frank Act have been adopted, the
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implementation of some of those rules and regulations is in its early stages, and rulemaking has not yet become final for certain
Dodd-Frank Act provisions. As a result, the full impact of the Dodd-Frank Act may not be known for many years.
A number of the effects of the Dodd-Frank Act are described or otherwise accounted for in various parts of this Supervision and
Regulation section. The following items provide a brief description of certain other provisions of the Dodd-Frank Act that may
be relevant to us and the bank.
•
•
•
•
The Dodd-Frank Act created 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.
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.
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.
As noted above, the implementation of the Dodd-Frank Act is ongoing, and certain provisions of the Dodd-Frank Act are still
subject to rulemaking. As a result, it is difficult to anticipate the overall financial impact of the Dodd-Frank Act on the bank and
us. However, compliance with the Dodd-Frank Act and its implementing regulations has resulted in, and is expected to 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
Government efforts made over the last decade 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.
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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, which are available free of charge through our corporate website as soon as reasonably practicable
after they are electronically filed with, or furnished to, the SEC. You may also obtain a copy of any such report from us free of
charge by requesting such copy in writing to 2500 Woodcrest Place, 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 (62) – 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 (61) – 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 (63) – 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 (60) – 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 (66) – Since September 2017, Mr. Owens has served as Executive Vice President. He served as Senior Vice
President and Chief Credit Officer for us and the bank from 2012 through his promotion to Executive Vice President. 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.
Kenneth L. Barber (63) – 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
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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.
G. Carlton Barker (69) – 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 (54) – Mr. Bryant has served as Executive Vice President and Tampa Bay Area President and Chief
Executive Officer of the Bank since January 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 (48) – 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, a member of the University of Alabama in Huntsville College of Business Executive Advisory Board, and
a board member for the National Children’s Advocacy Center.
William Bibb Lamar, Jr. (73) – 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 (55) – 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 (41) – 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 (53) – 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.
Bradford A. Vieira (42) – Mr. Vieira has served as Executive Vice President and Nashville President and Chief Executive
Officer of the Bank since June 2017 and as Senior Vice President and Nashville President since 2013 until his promotion to
Nashville CEO. Mr. Vieira began his career in banking with SouthTrust Bank and held several positions in lending and credit.
He also was with Fifth Third Bank as a commercial middle market sales manager. Mr. Vieira has been named Power Leader in
Finance by the Nashville Business Journal. Under his leadership, ServisFirst Bank was also named a 2017 Best Place to work by
the Nashville Business Journal.
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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 and the
medium and long-term fiscal outlook of the federal government 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 rising interest rates, though rates currently remain
relatively low, which may impact 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 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.
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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, 2017, 50.1% of our loan portfolio was composed of commercial and consumer real estate loans, of which
66.0% 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, 2017, our 10 largest borrowing relationships totaled over $273 million in commitments (including unfunded
commitments), or approximately 5% 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, 2017 was $59.4 million, or
1.02% 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.
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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, Alabama. 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:
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the sale of $34,750,000 in 5% subordinated notes due July 15, 2025 to accredited investor purchasers in July
2015; and
the sale of $30,000,000 in 4.5% subordinated notes due November 8, 2027 to accredited investor purchasers in
November 2017. At the same time, we redeemed $20,000,000 in 5.5% subordinated notes due November 9, 2022.
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,
including prevailing interest rates, 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.
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
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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:
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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, 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.
We use information technology in our operations and offer online banking services to our customers. Unauthorized access
to our or our customers’ confidential or proprietary information could expose us to reputational harm and litigation and
adversely affect our ability to attract and retain customers.
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Information security risks for financial institutions have 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. Our risk and exposure to these matters remains heightened because of the evolving
nature and complexity, and the increasing frequency, of these threats from cybercriminals and hackers, our plans to continue to
provide internet banking and mobile banking channels, and our plans to continue 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.
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, 2017, we held $6.7 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
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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, 2017, generally meaning that our net interest income 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.
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, 2017 were checking accounts and other liquid deposits, which are payable on demand
or upon several days’ notice, while by comparison, 83% 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.
The fair value of our investment securities can fluctuate due to factors outside of our control.
As of December 31, 2017, the fair value of our investment securities portfolio was approximately $538.3 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,
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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 and questions concerning the impact
of the Tax Cuts and Jobs Act on the long-term fiscal position of the U.S. federal government. However, in addition to causing
economic and financial market disruptions, any future downgrade, failure to continue to raise the U.S. statutory debt limit as
needed, 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.
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 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
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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 could be
introduced in the United States Congress that could 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. 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.
Additionally, 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.
A reduction in future corporate tax rates could have a material impact on the value of our deferred tax assets.
As we have seen during the fourth quarter of 2017, many financial holding companies, like us, revalued their deferred tax assets
and liabilities resulting from the passage of H.R. 1, the Tax Cuts and Jobs Act, in December 2017. The legislation decreased the
corporate income tax rate from 35% to 21%. As a result, we recognized $3.1 million of additional tax expense in revaluing our
deferred tax assets and liabilities as of December 31, 2017. 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. However, any such changes could have a material adverse effect
on the value of our net deferred tax assets.
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.
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FDIC deposit insurance assessments may materially increase in the future, which would have an adverse effect on earnings.
As an FDIC-insured institution, the bank is assessed a quarterly deposit insurance premium. The amount of the premium is
affected by a number of factors, including the risk the bank poses to the Deposit Insurance Fund and the adequacy of the fund to
cover the risk posed by all insured institutions. If either the bank or insured institutions as a whole present a greater risk to the
Deposit Insurance Fund in the future than they do today, if the Deposit Insurance Fund becomes depleted in any material respect,
or if other circumstances arise that lead the FDIC to determine that the Deposit Insurance Fund should be strengthened, the bank
could be required to pay significantly higher deposit insurance premiums and/or additional special assessments to the
FDIC. Those premiums and/or assessments could have a material adverse effect on the bank’s 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 CFPB, 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.
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:
32
•
•
•
•
•
•
•
•
•
•
•
•
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, may experience substantial fluctuations, which
may be 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 our outstanding debt and will be
subordinate to the rights of the holders of any preferred securities or any debt that we may issue in the future.
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.
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, 2017, our
bank could pay approximately $239.0 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
33
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:
•
•
•
•
•
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, 2017, we operated through 20 banking offices. Our Woodcrest Place 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:
2500 Woodcrest Place (1) .......................................................................... Birmingham
324 Richard Arrington Jr. Boulevard North .............................................. Birmingham
5403 Highway 280, Suite 401 ................................................................... Birmingham
35209
35203
35242
Owned
Leased
Leased
3/2/2005
12/19/2005
8/15/2006
Total ................................................................................................................
3 Offices
Huntsville:
401 Meridian Street, Suite 100 .................................................................. Huntsville
1267 Enterprise Way, Suite A (1) ............................................................. Huntsville
35801
35806
Leased
Leased
11/21/2006
8/21/2006
Total ................................................................................................................
2 Offices
Montgomery:
1 Commerce Street, Suite 200 ................................................................... Montgomery
8117 Vaughn Road, Unit 20 ...................................................................... Montgomery
36104
36116
Leased
Leased
6/4/2007
9/26/2007
Total ................................................................................................................
2 Offices
Dothan:
4801 West Main Street (1) ......................................................................... Dothan
1640 Ross Clark Circle, Suite 307 ............................................................. Dothan
36305
36301
Leased
Leased
10/17/2008
2/1/2011
Total ................................................................................................................
2 Offices
Mobile:
2 North Royal Street (1) ............................................................................ Mobile
4400 Old Shell Road .................................................................................. Mobile
54 South Greeno Road (2) ......................................................................... Fairhope
Total ................................................................................................................
Total Offices in Alabama ................................................................................
36602
36608
36532
Leased
Leased
Leased
7/9/2012
9/3/2014
9/29/2017
3 Offices
12 Offices
Florida:
Pensacola-Ferry Pass-Brent:
316 South Baylen Street, Suite 100 ........................................................... Pensacola
4980 North 12th Avenue ........................................................................... Pensacola
32502
32504
Leased
Owned
4/1/2011
8/27/2012
Total ................................................................................................................
2 Offices
Tampa-St. Petersburg-Clearwater:
4221 West Boy Scout Blvd. (1) ................................................................. Tampa
Total ................................................................................................................
Total Offices in Florida ...................................................................................
33607
Leased
1/4/2016
1 Office
3 Offices
Georgia:
Atlanta-Sandy Springs-Roswell
300 Galleria Parkway SE, Suite 100 ......................................................... Atlanta
2801 Chapel Hill Road .............................................................................. Douglasville
2454 Kennesaw Due West Road ............................................................... Kennesaw
30339
30135
30152
Leased
Owned
Owned
7/1/2015
1/28/2008
12/12/2011
Total Offices in Georgia .................................................................................
3 Offices
South Carolina:
Charleston-North Charleston
701 East Bay Street Suite 503 (1) .............................................................. Charleston
29403
Leased
4/20/2015
Total Offices in South Carolina ......................................................................
1 Office
Tennessee:
Nashville:
1801 West End Avenue, Suite 850 (1) ...................................................... Nashville
37203
Leased
6/4/2013
Total Offices in Tennessee..............................................................................
Total offices ....................................................................................................
1 Office
20 Offices
(1) Offices relocated to this address. Original offices opened on date indicated.
(2) Property served as a Loan Processing Office until 1/16/18, when it became a full service office.
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 21, 2018, there
were 550 holders of record of our common stock. As of the close of business on February 21, 2018, the price of our common
stock was $42.14 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 2017 and 2016.
Year Ended December 31,
2017
2016
High
Low
Cash
Dividends
Declared
High
Low
First quarter ................................................. $
Second quarter .............................................
Third quarter ...............................................
Fourth quarter ..............................................
42.66 $
39.34
39.30
44.00
34.06 $
33.01
32.54
35.35
$
0.05 $
0.05
0.05
0.05
0.20
23.39 $
26.36
26.79
38.65
Dividends
Cash
Dividends
Declared
0.04
0.04
0.04
0.04
0.16
17.06 $
21.66
23.46
25.00
$
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 2017 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, 2017.
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2017 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.
Plan Category
Equity Compensation Plans Approved by Security Holders ...........................
Equity Compensation Plans Not Approved by Security Holders ....................
Total ............................................................................................................
Number of Securities
To Be Issued Upon
Exercise of
Outstanding Awards
Weighted-average
Exercise Price of
Outstanding Awards
10.67
-
10.67
1,669,834 $
-
1,669,834 $
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
3,478,644
-
3,478,644
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
36
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 periodically grant shares 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, 2017, 2016, 2015, 2014 and
2013 and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 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 ..................
Federal funds sold ..............................................
Mortgage loans held for sale ..............................
Equity securities .................................................
Premises and equipment, net ..............................
Deposits ..............................................................
Federal funds purchased .....................................
Other borrowings ...............................................
Other liabilities ...................................................
Stockholders' Equity ...........................................
Selected income Statement Data:
Interest income ................................................... $
Interest expense ..................................................
Net interest income.............................................
Provision for loan losses ....................................
Net interest income after provision
for loan losses ................................................
Noninterest income ............................................
Noninterest expense ...........................................
Income before income taxes ...............................
Income taxes expenses .......................................
Net income .........................................................
Net income available to common
2017
As of and for the years ended December 31,
2014
2015
(Dollars in thousands except for share and per share data)
2016
$
$
7,082,384
5,851,261
5,791,855
538,080
250
86,213
151,849
239,524
4,459
1,034
58,900
6,091,674
301,797
64,832
16,477
607,604
262,756
35,333
227,423
23,225
204,198
19,046
85,894
137,350
44,258
93,092
$
$
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
$
$
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
13,577
73,996
89,005
25,465
63,540
$
$
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
10,966
57,335
73,978
21,601
52,377
2013
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
9,833
47,312
61,975
20,358
41,617
Stockholders ..................................................
93,030
81,432
63,260
51,946
41,201
Per common Share Data:
Net income, basic ............................................... $
Net income, diluted ............................................
Book value .........................................................
Weighted average shares outstanding:
Basic ...................................................................
Diluted ................................................................
Actual shares outstanding ...................................
$
1.76
1.72
11.47
1.55
1.52
9.93
$
$
$
1.23
1.20
8.65
$
$
$
1.09
1.05
7.40
$
$
$
1.00
0.95
5.83
52,887,359
54,123,957
52,992,586
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
37
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'
1.43%
16.38%
11.64%
3.68%
34.85%
1.42%
16.64%
10.53%
3.42%
39.47%
1.38%
14.56%
10.04%
3.75%
42.63%
1.39%
14.43%
9.57%
3.68%
40.51%
1.32%
15.70%
8.79%
3.80%
38.69%
$
96,304
1.82
1.78
1.48%
$
81,432
1.55
1.52
1.42%
$
65,027
1.27
1.23
1.42%
$
53,558
1.12
1.08
1.43%
41,201
1.00
0.95
1.32%
Equity ............................................................
16.96%
16.64%
14.96%
14.88%
15.70%
Core return on average common
stockholders' equity........................................
Core efficiency ratio ...........................................
Asset Quality ratios:
Net charge-offs to average
loans outstanding ...........................................
Non-performing loans to total loans ...................
Non-performing assets to total assets .................
Allowance for loan losses to total
16.95%
34.71%
16.63%
39.47%
15.73%
40.60%
16.74%
38.75%
15.69%
38.69%
0.29%
0.19%
0.25%
0.11%
0.34%
0.34%
0.13%
0.18%
0.26%
0.17%
0.30%
0.41%
0.33%
0.34%
0.64%
gross loans .....................................................
1.02%
1.06%
1.03%
1.06%
1.07%
Allowance for loan losses to total
non-performing loans .....................................
548.79%
307.30%
559.02%
354.52%
314.94%
Liquidity Ratios:
Net loans to total deposits ..................................
Net average loans to average
95.08%
89.66%
98.79%
97.82%
93.66%
earning assets .................................................
84.93%
80.44%
86.24%
83.94%
84.65%
Noninterest-bearing deposits to
total deposits ..................................................
23.64%
23.64%
24.94%
23.85%
21.54%
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 ...............................
8.58%
9.51%
9.52%
11.52%
8.51%
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%
14.25%
28.23%
21.31%
25.85%
20.82%
13.16%
11.18%
19.18%
12.39%
16.20%
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%
(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 2017 exclude the impact of non-routine expenses attributable to our net deferred tax asset revaluation due to lower corporate income tax
rates provided by the Tax Cuts and Jobs Act passed into law in December 2017, and lease termination and moving expenses associated with our move to our
new headquarters building in 2017. 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.
38
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
We recorded $3.1 million of additional tax expense as a result of revaluing our net deferred tax assets at December 31, 2017 due
to lower corporate income tax rates provided by the Tax Cuts and Jobs Act passed into law in December 2017. The revaluation
adjustment of our net deferred tax asset position was impacted by a number of factors, including increased loan charge-offs, in
the fourth quarter of 2017, increases in deferred tax liabilities relating to depreciation expense on our new headquarters building,
and dividends from our captive real estate investment trusts. We also recorded expenses of $347,000 related to terminating the
lease agreement on our previous headquarters building in Birmingham, Alabama and expenses of moving into our new
headquarters building. 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 expenses of $703,000 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 expenses 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. We consider all of the expenses in 2017, 2015 and 2014 discussed above to be
non-core expenses. The non-GAAP financial measures included in this annual report on Form 10-K results for the year ended
December 31, 2017 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 revaluing of our net deferred tax assets, lease termination, moving expenses, 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, 2017, 2015 and 2014. All amounts are in
thousands, except share and per share data.
39
Provision for income taxes – GAAP .................................................................................................. $
44,258
$
25,465
$
21,601
2017
2015
2014
Adjustments:
Tax (benefit) of adjustments .........................................................................................................
Core income tax expense – non-GAAP ............................................................................................. $
Net income available to common stockholders – GAAP .................................................................. $
Adjustments:
Adjustment for nonemployee stock compensation correction .....................................................
Adjustment for nonemployee stock vesting acceleration .............................................................
Adjustment for merger expenses ..................................................................................................
Adjustment for reserve for unfunded loan commitments .............................................................
Adjustment for revaluing net deferred tax assets .........................................................................
Adjustment for lease termination and moving expenses ..............................................................
Tax (benefit) of adjustments .........................................................................................................
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 nonemployee stock compensation correction .....................................................
Adjustment for nonemployee stock vesting acceleration .............................................................
Adjustment for merger expenses ..................................................................................................
Adjustment for reserve for unfunded loan commitments .............................................................
Adjustment for revaluing net deferred tax assets .........................................................................
Adjustment for lease termination and moving expenses ..............................................................
Tax (benefit) of adjustments .........................................................................................................
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 nonemployee stock compensation correction .....................................................
Adjustment for nonemployee stock vesting acceleration .............................................................
Adjustment for merger expenses ..................................................................................................
Adjustment for reserve for unfunded loan commitments .............................................................
Adjustment for lease termination and moving expenses ..............................................................
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 ....................................................................................................
(132)
$
$
44,126
93,030
829
26,294
63,260
$
$
2,096
500
3,059
347
(132)
$
$
96,304
1.76
52,887,359
1.82
1.72
54,123,957
1.78
$
1.43%
$
93,092
$
$
$
$
829
65,027
1.23
51,426,466
1.27
1.20
52,885,108
1.23
$
1.38%
$
63,540
$
$
2,096
500
96,366
6,495,067
3,059
347
(132)
$
$
1.48%
16.38%
$
16.96%
16.37%
$
16.95%
34.85%
$
85,894
568,228
568,228
829
65,307
4,591,861
436,544
$
$
1.42%
14.56%
$
14.96%
15.30%
$
15.73%
42.08%
$
73,996
413,445
2,096
500
$
347
85,547
227,423
19,046
246,469
$
34.71%
$
71,400
162,271
13,577
175,848
$
40.60%
865
22,466
51,946
703
1,774
865
53,558
1.09
47,710,002
1.12
1.05
49,636,442
1.09
1.39%
52,377
703
1,774
865
53,989
3,758,184
1.43%
14.43%
359,963
14.88%
16.23%
320,005
15.73%
42.08%
57,335
703
1,774
54,858
130,606
10,966
141,572
38.75%
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. This discussion should be read in conjunction with the financial
statements and selected financial data included elsewhere in this report.
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 20 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 Counties 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,
40
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.
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
Bancshares, Inc. (“Metro”). The core deposit intangible is being amortized over 7 years, and the estimated useful life is
periodically reviewed for reasonableness.
41
The Company has recorded $13.6 million of goodwill in connection with the acquisition of Metro. 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 $93.0 million for the year ended December 31, 2017, compared to $81.4
million for the year ended December 31, 2016. This increase in net income is primarily attributable to an increase in net interest
income, which increased $40.3 million, or 21.5%, to $227.4 million in 2017 from $187.1 million in 2016. Noninterest income
increased $934,000, or 5.2%, to $19.0 million in 2017 from $18.1 million in 2016. Noninterest expense increased by $4.9 million,
or 6.1%, to $85.9 million in 2017 from $81.0 million in 2016. Basic and diluted net income per common share were $1.76 and
$1.72, respectively, for the year ended December 31, 2017, compared to $1.55 and $1.52, respectively, for the year ended
December 31, 2016. Return on average assets was 1.43% in 2017, compared to 1.42% in 2016, and return on average
stockholders’ equity was 16.38% in 2017, compared to 16.64% in 2016.
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.
The following table presents some ratios of our results of operations for the years ended December 31, 2017, 2016 and 2015.
Return on average assets ......................................................................
Return on average stockholders' equity ................................................
Dividend payout ratio ...........................................................................
Average stockholders' equity to average total assets ............................
1.43%
16.38%
11.64%
8.75%
1.42%
16.64%
10.53%
8.52%
1.38%
14.56%
10.04%
9.51%
For the Years Ended December 31,
2015
2016
2017
The following tables present a summary of our statements of income, including the percent change in each category, for the years
ended December 31, 2017 compared to 2016, and for the years ended December 31, 2016 compared to 2015, respectively.
Year Ended December 31,
2017
2016
(Dollars in Thousands)
Change from
the Prior Year
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 ................................ $
262,756 $
35,333
227,423
23,225
204,198
19,046
85,894
137,350
44,258
93,092
62
93,030 $
212,902
25,805
187,097
13,398
173,699
18,112
80,993
110,818
29,339
81,479
47
81,432
23.42%
36.92%
21.55%
73.35%
17.56%
5.16%
6.05%
23.94%
50.85%
14.25%
31.91%
14.24%
42
Year Ended December 31,
2016
2015
(Dollars in Thousands)
Change from
the Prior Year
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 ................................ $
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%
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 $40.3 million, 21.5%, to $227.4 million for the year ended December 31, 2017 from $187.1 million
for the year ended December 31, 2016. This was due to an increase in total interest income of $49.9 million, or 23.4%, partially
offset by an increase in total interest expense of $9.5 million, or 36.9%. The increase in total interest income was primarily
attributable to a 19.3% increase in average loans outstanding from 2016 to 2017, which was the result of growth in all our
markets.
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
our markets, including in Nashville, Tennessee, Charleston, South Carolina and Tampa Bay, Florida, our newest 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, 2017, 2016 and 2015, 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.
43
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)
2017
Interest
Earned /
Paid
Average
Balance
Average
Yield /
Rate
Average
Balance
2016
Interest
Earned /
Paid
Average
Yield /
Rate
Average
Balance
2015
Interest
Earned /
Paid
Average
Yield /
Rate
Assets:
Interest-earning assets:
Loans, net of unearned income:
Taxable ....................................................................... $5,316,452 $245,296 4.61% $4,467,729 $199,599 4.47% $3,815,202 $170,723 4.47%
Tax-exempt (3) ...........................................................
496 5.01
Total loans, net of unearned income (1)(2) .................... 5,351,178 247,015 4.62 4,486,478 200,510 4.47 3,825,107 171,219 4.48
Mortgage loans held for sale ...........................................
237 3.00
Debt securities:
1,719 4.95
213 3.76
253 3.83
911 4.86
34,726
18,749
6,600
9,905
5,663
7,912
Taxable ....................................................................... 387,542
Tax-exempt (3) ........................................................... 131,450
5,341 2.25 193,803
5,035 3.70 136,305
Total debt securities (4)................................................... 518,992 13,537 2.61 373,612 10,376 2.78 330,108
31,014
Federal funds sold ........................................................... 146,688
Restricted equity securities .............................................
4,798
1,030
Interest-bearing balances with banks .............................. 208,382
2,571 0.52 189,361
Total interest-earning assets ............................................ $6,231,933 $264,774 4.25% $5,525,174 $214,935 3.89% $4,388,300 $182,077 4.15%
4,332 2.24
5,448 4.00
9,780 2.96
128 0.41
183 3.81
530 0.28
1,693 1.15 163,356
4,827
2,273 1.09 490,301
9,117 2.35 237,683
4,420 3.36 135,929
1,007 0.62
218 4.52
43 4.17
Non-interest-earning assets:
Cash and due from banks ................................................
Net premises and equipment ...........................................
Allowance for loan losses,
accrued interest and
other assets ................................................................. 145,794
Total assets ............................................................ $6,495,067
65,647
51,693
60,321
24,937
60,778
17,206
135,251
$5,745,683
125,577
$4,591,861
Interest-bearing liabilities:
Interest-bearing deposits:
1,656 0.28%
2,526 0.36% $ 584,756 $
Checking.......................................................................... $ 817,496 $
109 0.29
Savings ............................................................................
37,683
49,151
8,302 0.46
Money market ................................................................. 2,776,363 19,326 0.70 2,308,065 12,379 0.54 1,786,045
Time deposits (5) ............................................................ 547,435
4,828 1.01
5,127 1.00 478,819
Total interest-bearing deposits ........................................ 4,190,445 28,831 0.69 3,562,878 20,169 0.57 2,887,303 14,895 0.52
860 0.32
Federal funds purchased ................................................. 312,213
Other borrowings ............................................................
1,948 5.23
56,568
Total interest-bearing liabilities ...................................... $4,559,226 $ 35,333 0.77% $4,052,089 $ 25,805 0.64% $3,196,606 $ 17,703 0.55%
2,766 0.64 272,031
37,272
2,870 5.17
3,588 1.15 433,743
55,468
2,914 5.15
3,389 0.41% $ 697,109 $
44,521
5,963 1.09 513,183
153 0.31
137 0.31
Non-interest-bearing liabilities:
Non-interest-bearing
Checking .................................................................... 1,351,112
Other liabilities ................................................................
16,501
Stockholders' equity ........................................................ 567,741
487
Unrealized gains on securities ........................................
Total liabilities and
1,190,372
13,582
485,543
4,097
944,019
14,692
432,064
4,480
stockholders' equity .......................................... $6,495,067
$5,745,683
$4,591,861
Net interest income ..............................................................
Net interest spread ................................................................
Net interest margin ...............................................................
$229,441
$189,130
$164,374
3.47%
3.68%
3.25%
3.42%
3.60%
3.75%
(1) Non-accrual loans are included in average loan balances in all periods. Loan fees of $3,259,000, $2,273,000 and $1,384,000 are included in interest
income in 2017, 2016 and 2015, respectively.
(2) Accretion on acquired loan discounts of $464,000, $980,000 and $1,954,000 are included in interest income in 2017, 2016 and 2015, respectively.
(3) Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%.
(4) Net unrealized gains of $755,000, $6,301,000 and $6,679,000 are excluded from the yield calculation in 2017, 2016 and 2015, respectively.
(5) Accretion on acquired CD premiums of $32,000, $237,000 and $249,000 are included in interest expense in 2017, 2016 and 2015, respectively.
44
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,
2017 Compared to 2016 Increase
(Decrease) in Interest Income and
Expense Due to Changes in:
Rate
Total
Volume
2016 Compared to 2015 Increase
(Decrease) in Interest Income and
Expense Due to Changes in:
Rate
Total
Volume
Interest-earning assets:
Loans, net of unearned income:
Taxable ................................................ $
Tax-exempt .........................................
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
38,976 $
791
39,767
(35 )
6,721 $
17
6,738
(5)
45,697 $
808
46,505
(40)
29,151 $
430
29,581
(43)
(276) $
(15)
(291)
59
28,875
415
29,290
16
3,514
(162 )
3,352
(112 )
(160 )
262
(453)
(191)
798
(15)
3,776
(615)
3,161
686
(175)
988
(15)
973
788
1
24
(398)
(374)
91
34
1,012
(413)
599
879
35
with banks ...........................................
Total interest-earning assets ................
(2,033 )
40,779
1,735
9,060
(298)
49,839
1,317
32,617
724
243
2,041
32,860
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
470
14
2,815
355
3,654
(936 )
57
393
2
4,132
481
5,008
1,758
(13)
863
16
6,947
836
8,662
822
44
354
21
2,671
343
3,389
703
941
516
7
1,406
(44)
1,885
1,203
(19)
870
28
4,077
299
5,274
1,906
922
liabilities ..........................................
Increase in net interest income .................... $
2,775
38,004 $
6,753
2,307 $
9,528
40,311 $
5,033
27,584 $
3,069
(2,826) $
8,102
24,758
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 2016 to 2017, our growth in loans was again the primary driver of our volume component change and overall favorable
change. The rate component was modestly net favorable as loan yields increased 15 basis points compared to a 12 basis-point
increase in interest-bearing deposit cost. Growth in non-interest-bearing deposits also contributed to the improvement in net
interest margin in 2017.
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 liabilities increased by nine basis points.
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 3.47% and 3.68%, respectively, for the year ended December 31, 2017,
compared to 3.25% and 3.42%, respectively, for the year ended December 31, 2016. The increase in net interest spread and net
interest margin in 2017 primarily resulted from growth in average interest-earning assets. Our average interest-earning assets for
45
the year ended December 31, 2017 increased $706.8 million, or 12.8%, to $6.23 billion from $5.53 billion for the year ended
December 31, 2016. 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 $507.1 million, or 12.5%, to $4.56 billion for
the year ended December 31, 2017 from $4.05 billion for the year ended December 31, 2016. All of our markets had an increase
in total deposits during 2017. The ratio of our average interest-earning assets to average interest-bearing liabilities was 136.7%
and 136.4% for the years ended December 31, 2017 and 2016, respectively, as average noninterest-bearing deposits grew by
$160.7 million, or 13.5%, from 2016 to 2017.
Our average interest-earning assets produced a taxable equivalent yield of 4.25% for the year ended December 31, 2017,
compared to 3.89% for the year ended December 31, 2016. The average rate paid on interest-bearing liabilities was 0.77% for
the year ended December 31, 2017, compared to 0.64% for the year ended December 31, 2016.
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 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. 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.
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, 2017, total loans rated Special Mention, Substandard, and Doubtful were $99.8 million, or 1.7% of total loans,
compared to $128.8 million, or 2.6% of total loans, at December 31, 2016. Impaired loans are reviewed specifically and separately
under FASB ASC 310-30-35, Subsequent Measurement of Impaired Loans, to determine the appropriate reserve allocation. Our
management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the
loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-
dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-impaired loans are based on
historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses
inherent in our loan portfolio, our management considers historical loss experience based on volume and types of loans, trends
in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information.
Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at
an appropriate level.
The provision expense for loan losses was $23.2 million for the year ended December 31, 2017, an increase of $9.8 million from
$13.4 million in 2016. This increase in provision expense for loan losses for 2017 is primarily attributable to a $5.8 million
charge-off on one commercial relationship as well as the impact of loan growth. Nonperforming loans decreased to $10.8 million,
or 0.19% of total loans, at December 31, 2017 from $16.9 million, or 0.34% of total loans, at December 31, 2016. During 2017,
we had net charged-off loans totaling $15.7 million, compared to net charged-off loans of $4.9 million for 2016. The ratio of net
charged-off loans to average loans was 0.29% for 2017 compared to 0.11% for 2016. The ALLL totaled $59.4 million, or 1.02%
of loans, net of unearned income, at December 31, 2017, compared to $51.9 million, or 1.06% of loans, net of unearned income,
at December 31, 2016.
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
46
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.
Noninterest Income
Noninterest income increased $0.9 million, or 5.2%, to $19.0 million in 2017 from $18.1 million in 2016. Service charges on
deposit accounts increased $0.3 million, or 6.5%, to $5.7 million in 2017 compared to 2016 due to increases in the number of
accounts. Mortgage banking income increased $0.1 million, or 3.0%, to $3.8 million in 2017 compared to 2016. Credit card
income increased $1.6 million, or 50.1%, to $4.8 million in 2017 compared to 2016, primarily due to a 78% increase in number
of accounts and a 61% increase in total spending. The cash surrender value of bank-owned life insurance contracts increased
$0.3 million, or 12.1%, to $3.1 million in 2017 compared to 2016 which is the result of additional investment of $10.0 million
in such contracts in May of 2017. Other operating income decreased by $1.5 million, or 48.5%, to $1.6 million in 2017 compared
to 2016. A gain on sale of fixed assets of $1.4 million was recognized during 2016. Excluding this gain, other operating income
decreased $0.1 million in 2017 compared to 2016.
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 Expense
Noninterest expenses increased $4.9 million, or 6.1%, to $85.9 million for the year ended December 31, 2017 from $81.0 million
for the year ended December 31, 2016. Higher salary and employee benefits expenses, FDIC and regulatory assessments and
other operating expenses drove this increase in total noninterest expense. Salary and employee benefits expenses increased $3.6
million, or 8.3%, to $47.6 million in 2017 compared to 2016. We had 428 full-time equivalent employees at December 31, 2017
compared to 412 at December 31, 2016, a 3.9% increase. Staffing Tampa Bay, Florida, our newest market, and new hires in
operations staffing in our Birmingham headquarters drove this increase in the number of employees during 2017. Equipment and
occupancy expense only increased $33,000, or 0.4%, to $8.0 million in 2017 compared to 2016. We moved into our new
headquarters building in Birmingham, Alabama, which is owned by us, during the fourth quarter of 2017. We anticipate the cost
of operating this new larger facility will be approximately the same as operating our previous headquarters office, which was
leased by us. Professional services expense decreased $0.8 million, or 19.1%, to $3.2 million in 2017 compared to 2016. Most
of this decrease is the result of lower legal accruals related to pending litigation. FDIC assessments were up $0.5 million, or
15.2%, to $3.9 million in 2017 from $3.4 million in 2016, 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 57.4%, to $0.3 million in 2017 compared to 2016, primarily the
result of fewer write-downs on properties owned during 2017. Other operating expenses increased $1.9 million, or 9.1%, to $22.8
million in 2017 compared to 2016. Higher data processing and loan expenses were the result of growth in loans and increases in
transactions on loan and deposit accounts. Higher state sales taxes resulted from our new headquarters building in Birmingham,
Alabama. 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 2016 to 2017 are detailed in Note 17,
“Other Operating Income and Expenses,” to the Consolidated Financial Statements.
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, an 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
47
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.
Income Tax Expense
Income tax expense was $44.3 million for the year ended December 31, 2017 compared to $29.3 million in 2016 and $25.5
million in 2015. Our effective tax rates for 2017, 2016 and 2015 were 32.22%, 26.47% and 28.61%, respectively. The increased
effective tax rate for 2017 is due to $3.1 million of additional tax expense resulting from revaluing our net deferred tax assets as
of December 22, 2017 in connection with the Tax Cuts and Jobs Act passed into law in December 2017 as the corporate income
tax rate decreased to 21% from 35%, commencing in 2018. The revaluation adjustment required of our net deferred tax asset
position was impacted by a number of factors, including increased loan charge-offs, in the fourth quarter of 2017, increases in
deferred tax liabilities relating to depreciation expense on our new headquarters building, and dividends from our captive real
estate investment trusts. We recognized historic rehabilitation tax credits during 2015 and 2016, resulting in lower effective tax
rates 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 $112.5 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 an indirect, 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.
Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other things, the new law
(a) establishes a new, flat corporate federal statutory income tax rate of 21%, (b) eliminates the corporate alternative minimum
tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year, (c) limits the deduction for
net interest expense incurred by U.S. corporations, (d) allows businesses to immediately expense, for tax purposes, the cost of
new investments in certain qualified depreciable assets, (e) eliminates or reduces certain deductions related to meals and
entertainment expenses, (f) modifies the limitation on excessive employee remuneration to eliminate the exception for
performance-based compensation and clarifies the definition of a covered employee, and (g) limits the deductibility of deposit
insurance premiums. The Tax Cuts and Jobs Act also significantly changes U.S. tax law related to foreign operations, however,
such changes do not currently impact us. Based upon our current 2018 projections, we expect that our effective tax rate for 2018
will be approximately 11 percentage points lower under the new tax law than would have been the case prior to enactment;
however, there can be no assurance as to the actual amount of any reduction because it will be dependent upon the nature and
amount of future income and expenses as well as transactions with specific tax effects.
Financial Condition
Assets
Total assets at December 31, 2017, were $7.1 billion, an increase of $0.7 billion, or 10.9%, over total assets of $6.4 billion at
December 31, 2016. Average assets for the year ended December 31, 2017 were $6.5 billion, an increase of $0.7 billion, or
12.3%, over average assets of $5.7 billion for the year ended December 31, 2016. Loan growth was the primary reason for the
increase in ending and average total assets. Year-end 2017 loans were $5.9 billion, up $0.9 billion, or 18.4%, over year-end 2016
total loans of $4.9 billion.
48
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.
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,
and cash and due-from-bank accounts used for transaction processing. Earning assets at December 31, 2017 were $6.9 billion,
or 97.2% of total assets of $7.1 billion. Earning assets at December 31, 2016 were $6.2 billion, or 96.9% of total assets of $6.4
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, 2017, mortgage-backed securities
represented 51.7% of the investment portfolio, state and municipal securities represented 25.0% of the investment portfolio, U.S.
Treasury and government agencies represented 10.3% of the investment portfolio, and corporate debt represented 13.0% 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, 2017, any structured investment vehicles or any private-label mortgage-backed securities. The
amortized cost of securities in our portfolio totaled $538.6 million at December 31, 2017, compared to $485.9 million at
December 31, 2016. The following table presents the amortized cost of securities available for sale and held to maturity by type
at December 31, 2017, 2016 and 2015.
In the fourth quarter of 2017, we transferred certain of our held-to-maturity securities to available-for-sale in order to provide
more flexibility managing our investment portfolio. As a result of this transfer, we will be prohibited from classifying any
investment securities as held-to-maturity for two years from the date of the transfer.
Debt Securities Available for Sale
U.S. Treasury and government sponsored agencies .......................... $
Mortgage-backed securities ...............................................................
State and municipal securities ...........................................................
Corporate debt ...................................................................................
Total ...................................................................................................... $
Debt Securities Held to Maturity
Mortgage-backed securities ............................................................... $
State and municipal securities ...........................................................
Corporate debt ...................................................................................
Total ...................................................................................................... $
2017
December 31,
2016
(In Thousands)
2015
55,567 $
278,177
134,641
69,996
538,381 $
45,998 $
228,843
139,504
8,985
423,330 $
44,581
135,363
143,403
14,902
338,249
- $
250
-
250 $
19,164 $
5,888
37,512
62,564 $
21,666
5,760
-
27,426
The following table presents the amortized cost of our securities as of December 31, 2017 by their stated maturities (this maturity
schedule excludes security prepayment and call features), as well as the taxable equivalent yields for each maturity range.
49
Maturity of Debt Securities - Amortized Cost
Less Than One
Year
One Year
through Five
Years
Six Years
through Ten
Years
(In Thousands)
More Than Ten
Years
Total
Securities Available for Sale:
U.S. Treasury and government agencies ........................................ $
Mortgage-backed securities ............................................................
State and municipal securities .........................................................
Corporate debt .................................................................................
Total ..................................................................................................... $
1,998 $
11
20,125
-
22,134 $
50,444 $
8,101
100,338
9,990
168,873 $
3,125 $
55,624
10,231
56,506
125,486 $
- $
214,441
3,947
3,500
221,888 $
55,567
278,177
134,641
69,996
538,381
Tax-equivalent Yield (1)
U.S. Treasury and government agencies ........................................
Mortgage-backed securities ............................................................
State and municipal securities .........................................................
Corporate debt .................................................................................
Weighted average yield ........................................................................
1.58%
4.94
3.03
-
2.90%
1.99 %
2.68
2.82
3.04
2.58 %
1.71%
2.29
3.45
5.12
3.64%
-%
2.37
5.85
5.25
2.48%
Securities Held to Maturity:
State and municipal securities ......................................................... $
Total ..................................................................................................... $
250 $
250 $
Tax-equivalent Yield (1)
State and municipal securities .........................................................
Total .....................................................................................................
1.60%
1.60%
(1) Yields are presented on a fully-taxable equivalent basis using a tax rate of 35%.
- $
- $
- %
- %
- $
- $
-%
-%
- $
- $
-%
-%
1.96%
2.36
2.99
4.83
2.80%
250
250
1.60%
1.60%
At December 31, 2017, we had $239.5 million in federal funds sold, compared with $160.4 million at December 31, 2016. At
year-end 2017, 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 $5.9 billion at December 31, 2017. 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, as
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 ..................................
Percentage of Total Loans Assigned to Market
43%
10%
9%
7%
6%
75%
6%
2%
8%
9%
5%
3%
50
The following table details our loans at December 31, 2017, 2016, 2015, 2014 and 2013:
2017
2016
2015
(Dollars in Thousands)
2014
2013
Commercial, financial and agricultural ............................. $ 2,279,366 $ 1,982,267 $ 1,760,479 $ 1,504,652 $ 1,285,878
Real estate – construction .................................................. 580,874 335,085 243,267 208,769 151,868
Real estate – mortgage:
Owner-occupied commercial ........................................ 1,328,666 1,171,719 1,014,669 793,917 710,372
1-4 family mortgage ...................................................... 603,063 536,805 444,134 333,455 278,621
Other mortgage.............................................................. 997,079 830,683 698,779 471,363 391,396
Total real estate – mortgage ...................................... 2,928,808 2,539,207 2,157,582 1,598,735 1,380,389
40,733
Total Loans ................................................................... 5,851,261 4,911,770 4,216,375 3,359,858 2,858,868
(30,663)
Net Loans ...................................................................... $ 5,791,855 $ 4,859,877 $ 4,172,956 $ 3,324,229 $ 2,828,205
Less: Allowance for loan losses ........................................
Consumer ..........................................................................
(51,893)
(43,419)
(59,406)
(35,629)
62,213
55,211
55,047
47,702
The following table details the percentage composition of our loan portfolio by type at December 31, 2017, 2016, 2015, 2014
and 2013:
Commercial, financial and agricultural ............................
Real estate – construction .................................................
Real estate – mortgage:
Owner-occupied commercial .......................................
1-4 family mortgage .....................................................
Other mortgage.............................................................
Total real estate – mortgage .....................................
Consumer .........................................................................
Total Loans ..................................................................
2017
2016
2015
2014
38.96%
9.93
40.36%
6.82
41.75%
5.77
44.78%
6.21
22.71
10.30
17.04
50.05
1.06
100.00%
23.86
10.93
16.91
51.70
1.12
100.00%
24.07
10.53
16.57
51.17
1.31
100.00%
23.63
9.92
14.03
47.58
1.43
100.00%
2013
44.98%
5.31
24.85
9.74
13.69
48.28
1.43
100.00%
The following table details maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2017:
Commercial, financial and agricultural ................................................... $ 1,033,362 $ 1,074,513 $ 171,491 $ 2,279,366
Real estate – construction ........................................................................ 165,395 320,440
95,039 580,874
Real estate – mortgage:
Due in 1
year or less
Due in
1 to 5
years
Due after 5
years
Total
(in Thousands)
Owner-occupied commercial .............................................................. 133,360 906,234 289,072 1,328,666
1-4 family mortgage ............................................................................ 116,699 198,023 288,341 603,063
Other mortgage.................................................................................... 139,947 708,884 148,248 997,079
Total real estate – mortgage ............................................................ 390,006 1,813,141 725,661 2,928,808
62,213
Total Loans ......................................................................................... $ 1,626,351 $ 3,231,390 $ 993,520 $ 5,851,261
(59,406)
$ 5,791,855
Less: Allowance for loan losses ..............................................................
Net Loans ............................................................................................
Consumer ................................................................................................
37,588
23,296
1,329
Interest rate sensitivity:
Fixed interest rates .............................................................................. $ 325,179 $ 2,202,675 $ 455,430 $ 2,983,284
Floating or adjustable rates ................................................................. 1,301,172 1,028,715 538,090 2,867,977
Total ........................................................................................................ $ 1,626,351 $ 3,231,390 $ 993,520 $ 5,851,261
51
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 2017 was 0.29%, compared to 0.11% for 2016.
Analysis of the Allowance for Loan Losses
2017
2016
2015
(Dollars in Thousands)
2014
2013
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 ........................................................
51,893 $
43,419 $
35,629 $
30,663 $
26,258
(13,910)
(56)
(3,791)
(815)
(3,802)
(667)
(2,311)
(1,267)
(1,932)
(4,829)
(522)
(878)
(656)
(2,056)
(310)
(16,332)
(2)
(269)
(109)
(380)
(212)
(5,198)
(211)
(446)
(447)
(1,104)
(171)
(5,744)
(36)
(1,529)
(400)
(1,965)
(228)
(5,771)
(1,100)
(941)
-
(2,041)
(210)
(9,012)
337
168
-
64
25
89
26
620
49
76
-
114
32
146
3
274
279
238
-
169
-
169
1
687
48
322
-
65
9
74
34
478
66
296
32
4
-
36
11
409
Net charge-offs .............................................................
(15,712)
(4,924)
(5,057)
(5,293)
(8,603)
Provision for loan losses charged to expense ...................
23,225
13,398
12,847
10,259
13,008
Allowance for loan losses at end of period ...................... $
59,406 $
51,893 $
43,419 $
35,629 $
30,663
As a percent of year to date average loans:
Net charge-offs .............................................................
Provision for loan losses ..............................................
0.29%
0.43%
0.11%
0.30%
0.13%
0.34%
0.17%
0.34%
0.33%
0.50%
Allowance for loan losses as a percentage of:
Year-end loans .............................................................
Nonperforming assets ...................................................
1.02%
338.96%
1.06%
237.23%
1.03%
329.96%
1.06%
210.95%
1.07%
135.70%
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, 2017.
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.
52
2013
Percentage
of loans in
each
category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
(Dollars in Thousands)
For the Years Ended December 31,
2015
Percentage
of loans in
each
category to
2017
Percentage
of loans in
each
category to
2014
Percentage
of loans in
each
category to
2016
Percentage
of loans in
each
category to
Commercial,
financial and
agricultural ............ $ 32,880
Real estate -
38.96% $ 28,872
40.36% $ 21,495
41.75% $ 16,079
44.78% $ 13,576
44.98%
construction...........
4,989
9.93 5,125
6.82 5,432
5.77 6,395
6.21 6,078
5.31
Real estate -
mortgage ............... 21,022
50.05 17,504
51.70 16,061
51.17 12,112
47.58 10,065
48.28
Consumer ..................
515
1.06
392
1.12
431
1.31 1,043
1.43
944
1.43
Total ...................... $ 59,406 100.00% $ 51,893 100.00% $ 43,419 100.00% $ 35,629 100.00% $ 30,663 100.00%
We target small and medium-sized businesses as loan customers. Because of their size, these borrowers may be less able to
withstand competitive or economic pressures than larger borrowers in periods of economic weakness. If loan losses occur at a
level where the loan loss reserve is not sufficient to cover actual loan losses, our earnings will decrease. We use an independent
consulting firm to review our loans annually for quality in addition to the reviews that may be conducted by bank regulatory
agencies as part of their examination process.
As of December 31, 2017, we had impaired loans of $40.5 million, a decrease of $5.1 million from $45.6 million as of December
31, 2016. We allocated $5.6 million of our allowance for loan losses at December 31, 2017 to these impaired loans compared to
$8.2 million at December 31, 2016. We had previous write-downs against impaired loans of $7.2 million at December 31, 2017,
compared to $5.7 million at December 31, 2016. The recorded investment in impaired loans at December 31, 2017 is also
inclusive of a purchase loan discount associated with the acquisition of Metro Bank totaling $0.2 million. The average recorded
balance for 2017 of impaired loans was $48.7 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 $10.8 million at December 31, 2017, an
increase of $0.2 million compared to $10.6 million at December 31, 2016. Interest income foregone throughout the year on
nonaccrual loans was $1,012,000, and we recognized $506,000 of interest income on nonaccrual loans for the year ended
December 31, 2017, compared to interest income foregone in 2016 of $516,000 and $629,000 of interest income recognized on
nonaccrual loans for the year ended December 31, 2016.
Of the $40.5 million of impaired loans reported as of December 31, 2017, $26.4 million were commercial and industrial loans,
$12.4 million were real estate mortgage loans, $1.6 million were real estate construction loans and $88,000 were consumer loans.
Of the $1.6 million of impaired real estate construction loans, $45,000 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:
• We closely monitor the past due and overdraft reports on a weekly basis to identify deterioration as early as possible
and the placement of identified loans on the watch list.
• We perform extensive monthly credit review for all watch list/classified loans, including formulation of aggressive
workout or action plans. When a workout is not achievable, we move to collection/foreclosure proceedings to obtain
control of the underlying collateral as rapidly as possible to minimize the deterioration of collateral and/or the loss of
its value.
53
• We require updated financial information, global inventory aging and interest carry analysis for existing customers to
help identify potential future loan payment problems.
• We generally limit loans for new construction to established builders and developers that have an established record of
turning their inventories, and we restrict our funding of undeveloped lots and land.
Nonperforming Assets
The table below summarizes our nonperforming assets at December 31, 2017, 2016, 2015, 2014 and 2013:
2017
2016
2015
2014
2013
Balance
Number
of Loans Balance
Number
of Loans Balance
Number
of Loans Balance
Number
of Loans Balance
Number
of Loans
(Dollars in Thousands)
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 ................................... $
9,712
-
556
459
-
1,015
38
10,765
90+ days past due and accruing:
Commercial, financial
and agricultural ................................... $
12
Real estate - construction ..........................
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage ............................
Other mortgage ....................................
-
-
-
-
Total real estate - mortgage ......................
Consumer ..................................................
-
48
Total 90+ days past due
and accruing ............................................. $
Total nonperforming Loans ........................... $
Plus: Other real estate
60
10,825
owned and repossessions .........................
Total nonperforming Assets .......................... $
6,701
17,526
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 ..................................................
11,438
997
3,664
850
-
4,514
-
Total restructured
18 $
-
2
2
-
4
1
23 $
3 $
-
-
-
-
-
24
27 $
50 $
12
62 $
6 $
1
2
1
-
3
-
7,282
3,268
-
74
-
74
-
10,624
10
-
6,208
-
-
6,208
45
6,263
16,887
4,988
21,875
13 $
5
-
1
-
1
-
19 $
1 $
-
1
-
-
1
10
12 $
31 $
12
43 $
1,918
4,000
-
198
1,619
1,817
31
7,766
-
-
-
-
-
-
1
7 $
7
-
2
5
7
1
22 $
- $
-
-
-
-
-
1
172
5,049
683
1,596
959
3,238
666
9,125
925
-
-
-
-
-
-
4 $
11
2
3
1
6
4
25 $
1 $
-
-
-
-
-
-
1,714
3,749
1,435
1,878
243
3,556
602
9,621
-
-
-
19
-
19
96
1
7,767
5,392
13,159
1 $
23 $
18
41 $
925
10,050
6,840
16,890
1 $
26 $
22
48 $
115
9,736
12,861
22,597
354
-
1 $
-
6,618
-
8 $
-
6,632
-
-
-
204
204
-
-
-
1
1
-
-
-
253
253
-
-
-
1
1
-
-
-
1,663
1,663
-
8 $
-
-
-
2
2
-
962
217
-
8,225
285
8,510
-
accruing loans ........................................... $
16,949
10 $
558
2 $
6,871
9 $
8,295
10 $
9,689
9
14
3
3
1
7
4
34
-
-
-
1
-
1
1
2
36
51
87
2
1
-
2
1
3
-
6
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
34,475
72 $
22,433
45 $
20,030
50 $
25,185
58 $
32,286
93
1,012
$
516
$
678
$
750
$
972
506
$
629
$
602
$
255
$
433
to total loans .............................................
0.19%
0.34 %
0.18%
0.30 %
0.34%
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 .........................
0.30%
0.44 %
0.31%
0.50 %
0.85%
0.59%
0.46 %
0.47%
0.75 %
1.12%
54
The balance of nonperforming assets can fluctuate due to changes in economic conditions. We have established a policy to
discontinue accruing interest on a loan (i.e., place the loan on nonaccrual status) after it has become 90 days delinquent as to
payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection.
In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the
collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current
income when the receivable is determined to be uncollectible. Interest income on nonaccrual loans is recognized only as received.
If we believe that a loan will not be collected in full, we will increase the allowance for loan losses to reflect management’s
estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal.
There are not any loans, outside of those included in the table above, that cause management to have serious doubts as to the
ability of borrowers to comply with present repayment terms.
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, 2017, 2016 and 2015:
Average Deposits
Average for Years Ended December 31,
2016
2015
2017
Average
Balance
Average
Rate
Paid
Average
Rate
Paid
Average
Balance
(Dollars in Thousands)
Average
Balance
Average
Rate
Paid
Types of Deposits:
Non-interest-bearing demand
deposits ................................................... $1,351,112
Interest-bearing demand deposits ............... 817,496
Money market accounts ............................. 2,776,363
49,151
Savings accounts ........................................
Time deposits, $250,000 and under ............ 206,606
Time deposits, over $250,000 .................... 340,829
Total deposits ......................................... $5,541,557
-% $1,190,372
0.41% 697,109
0.70% 2,308,065
44,521
0.31%
1.11% 238,565
1.08% 274,618
$4,753,250
-% $ 944,019
0.36% 584,756
0.54% 1,786,045
37,683
0.31%
0.92% 237,086
1.07% 241,730
$ 3,831,319
-%
0.28%
0.46%
0.29%
0.98%
1.04%
55
The following table presents the maturities of our certificates of deposit as of December 31, 2017 and 2016.
At December 31, 2017
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)
46,778 $
37,759
124,188
133,977
342,702 $
41,772 $
36,805
66,111
83,852
228,540 $
88,550
74,564
190,299
217,829
571,242
Less than or
equal to
$250,000
Total
At December 31, 2016
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)
39,050 $
33,207
70,802
150,607
293,666 $
45,136 $
38,601
62,695
87,725
234,157 $
84,186
71,808
133,497
238,332
527,823
Less than or
equal to
$250,000
Total
Total average deposits for the year ended December 31, 2017 were $5.5 billion, an increase of $0.8 billion, or 16.6%, over total
average deposits of $4.8 billion for the year ended December 31, 2016. Average noninterest-bearing deposits increased by $0.2
billion, or 13.5%, from $1.2 billion for the year ended December 31, 2016 to $1.35 billion for the year ended December 31, 2017.
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.
Borrowed Funds
We had available $468.0 million in unused federal funds lines of credit with regional banks as of December 31, 2017, compared
to $378.0 million as of December 31, 2016. The increase was attributable to additional lines of credit initiated with new banks
during 2017. These lines are subject to certain restrictions and in some cases collateral requirements.
Federal funds purchased from correspondent banks averaged $312.2 million, $433.7 million and $272.0 million for 2017, 2016
and 2015, respectively. We paid average interest rates on these funds of 1.15%, 0.64% and 0.32% for the same three years,
respectively. The maximum amount outstanding at month-end during 2017 and 2016 was $394.1 million and $514.8 million,
respectively.
Stockholders’ Equity
Stockholders’ equity increased $84.7 million during 2017, to $607.6 million at December 31, 2017 from $522.9 million at
December 31, 2016. The increase in stockholders’ equity resulted from net income of $93.1 million during the year ended
December 31, 2017.
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
56
instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet
instruments.
The following table sets forth our credit arrangements and financial instruments whose contract amounts represent credit risk as
of December 31, 2017, 2016 and 2015:
2017
2016
(In Thousands)
2015
Commitments to extend credit ............................................................... $ 1,945,171 $ 1,667,015 $ 1,409,425
62,462
Credit card arrangements .......................................................................
38,224
Standby letters of credit and financial guarantees .................................
Total .................................................................................................. $ 2,114,974 $ 1,808,684 $ 1,510,111
128,149
41,654
100,678
40,991
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, 2017 and 2016 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, 2017,
our gap was within such ranges. See “—Quantitative and Qualitative Analysis of Market Risk” below in Item 7A for additional
information.
57
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, 2017, our liquid
assets, represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $821.5
million. Additionally, at such date we had available to us approximately $468.0 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, 2017. The amounts shown do
not reflect any early withdrawal or prepayment assumptions.
Payments due by Period
Total
less than
1 year
1 - 3 years
3 - 5 years
Over 5 years
(In Thousands)
Contractual Obligations (1)
Deposits without a stated maturity ................ $ 5,520,432 $ 5,520,432 $
353,413
Certificates of deposit (2) ..............................
301,797
Federal funds purchased ................................
200
Other borrowings ..........................................
3,093
Operating lease commitments .......................
Total .......................................................... $ 6,475,849 $ 6,178,935 $
571,242
301,797
64,832
17,546
- $
138,505
-
-
6,031
144,536 $
- $
79,274
-
-
4,781
84,055 $
-
50
-
64,632
3,641
68,323
(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, 2017, 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, 2017. In addition, the
Alabama Banking Department has required that the bank maintain a leverage ratio of 8.00%.
58
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, 2017.
CET 1 Capital Ratio .....................................................................................................
Tier 1 Capital Ratio ......................................................................................................
Total Capital Ratio .......................................................................................................
Leverage ratio ...............................................................................................................
Well-
Capitalized
6.50%
8.00%
10.00%
5.00%
Actual at
December 31,
2017
10.45%
10.45%
11.42%
9.35%
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, 2017, our gap was within such ranges.
59
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, 2017. Management uses the one-year gap as the
appropriate time period for setting strategy.
Rate Sensitive Gap Analysis
1-3 Months 4-12 Months 1-5 Years Over 5 Years
Total
(Dollars in Thousands)
Interest-earning assets:
Loans, including mortgages held for sale ......................... $ 2,910,824
Securities ..........................................................................
29,509
239,524
Federal funds sold ............................................................
Interest bearing balances with banks ................................
150,364
Total interest-earning assets ............................................. $ 3,330,221
$ 635,859
75,020
-
-
$ 710,879
$2,135,700 $ 173,337 $ 5,855,720
98,673 539,364
336,162
- 239,524
-
- 151,849
1,485
$2,473,347 $ 272,010 $ 6,786,457
Interest-bearing liabilities:
Deposits:
Interest-bearing checking ............................................. $
990,700
Money market and savings ........................................... 3,089,406
88,549
Time deposits ...............................................................
Federal funds purchased ...................................................
100
Other borrowings .............................................................
301,797
Total interest-bearing liabilities ....................................... 4,470,552
Interest sensitivity gap ...................................................... $(1,140,331)
Cumulative sensitivity gap ............................................... $(1,140,331)
Percent of cumulative sensitivity Gap to total interest-
$
-
-
264,863
100
-
264,963
$ 445,916
$ (694,415)
$
- $ 990,700
- $
- 3,089,406
-
50 571,242
217,780
64,832
-
- 301,797
-
217,780
64,682 5,017,977
$2,255,567 $ 207,328 $ 1,768,480
-
$1,561,152 $1,768,480 $
64,632
earning assets ................................................................
(16.80)%
(10.23)%
23.00%
26.06%
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 remained at those low levels until the Federal Reserve started
increasing its target rate in December 2015. Since the first increase, the Federal Reserve has raised its targeted federal funds rate
by 125 basis points to its current rate of 1.50%. At December 31, 2017, the model shows an increase in our EVE for all upward
shifts in rates. The negative 9.5% change for a 100 basis point downward shift in rates is within our policy limit.
The chart below identifies the EVE impact of a downward shift in rates of 100 basis points and an upward shift in rates of 100,
200, 300 and 400 basis points.
Economic Value of Equity Under Rate Shock
At December 31, 2017
0 bps
-100 pbs
+100 bps
+200 bps
(Dollars in Thousands)
+300 bps
+400 bps
Economic value of equity ........................... $ 607,604 $ 549,882
Actual dollar change ..................................
$ (57,722)
Percent change ...........................................
$ 632,516 $ 648,313 $ 662,896 $ 673,833
66,229
$
10.90%
(9.50)%
40,709 $ 55,292 $
9.10%
24,912 $
4.10%
6.70%
The one year gap ratio of negative 10.7% indicates that we would show a decrease in net interest income in a rising rate
environment, and the EVE rate shock shows that the EVE would increase in a rising rate environment. The EVE simulation
model is a static model which provides information only at a certain point in time. For example, in a rising rate environment, the
model does not take into account actions which management might take to change the impact of rising rates on us. Given that
limitation, it is still useful in assessing the impact of an unanticipated movement in interest rates.
The above analysis may not on its own be an entirely accurate indicator of how net interest income or EVE will be affected by
changes in interest rates. Income associated with interest earning assets and costs associated with interest bearing liabilities may
not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may
60
have a significant impact on net interest income. Interest rates on certain types of assets and liabilities fluctuate in advance of
changes in general market rates, while interest rates on other types may lag behind changes in general market rates. Our asset
liability committee develops its view of future rate trends by monitoring economic indicators, examining the views of economists
and other experts, and understanding the current status of our balance sheet and conducts a quarterly analysis of the rate sensitivity
position. The results of the analysis are reported to our board of directors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulations S-X and by Item 302 of Regulation S-K are set forth
in the pages listed below.
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements ..............................
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting ...................
Consolidated Balance Sheets at December 31, 2017 and 2016 .......................................................................................
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015 .....................................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015 ...........
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2017, 2016 and 2015 ................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015 ...............................
Notes to Consolidated Financial Statements ...................................................................................................................
62
63
64
65
66
67
68
69
Page
61
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
ServisFirst Bancshares, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of ServisFirst Bancshares, Inc. and subsidiaries (the "Company")
as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders' equity,
and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to
as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
("PCAOB"), the Company's internal control over financial reporting as of December 31, 2017, 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, 2018, expressed an unqualified opinion thereon.
Change in Accounting Principle
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.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Dixon Hughes Goodman LLP
We have served as the Company's auditor since 2014.
Atlanta, Georgia
February 28, 2018
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
ServisFirst Bancshares, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited ServisFirst Bancshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. In our opinion, ServisFirst Bancshares, Inc. and subsidiaries (the “Company”) maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2017, 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)
(“PCAOB”), the consolidated financial statements of ServisFirst Bancshares, Inc. as of December 31, 2017 and 2016 and for each of
the three years in the period ended December 31, 2017, and our report dated February 28, 2018, 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.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Dixon Hughes Goodman LLP
Atlanta, Georgia
February 28, 2018
63
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
Cash and due from banks ............................................................................................................. $
Interest-bearing balances due from depository institutions ..........................................................
Federal funds sold ........................................................................................................................
Cash and cash equivalents ........................................................................................................
Available for sale debt securities, at fair value .............................................................................
Held to maturity debt securities (fair value of $250 and $63,302 at December 31, 2017 and
86,213 $
151,849
239,524
477,586
538,080
56,855
566,707
160,435
783,997
422,375
December 31,
2017
December 31,
2016
December 31, 2016, 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 ..................................................................................................................................
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
Total assets ............................................................................................................................... $ 7,082,384 $ 6,370,448
250
1,034
4,459
5,851,261
(59,406)
5,791,855
58,900
20,661
13,022
6,701
127,519
14,719
27,598
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest-bearing demand ................................................................................................... $ 1,440,326 $ 1,281,605
4,138,706
Interest-bearing ........................................................................................................................
5,420,311
Total deposits .......................................................................................................................
355,944
Federal funds purchased ...............................................................................................................
55,262
Other borrowings .........................................................................................................................
4,401
Accrued interest and dividends payable .......................................................................................
11,641
Other liabilities .............................................................................................................................
5,847,559
Total liabilities .........................................................................................................................
4,651,348
6,091,674
301,797
64,832
4,971
11,506
6,474,780
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,
2017 and December 31, 2016 ...............................................................................................
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at
December 31, 2017 and December 31, 2016........................................................................
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 52,992,586
-
-
-
-
shares issued and outstanding at December 31, 2017, and 52,636,896 shares issued and
outstanding at December 31, 2016 .......................................................................................
Additional paid-in capital .........................................................................................................
Retained earnings .....................................................................................................................
Accumulated other comprehensive loss ...................................................................................
Total stockholders' equity attributable to ServisFirst Bancshares, Inc. ................................
Noncontrolling interest .............................................................................................................
Total stockholders' equity .....................................................................................................
53
215,932
307,151
(624)
522,512
377
522,889
Total liabilities and stockholders' equity .................................................................................. $ 7,082,384 $ 6,370,448
53
217,693
389,554
(198)
607,102
502
607,604
See Notes to Consolidated Financial Statements.
64
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 .........................................................................................
Credit card income ........................................................................................
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.
Year Ended December 31,
2016
2017
2015
246,682 $
9,117
2,948
1,693
2,316
262,756
28,831
6,502
35,333
227,423
23,225
204,198
5,702
3,835
4,815
-
3,131
1,563
19,046
47,604
8,018
3,217
3,918
323
-
22,814
85,894
137,350
44,258
93,092
62
93,030 $
1.76 $
1.72 $
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
3,207
(3)
2,794
3,034
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
2,073
29
2,621
1,084
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
65
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income ........................................................................................................ $
Other comprehensive (loss) income, net of tax:
Unrealized holding losses arising during period from securities available
for sale, net of tax of $(362), $(1,980) and $(767) for 2017, 2016 and
2015, respectively .....................................................................................
Reduction in unrealized loss related to held to maturity debt securities
transferred to available for sale, net of tax of $592 ...................................
Reclassification adjustment for net losses (gains) on sale of securities, net
of tax of $(1) and $10 for 2016 and 2015, respectively.............................
Other comprehensive income (loss), net of tax .............................................
Comprehensive income ..................................................................................... $
See Notes to Consolidated Financial Statements.
Year Ended December 31,
2016
2017
2015
93,092 $
81,479 $
63,540
(674)
(3,674)
(1,423)
1,100
-
-
-
426
93,518 $
2
(3,672)
77,807 $
(19)
(1,442)
62,098
66
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In thousands, except share amounts)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
25 $ 185,397 $177,091 $
(4,643)
-
(1,558)
-
(280)
-
-
-
-
Accumulated
Other
Comprehensive
(loss) Income
4,490 $
-
-
-
Noncontrolling
Interest
Total
Stockholders'
Equity
Balance, December 31, 2014 ............................... $ 39,958 $
-
-
-
Common dividends paid, $0.09 per share .......
Common dividends declared, $.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 ....................
Issue 125 shares of REIT preferred stock .......
Redeem 40,000 shares of preferred stock
issued to the ................................................
-
-
-
-
1 19,355
(73)
-
-
-
3,801
1,843
-
-
-
-
Department of the Treasury under TARP ....... (39,958)
-
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
-
-
-
-
-
(42)
-
1,265
-
-
- 63,540
26 211,546 234,150
(6,299)
-
(2,105)
-
(47)
-
-
-
-
252 $ 407,213
(4,643)
(1,558)
(280)
-
-
-
-
-
19,356
(73)
-
125
3,801
1,968
-
-
-
-
377
-
-
-
(40,000)
1,265
(1,442)
63,540
449,147
(6,299)
(2,105)
(47)
-
-
-
-
-
-
(1,442)
-
3,048
-
-
-
stock dividend.............................................
Issue 682,500 shares of common stock upon
exercise of stock options.............................
Stock based compensation expense ................
Other comprehensive income, net of tax .........
Net income ......................................................
Balance, December 31, 2016 ..........................
Common dividends paid, $0.15 per share .......
Common dividends declared, $0.05 per share
Preferred dividends paid .................................
Issue 385,500 shares of common stock upon
exercise of stock options.............................
35,010 Shares withheld in net settlement
upon exercise of stock options ....................
Issue 125 shares of REIT preferred stock .......
Stock based compensation expense ................
Other comprehensive income, net of tax .........
Reclassification of the disproportionate tax
effect of enactment of the Tax Cuts and
Jobs Act of 2017 .........................................
Net income ......................................................
Balance, December 31, 2017 .......................... $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
27
-
(27)
-
-
-
-
-
-
-
-
3,188
-
1,198
-
-
- 81,479
53 215,932 307,151
(7,935)
-
(2,649)
-
(62)
-
-
-
-
-
-
(3,672)
-
(624)
-
-
-
-
-
-
-
377
-
-
-
3,188
1,198
(3,672)
81,479
522,889
(7,935)
(2,649)
(62)
-
1,911
-
-
-
-
(1,320)
-
1,170
-
-
-
-
-
-
-
-
1,911
-
-
-
383
-
125
-
-
(1,320)
125
1,170
383
-
-
- $
-
-
(43)
-
- 93,092
53 $ 217,693 $389,554 $
43
-
(198) $
-
-
-
93,092
502 $ 607,604
See Notes to Consolidated Financial Statements.
67
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
93,092 $
81,479 $
63,540
2017
Year Ended December 31,
2016
2015
Deferred tax expense (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 debt 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 ....................................................................
Operating 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 debt securities available for sale .....................................................................................................
Proceeds from maturities, calls and paydowns of debt securities available for sale ..........................................
Proceeds from sale of debt securities available for sale .....................................................................................
Purchase of debt securities held to maturity .......................................................................................................
Proceeds from maturities, calls and paydowns of debt 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 contracts ...............................................................................................
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 (decrease) 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 issuance of 4.5% subordinated notes due November 8, 2027, net of issuance cost ...................
Repayment of 5.5% subordinated notes due November 9, 2022 ........................................................................
Repayment of Federal Home Loan Bank advances ............................................................................................
Proceeds from sale of preferred stock, net ..........................................................................................................
Proceeds from exercise of stock options .............................................................................................................
Taxes paid in net settlement upon exercise of stock options ..............................................................................
Capitalized cost of shelf registration ..................................................................................................................
Dividends paid on common stock .......................................................................................................................
Dividends paid on preferred stock ......................................................................................................................
Net cash provided by financing activities ...............................................................................................
Net (decrease) increase in cash and cash equivalents ..............................................................................................
Cash and cash equivalents at beginning of year .......................................................................................................
Cash and cash equivalents at end of year ................................................................................................................. $
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest ........................................................................................................................................................... $
Income taxes ..................................................................................................................................................
Income tax refund ..........................................................................................................................................
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 ........................................................................................................... $
Intangible assets acquired..............................................................................................................................
Fair value of liabilities assumed ....................................................................................................................
Net identifiable assets acquired over liabilities assumed ........................................................................ $
See Notes to Consolidated Financial Statements.
68
14,048
23,225
2,568
(464)
277
4,019
(4,860)
1,170
570
136,259
(132,208)
-
(3,835)
(33)
23
79
(3,131)
(12,335)
118,464
(83,004)
84,637
3,500
(66,002)
6,227
(10)
-
(957,975)
(21,154)
(10,000)
-
1,533
-
-
(1,042,248)
158,721
512,642
(54,147)
-
-
29,943
(20,000)
(400)
125
1,911
(1,320)
-
(10,040)
(62)
617,373
(306,411)
783,997
477,586 $
34,763 $
42,586
(492)
4,685 $
1,449
2,649
- $
-
-
- $
(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 $
30,268
(929)
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
27,113
(50)
2,092
1,799
1,558
204,985
15,707
(180,410)
40,282
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 $51.8 million at December 31, 2017 and $39.2 million at
December 31, 2016.
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.
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.
69
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, 2017 and 2016.
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.
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
70
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 39.5
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, 2017 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.
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
71
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, 2017 and 2016 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.
Stock-Based Compensation
At December 31, 2017, 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
72
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, 2017, 2016 and 2015 was
$716,000, $544,000 and $562,000, 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 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 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 was permitted. The Company elected to early adopt the
provisions of 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. Accordingly, the Company recognized a reduction in its provision for income
taxes for 2017 and 2016 of $4.6 million and $4.8 million, respectively. Prior to the adoption of ASU 2016-09, such tax benefits
were recorded as an increase to additional paid-in capital.
73
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 became 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. Adoption of this standard has not affected the consolidated financial statements.
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 recently issued accounting standards adopted in a future period will have on its accounting and disclosures.
In February 2018, the FASB issued a proposed Accounting Standards Update, ASU 2018-02, Income Statement - Reporting
Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income. The amendments in this ASU require a reclassification from / to accumulated other comprehensive income and to /
from retained earnings for stranded tax effects resulting from the change in the newly enacted federal corporate income tax
rate. Consequently, the amendments in this ASU eliminates the stranded tax effects associated with the change in the federal
corporate income tax rate in the Tax Cuts and Jobs Act of 2017. The amendments in this ASU are effective for all entities for
fiscal year beginning after December 15, 2018 with early adoption allowed. The Bank has elected to early adopt this ASU as of
December 31, 2017. The effect of the adoption of this ASU was to decrease accumulated other comprehensive income by
$43,000 with the offset to retained earnings as recorded in the statement of changes in stockholders' equity. This represents the
difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate.
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. The Company’s revenue is more significantly
weighted towards net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new
standard, and noninterest income has not been as significant. The Company assessed its revenue streams and reviewed its
contracts with customers that are affected by the new guidance including fees on deposits, gains and losses on the sale of other
real estate owned, credit and debit card interchange fees, and credit card revenue, to determine the potential impact the new
guidance has on the Company’s consolidated financial statements. The Company’s revenue recognition pattern for these revenue
streams is not materially different from current practice. The amendments in this ASU are effective for the Company on January
1, 2018 using a modified retrospective transition approach and will not have a significant impact on the Company’s consolidated
financial statements.
74
In January 2016, the FASB issued ASU 2016-01, Financial Instruments Overall (Topic 825): Recognition and Measurement of
Financial Assets and Financial Liabilities. The amendments in ASU 2016-1: (a) require 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) simplify the impairment assessment of equity securities without
readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminate 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) require public business entities to use
the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (e) require 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) require 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) clarify
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 the Company on January
1, 2018 and will not have a material impact 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. In January 2018, the
FASB issued a proposal to allow an additional transition method that would allow entities to not apply the guidance in ASU
2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment
to the opening balance of retained earnings in the period of adoption. The Company leases many of its banking offices under
lease agreements it classifies as operating leases. Management currently anticipates recognizing a right-of-use asset and a lease
liability associated with its long-term operating leases, which among other things, will increase the amount of risk-weighted
assets it reports in the calculation of its regulatory capital ratios.
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 March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium
Amortization on Purchased Callable Debt Securities. The amendments shorten the amortization period for certain callable debt
securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The
amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to
maturity. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Early adoption is permitted. The amendments should be applied on a modified
retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.
The amendments in this ASU will not impact the Company’s financial statements as it has always amortized premiums to the
first call date.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718), Scope of Modification
Accounting. The amendments provide guidance on determining which changes to the terms and conditions of share-based
payment awards require an entity to apply modification accounting under Topic 718. The guidance is effective for all entities for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted,
including adoption in an interim period. The amendments in this ASU should be applied prospectively to an award modified on
or after the adoption date. The Company has determined that the amendments in this ASU will have no impact on its consolidated
financial statements since there have been no modifications to any of its share-based payment awards.
75
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 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.
NOTE 3. DEBT SECURITIES
The amortized cost and fair values of available-for-sale and held-to-maturity debt securities at December 31, 2017 and 2016 are
summarized as follows:
December 31, 2017
Securities Available for Sale
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gain
Loss
Market
Value
(In Thousands)
U.S. Treasury and government sponsored agencies ........ $
Mortgage-backed securities .............................................
State and municipal securities .........................................
Corporate debt .................................................................
Total .................................................................................... $
Securities Held to Maturity
State and municipal securities .........................................
Total .................................................................................... $
55,567 $
278,177
134,641
69,996
538,381 $
38 $
1,006
761
1,416
3,221 $
(249) $
(2,685)
(553)
(35)
(3,522) $
55,356
276,498
134,849
71,377
538,080
250
250 $
-
- $
-
- $
250
250
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 .................................................................................... $
45,998 $
228,843
139,504
8,985
423,330 $
19,164
5,888
37,512
62,564 $
382 $
1,515
1,120
16
3,033 $
321
315
374
1,010 $
(126) $
(3,168)
(694)
-
(3,988) $
(245)
(12)
(15)
(272) $
46,254
227,190
139,930
9,001
422,375
19,240
6,191
37,871
63,302
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 2017 and 2016, 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.
In the fourth quarter of 2017, the Company transferred its held-to-maturity investment portfolio to available-for-sale in order to
provide more flexibility managing its investment portfolio. As a result, the Company is prohibited from classifying any
investment securities bought during the two years following the transfer as held-to-maturity.
The amortized cost and fair value of debt securities as of December 31, 2017 and 2016 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.
76
December 31, 2017
December 31, 2016
Amortized
Cost
Market
Value
Amortized
Cost
Market
Value
(In Thousands)
Debt securities available for sale
Due within one year ................................................... $
Due from one to five years ........................................
Due from five to ten years .........................................
Due after ten years .....................................................
Mortgage-backed securities .......................................
$
22,122 $
160,773
73,362
3,947
278,177
538,381 $
22,172 $
160,563
74,684
4,163
276,498
538,080 $
28,270 $
152,347
13,870
-
228,843
423,330 $
28,400
153,003
13,782
-
227,190
422,375
Debt securities held to maturity
Due from one to five years ........................................ $
Due from five to ten years .........................................
Due after ten years .....................................................
Mortgage-backed securities .......................................
$
250 $
-
-
-
250 $
250 $
-
-
-
250 $
250 $
34,251
8,899
19,164
62,564 $
250
34,617
9,195
19,240
63,302
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, 2017 and 2016. 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, 2017.
There were no other-than-temporary impairments for the years ended December 31, 2017, 2016 and 2015.
Less Than Twelve Months Twelve Months or More
Gross
Unrealized
Losses
Gross
Unrealized
Fair Value Losses
Total
Gross
Unrealized
Fair Value Losses
Fair Value
December 31, 2017
U.S. Treasury and government sponsored
agencies ................................................... $
Mortgage-backed securities .........................
State and municipal securities .....................
Corporate debt .............................................
Total ........................................................ $
December 31, 2016
U.S. Treasury and government sponsored
agencies ................................................... $
Mortgage-backed securities .........................
State and municipal securities .....................
Corporate debt .............................................
Total ........................................................ $
(In Thousands)
(151 ) $
33,401 $
(986 ) 140,432
66,637
(450 )
6,955
(35 )
(1,622 ) $ 247,425 $
(98) $
(1,699)
(103)
-
(1,900) $
2,926 $
75,903
6,648
-
85,477 $
(126 ) $
10,865 $
(3,413 ) 174,225
64,502
3,034
(4,252 ) $ 252,626 $
(698 )
(15 )
- $
-
(8)
-
(8) $
- $
-
1,021
-
1,021 $
(249) $
36,327
(2,685) 216,335
73,285
6,955
(3,522) $ 332,902
(553)
(35)
(126) $
10,865
(3,413) 174,225
65,523
3,034
(4,260) $ 253,647
(706)
(15)
At December 31, 2017, 72 of the Company’s 796 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.
77
Sale proceeds ......................................................................................... $
Gross realized gains ............................................................................... $
Gross realized losses..............................................................................
Net realized gain (loss) .......................................................................... $
2017
Years Ended December 31,
2016
(In Thousands)
6,085 $
4 $
(7)
(3) $
- $
- $
-
- $
2015
16,738
29
-
29
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, 2017 and 2016 was $284.2 million and $246.0 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. The
amount of investment in the Federal Home Loan Bank of Atlanta stock was $30,000 at December 31, 2017 and 2016. 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, 2017 and 2016. The amount of investment in the CRA-qualified mutual fund
was $500,000 at December 31, 2017 and 2016. The amount of the investment in common stock of the bank holding company
was $100,000 at December 31, 2017 and 2016.
NOTE 4. LOANS
The composition of loans at December 31, 2017 and 2016 is summarized as follows:
Commercial, financial and agricultural ........................................................................ $ 2,279,366 $ 1,982,267
Real estate – construction .............................................................................................
335,085
Real estate – mortgage:
580,874
December 31,
2017
2016
(In Thousands)
Owner-occupied commercial .................................................................................... 1,328,666 1,171,719
536,805
1-4 family mortgage .................................................................................................
Other mortgage .........................................................................................................
830,683
Total real estate – mortgage ...................................................................................... 2,928,808 2,539,207
55,211
Total Loans ............................................................................................................... 5,851,261 4,911,770
(51,893)
Net Loans ................................................................................................................. $ 5,791,855 $ 4,859,877
Consumer .....................................................................................................................
Less: Allowance for loan losses ...................................................................................
603,063
997,079
(59,406)
62,213
Changes in the allowance for loan losses during the years ended December 31, 2017, 2016 and 2015, respectively are as follows:
Balance, beginning of year .................................................................... $
Loans charged off ..............................................................................
Recoveries .........................................................................................
Provision for loan losses ....................................................................
Balance, end of year .............................................................................. $
2017
Years Ended December 31,
2016
(In Thousands)
43,419 $
(5,198)
274
13,398
51,893 $
51,893 $
(16,332 )
620
23,225
59,406 $
2015
35,629
(5,744)
687
12,847
43,419
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
78
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.
The following table presents an analysis of the allowance for loan losses by portfolio segment as of December 31, 2017 and
2016. 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, 2017 and 2016,
respectively, are as follows:
79
Commercial,
financial and
agricultural
Real estate -
construction
Real estate -
mortgage
(In Thousands)
Year Ended December 31, 2017
Consumer
Total
Allowance for loan losses:
Balance at December 31, 2016 ....................................... $
Charge-offs .................................................................
Recoveries ..................................................................
Provision.....................................................................
Balance at December 31, 2017 ....................................... $
28,872 $
(13,910 )
337
17,581
32,880 $
Individually Evaluated for Impairment ........................... $
Collectively Evaluated for Impairment ...........................
4,276 $
28,604
5,125 $
(56)
168
(248)
4,989 $
17,504 $
(2,056)
89
5,485
21,022 $
December 31, 2017
120 $
4,869
1,163 $
19,859
392 $
(310)
26
407
515 $
51,893
(16,332)
620
23,225
59,406
50 $
465
5,609
53,797
Loans:
Ending Balance ............................................................... $
Individually Evaluated for Impairment ...........................
Collectively Evaluated for Impairment ...........................
2,279,366 $
26,447
2,252,919
580,874 $
1,571
579,303
2,928,808 $
12,404
2,916,404
62,213 $
88
62,125
5,851,261
40,510
5,810,751
Allowance for loan losses:
Balance at December 31, 2015 ....................................... $
Charge-offs .................................................................
Recoveries ..................................................................
Provision.....................................................................
Balance at December 31, 2016 ....................................... $
21,495 $
(3,791 )
49
11,119
28,872 $
Individually Evaluated for Impairment ........................... $
Collectively Evaluated for Impairment ...........................
6,607 $
22,265
Year Ended December 31, 2016
5,432 $
(815)
76
432
5,125 $
16,061 $
(380)
146
1,677
17,504 $
December 31, 2016
923 $
4,202
622 $
16,882
431 $
(212)
3
170
392 $
43,419
(5,198)
274
13,398
51,893
- $
392
8,152
43,741
Loans:
Ending Balance ............................................................... $
Individually Evaluated for Impairment ...........................
Collectively Evaluated for Impairment ...........................
1,982,267 $
27,922
1,954,345
335,085 $
4,314
330,771
2,539,207 $
13,350
2,525,857
55,211 $
3
55,208
4,911,770
45,589
4,866,181
The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard
asset classification system used by the federal banking agencies. The following table presents credit quality indicators for the
loan loss portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using
historical losses adjusted for current economic conditions defined as follows:
•
•
•
Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or obligors, if any) or by the fair
value, less cost to acquire and sell, of any underlying collateral.
Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the
Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk
to warrant an adverse classification.
Substandard – loans that exhibit well-defined weakness or weaknesses that presently jeopardize debt repayment. These loans are
characterized by the distinct possibility that the institution will sustain some loss if the weaknesses are not corrected.
• Doubtful – loans that have all the weaknesses inherent in loans classified substandard, plus the added characteristic that the
weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable
and improbable.
Loans by credit quality indicator as of December 31, 2017 and 2016 were as follows:
December 31, 2017
Pass
Special
Mention
Substandard Doubtful
(In Thousands)
Total
Commercial, financial and agricultural ....................................... $ 2,225,084 $
Real estate – construction ...........................................................
572,657
Real estate - mortgage:
Owner-occupied commercial .................................................. 1,317,113
598,222
1-4 family mortgage ................................................................
976,348
Other mortgage .......................................................................
Total real estate – mortgage ....................................................... 2,891,683
62,083
Consumer ...................................................................................
Total .................................................................................. $ 5,751,507 $
27,835 $
6,691
26,447 $
1,526
- $ 2,279,366
580,874
-
7,333
1,599
18,122
27,054
42
61,622 $
4,220
3,242
2,609
10,071
88
38,132 $
- 1,328,666
603,063
-
997,079
-
- 2,928,808
-
62,213
- $ 5,851,261
80
December 31, 2016
Special
Mention
Pass
Substandard Doubtful
(In Thousands)
Total
Commercial, financial and agricultural ............................. $ 1,893,664 $
Real estate - construction .................................................. 324,958
Real estate - mortgage:
Owner-occupied commercial ........................................ 1,158,615
1-4 family mortgage ...................................................... 531,868
Other mortgage.............................................................. 818,724
Total real estate - mortgage ............................................... 2,509,207
55,135
Consumer ..........................................................................
Total .......................................................................... $ 4,782,964 $
61,035 $
5,861
27,568 $
4,266
6,037
2,065
11,224
19,326
76
86,298 $
7,067
2,872
735
10,674
-
42,508 $
- $ 1,982,267
- 335,085
- 1,171,719
- 536,805
- 830,683
- 2,539,207
-
55,211
- $ 4,911,770
Nonperforming loans include nonaccrual loans and loans 90 or more days past due and still accruing. Loans by performance
status as of December 31, 2017 and 2016 are as follows:
December 31, 2017
Performing Nonperforming
(In Thousands)
Total
Commercial, financial and agricultural ...................................................... $ 2,269,642 $
Real estate - construction ............................................................................ 580,874
Real estate - mortgage:
Owner-occupied commercial .................................................................. 1,328,110
1-4 family mortgage ............................................................................... 602,604
Other mortgage ....................................................................................... 997,079
Total real estate - mortgage ........................................................................ 2,927,793
62,127
Consumer ...................................................................................................
Total ................................................................................................... $ 5,840,436 $
9,724 $2,279,366
- 580,874
556 1,328,666
459 603,063
- 997,079
1,015 2,928,808
62,213
10,825 $5,851,261
86
December 31, 2016
Performing Nonperforming
(In Thousands)
Total
Commercial, financial and agricultural ...................................................... $ 1,974,975 $
Real estate - construction ............................................................................ 331,817
Real estate - mortgage:
Owner-occupied commercial .................................................................. 1,165,511
1-4 family mortgage ............................................................................... 536,731
Other mortgage ....................................................................................... 830,683
Total real estate - mortgage ........................................................................ 2,532,925
55,166
Consumer ...................................................................................................
Total ................................................................................................... $ 4,894,883 $
7,292 $1,982,267
3,268 335,085
6,208 1,171,719
74 536,805
- 830,683
6,282 2,539,207
55,211
16,887 $4,911,770
45
Loans by past due status as of December 31, 2017 and 2016 are as follows:
December 31, 2017
Past Due Status (Accruing Loans)
30-59 Days 60-89 Days 90+ Days
Total Past
Due
(In Thousands)
Non-Accrual
Current
Total Loans
Commercial, financial and
agricultural ............................ $
Real estate - construction ..........
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage ..............
Other mortgage .....................
Total real estate - mortgage ...
Consumer ..................................
Total .......................................... $
1,410 $
56
5,702 $
997
-
430
5,116
5,546
131
7,143 $
3,664
850
-
4,514
23
11,236 $
12 $
-
-
-
-
-
48
60 $
7,124 $
1,053
9,712 $ 2,262,530 $ 2,279,366
580,874
579,821
-
3,664
1,280
5,116
10,060
202
18,439 $
556 1,324,446 1,328,666
603,063
601,324
459
997,079
991,963
-
1,015 2,917,733 2,928,808
62,213
61,973
10,765 $ 5,822,057 $ 5,851,261
38
81
December 31, 2016
Past Due Status (Accruing Loans)
30-59 Days 60-89 Days 90+ Days
Total Past
Due
(In Thousands)
Non-Accrual
Current
Total Loans
Commercial, financial and
agricultural ............................ $
Real estate - construction ..........
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage ..............
Other mortgage .....................
Total real estate - mortgage ...
Consumer ..................................
Total .......................................... $
710 $
59
-
160
95
255
52
1,076 $
40 $
-
-
129
811
940
17
997 $
10 $
-
760 $
59
7,282 $ 1,974,225 $ 1,982,267
335,085
331,758
3,268
6,208
-
-
6,208
45
6,263 $
6,208
289
906
7,403
114
8,336 $
74
-
536,442
829,777
- 1,165,511 1,171,719
536,805
830,683
74 2,531,730 2,539,207
55,211
55,097
10,624 $ 4,892,810 $ 4,911,770
-
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.
The following table presents details of the Company’s impaired loans as of December 31, 2017 and 2016, respectively. Loans
which have been fully charged off do not appear in the tables.
December 31, 2017
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(In Thousands)
Average
Recorded
Investment
Interest Income
Recognized
in Period
10,036 $
574
16,639 $
577
- $
-
16,417 $
663
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 ........................................................
2,640
2,262
746
5,648
38
16,296
2,806
2,262
746
5,814
39
23,069
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 .............................................................
16,411
997
16,992
997
3,914
980
1,862
6,756
50
24,214
3,914
980
1,862
6,756
50
24,795
-
-
-
-
-
-
4,276
120
601
281
281
1,163
50
5,609
2,875
2,289
727
5,891
42
23,013
17,912
997
3,801
1,113
1,862
6,776
42
25,727
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 ............................................................................. $
26,447
1,571
33,631
1,574
4,276
120
34,329
1,660
6,554
3,242
2,608
12,404
88
40,510 $
6,720
3,242
2,608
12,570
89
47,864 $
601
281
281
1,163
50
5,609 $
6,676
3,402
2,589
12,667
84
48,740 $
82
571
31
159
93
44
296
3
901
651
56
215
54
80
349
3
1,059
1,222
87
374
147
124
645
6
1,960
December 31, 2016
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(In Thousands)
Average
Recorded
Investment
Interest Income
Recognized in
Period
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 ........................................................
1,003 $
938
1,003 $
1,802
2,615
1,899
940
5,454
3
7,398
2,778
1,899
940
5,617
5
8,427
- $
-
-
-
-
-
-
-
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 .............................................................
26,919
3,376
31,728
3,376
6,924
972
-
7,896
-
38,191
6,924
972
-
7,896
-
43,000
6,607
923
348
274
-
622
-
8,152
992 $
1,159
2,884
1,901
965
5,750
6
7,907
26,955
3,577
6,934
313
-
7,247
-
37,779
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 ............................................................................. $
27,922
4,314
32,731
5,178
6,607
923
27,947
4,736
9,539
2,871
940
13,350
3
45,589 $
9,702
2,871
940
13,513
5
51,427 $
348
274
-
622
-
8,152 $
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
83
Troubled Debt Restructurings (“TDR”) at December 31, 2017 and 2016 totaled $20.6 million and $7.3 million, respectively. At
December 31, 2017, the Company had a related allowance for loan losses of $4.3 million allocated to these TDRs, compared to
$2.3 million at December 31, 2016. The Company’s TDRs for the years ended December 31, 2017 and 2016 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.
Year Ended December 31, 2017
Pre-
Post-
Modification Modification
Outstanding Outstanding
Number of Recorded
Contracts
Recorded
Investment Investment
(In Thousands)
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...........................................................................................
6 $
1
11,438 $
997
11,438
997
2
1
-
3
-
10 $
3,664
850
-
4,514
-
16,949 $
3,664
850
-
4,514
-
16,949
Year ended December 31, 2016
Pre-
Post-
Modification Modification
Outstanding Outstanding
Commercial, financial and agricultural .................................................
Real estate - construction .......................................................................
Real estate - mortgage:
Owner-occupied commercial .............................................................
1-4 family mortgage ..........................................................................
Other mortgage ..................................................................................
Total real estate - mortgage ...................................................................
Consumer ..............................................................................................
Number of Recorded
Contracts
Recorded
Investment Investment
7,099
-
7,099 $
-
9 $
-
-
-
1
1
-
10 $
-
-
234
234
-
7,333 $
-
-
234
234
-
7,333
The following table presents TDRs by portfolio segment which defaulted during the years ended December 31, 2017 and 2016,
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.
Year Ended December 31,
2017
2016
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 .....................................................................................................................
$
- $
-
-
-
-
-
-
- $
6,734
-
-
-
-
-
-
6,734
84
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, 2017 and
2016 are as follows:
Balance, beginning of year ........................................................................................... $
Advances ......................................................................................................................
Repayments ..................................................................................................................
Balance, end of year ..................................................................................................... $
(In Thousands)
10,806 $
7,351
(9,717)
8,440 $
12,090
9,763
(11,047)
10,806
Years Ended December 31,
2017
2016
NOTE 5. FORECLOSED PROPERTIES
Other real estate and certain other assets acquired in foreclosure are carried at the lower of the recorded investment in the loan
or fair value less estimated costs to sell the property.
An analysis of foreclosed properties for the years ended December 31, 2017, 2016 and 2015 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:
2017
2016
(In Thousands)
5,392 $
-
4,112
(3,931)
(585)
4,988 $
4,988 $
-
4,685
(2,982 )
10
6,701 $
2015
6,840
2,348
2,210
(5,227)
(779)
5,392
Land .............................................................................................................................. $
Building ........................................................................................................................
Furniture and equipment ...............................................................................................
Leasehold improvements ..............................................................................................
Construction in progress ...............................................................................................
Total premises and equipment, gross........................................................................
Accumulated depreciation ............................................................................................
Total premises and equipment, net of accumulated depreciation ............................. $
December 31,
2017
2016
(In Thousands)
5,468 $
36,259
23,297
9,599
88
74,711
(15,811)
58,900 $
5,506
7,817
18,668
7,469
14,115
53,575
(13,261)
40,314
Increases in land and building and decreases in construction in progress are the result of the recently completed headquarters
building in Birmingham, Alabama. The new headquarters building, which opened in the fourth quarter of 2017, consists of
approximately 97,500 square feet and houses the main office, sales and operations staff.
85
The provisions for depreciation charged to occupancy and equipment expense for the years ended December 31, 2017, 2016 and
2015 were $2,568,000, $2,724,000 and $2,219,000, 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, 2017 are summarized as follows:
2018 ........................................................... $
2019 ...........................................................
2020 ...........................................................
2021 ...........................................................
2022 ...........................................................
Thereafter ..................................................
Total ..................................................... $
(In Thousands)
3,093
3,024
3,007
2,397
2,384
3,641
17,546
For the years ended December 31, 2017, 2016 and 2015, annual rental expense on operating leases was $4,253,000, $3,759,000,
and $2,919,000, 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, 2017 and 2016 was $0 and $96,000, 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, 2017
and 2016 was $21,147,000 and $24,117,000, respectively, of which $13,555,000 and $14,254,000 as of December 31, 2017 and
2016, respectively, are included in loans of the Company. The remaining amounts are included in other assets.
NOTE 8. DEPOSITS
Deposits at December 31, 2017 and 2016 were as follows:
Noninterest-bearing demand......................................................................................... $ 1,440,326 $ 1,281,605
Interest-bearing checking ............................................................................................. 4,029,147 3,562,165
48,718
Savings .........................................................................................................................
234,157
Time deposits, $250,000 and under ..............................................................................
293,666
Time deposits, over $250,000.......................................................................................
Total ........................................................................................................................ $ 6,091,674 $ 5,420,311
50,959
228,540
342,702
December 31,
2017
2016
(In Thousands)
86
The scheduled maturities of time deposits at December 31, 2017 were as follows:
2018 ........................................................... $
2019 ...........................................................
2020 ...........................................................
2021 ...........................................................
2022 ...........................................................
Thereafter ..................................................
Total ..................................................... $
(In Thousands)
353,413
96,661
41,844
46,862
32,412
50
571,242
At December 31, 2017 and 2016, overdraft deposits reclassified to loans were $1,717,000 and $2,033,000, respectively.
NOTE 9. FEDERAL FUNDS PURCHASED
At December 31, 2017, the Company had $301.8 million in federal funds purchased from its correspondent banks that are clients
of its correspondent banking unit, compared to $355.9 million at December 31, 2016. Rates paid on these funds were between
1.55% and 1.70% as of December 31, 2017 and 0.75% and 0.80% as of December 31, 2016.
At December 31, 2017, the Company had available lines of credit totaling approximately $468.0 million with various financial
institutions for borrowing on a short-term basis, with no amount outstanding. Available lines totaled approximately $378.0
million at December 31, 2016. These lines are subject to annual renewals with varying interest rates.
NOTE 10. OTHER BORROWINGS
Other borrowings are comprised of:
•
•
•
$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.
$30.0 million on the Company’s 4.5% Subordinated Notes due November 8, 2027, which were issued in a private
placement in November 2017 and pay interest semi-annually. The Notes may not be prepaid by the Company prior to
November 8, 2022.
$200,000 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 $118,000 and $87,000 as of December 31, 2017 and 2016, 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.
87
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.
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, 2017 and December 31,
2016 were not material.
NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS
At December 31, 2017, 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 $1,170,000, $1,198,000 and $1,265,000 for the years ended
December 31, 2017, 2016 and 2015, respectively.
Stock Incentive Plans
The Company’s 2005 Stock Incentive Plan (the “2005 Plan”), originally permitted the grant of stock options to its officers,
employees, directors and organizers of the Company for up to 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, 2017, there are a total of 3,478,644 shares available to be granted under the 2005 and 2009 Plans.
Stock-based compensation expense for stock-based compensation awards granted is based on the grant-date fair value. For stock
option awards, the fair value is estimated at the date of grant using the Black-Scholes-Merton valuation model. This model
requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. The fair value
of each option granted is estimated on the date of grant using the Black-Scholes-Merton model based on the weighted-average
assumptions for expected dividend yield, expected stock price volatility, risk-free interest rate and expected life of options
granted.
88
The assumptions used in determining the fair value of 2017, 2016 and 2015 stock option grants were as follows:
Expected price volatility .......................................................................
Expected dividend yield .......................................................................
Expected term (in years) ......................................................................
Risk-free rate ........................................................................................
29.00%
0.44%
6
2.08%
29.00%
0.64%
6
1.85%
24.00%
0.71%
6
1.85%
2017
2016
2015
The weighted average grant-date fair value of options granted during the years ended December 31, 2017, 2016 and 2015 was
$11.82, $6.00 and $4.20, respectively.
The following tables summarize stock option activity:
Weighted
Average
Exercise Price
Shares
Weighted
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic Value
(In Thousands)
Year Ended December 31, 2017:
Outstanding at beginning of year ..................................................
Granted .....................................................................................
Exercised ..................................................................................
Forfeited ...................................................................................
Outstanding at end of year ............................................................
2,026,334 $
58,000
(385,500 )
(32,000 )
1,666,834 $
9.00
37.59
4.96
21.96
10.68
6.2 $
9.1
4.0
8.1
5.5 $
57,636
227
14,087
625
51,377
Exercisable at December 31, 2017 ....................................................
808,236 $
5.22
3.9 $
29,321
Year Ended December 31, 2016:
Outstanding at beginning of year ..................................................
Granted .....................................................................................
Exercised ..................................................................................
Forfeited ...................................................................................
Outstanding at end of year ............................................................
2,498,834 $
241,000
(682,500 )
(31,000 )
2,026,334 $
6.66
20.15
4.28
11.04
9.00
6.3 $
9.1
3.9
6.8
6.2 $
42,746
4,166
22,629
818
57,636
Exercisable at December 31, 2016 ....................................................
928,536 $
5.08
4.8 $
30,051
Year Ended December 31, 2015:
Outstanding at beginning of year ..................................................
Granted .....................................................................................
Exercised ..................................................................................
Forfeited ...................................................................................
Outstanding at end of year ............................................................
3,245,834 $
324,000
(1,051,000 )
(20,000 )
2,498,834 $
4.69
16.63
3.62
8.40
6.66
5.9 $
9.2
2.7
7.1
6.3 $
38,256
2,311
21,177
-
42,746
Exercisable at December 31, 2015 ....................................................
410,836 $
4.84
5.4 $
7,775
Exercisable options at December 31, 2017 were as follows:
Range of
Exercise Price
Shares
Weighted
Average
Exercise Price
$
4.17
5.00
5.50
6.92
15.74
145,336 $
483,500
120,000
45,000
14,400
808,236
4.17
5.00
5.50
6.92
15.74
5.22
Weighted
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic Value
(In Thousands)
5,426
17,648
4,320
1,556
371
29,321
2.4 $
3.8
5.2
6.0
7.1
3.9 $
89
As of December 31, 2017, there was $1,973,000 of total unrecognized compensation cost related to non-vested stock options. As
of December 31, 2017, non-vested stock options had a weighted average remaining time to vest of 2.5 years. The total fair value
of stock options vested during the years ended December 31, 2017, 2016 and 2015 was $315,000, $1,908,000 and $242,000,
respectively.
Restricted Stock
The Company periodically grants restricted stock awards that vest upon service conditions. Dividend payments are made during
the vesting period. The value of restricted stock is determined to be the current value of the Company’s stock, and this total value
will be recognized as compensation expense over the vesting period. As of December 31, 2017, there was $473,000 of total
unrecognized compensation cost related to non-vested restricted stock. As of December 31, 2017, non-vested restricted stock
had a weighted average remaining time to vest of 1.0 year.
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
$1,419,000, $1,294,000 and $1,080,000 for 2017, 2016 and 2015, 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 and the three-for-one stock split described below.
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 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.
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.
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 $239.0 million in dividends as of December 31, 2017.
The Bank is subject to various regulatory capital requirements administered by the state and federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Bank and the financial statements. Under regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving
quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank’s capital amounts and classification under the prompt corrective guidelines are also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table below) of 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, 2017, that the Bank meets all capital adequacy requirements to which it is subject.
90
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, 2017 was 1.25% and the Company and bank exceeded such requirement.
As of December 31, 2017, 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,
2017.
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, 2017:
CET I Capital to Risk Weighted Assets:
Consolidated ....................................... $ 593,111
ServisFirst Bank ................................. 651,201
9.51% $ 280,553
10.45% 280,523
4.50%
4.50% $
N/A
405,199
Tier I Capital to Risk Weighted Assets:
Consolidated ....................................... 593,613
ServisFirst Bank ................................. 651,703
9.52% 374,070
10.45% 374,030
6.00%
6.00%
N/A
498,707
Total Capital to Risk Weighted Assets:
Consolidated ....................................... 718,151
ServisFirst Bank ................................. 711,609
11.52% 498,760
11.42% 498,707
8.00%
8.00%
N/A
623,384
Tier I Capital to Average Assets:
Consolidated ....................................... 593,613
ServisFirst Bank ................................. 651,703
8.51% 278,970
9.35% 278,954
4.00%
4.00%
N/A
348,693
As of December 31, 2016:
CET I Capital to Risk Weighted Assets:
Consolidated ....................................... $ 508,982
ServisFirst Bank ................................. 560,731
9.78% $ 234,262
10.77% 234,232
4.50%
4.50% $
N/A
338,335
Tier I Capital to Risk Weighted Assets:
Consolidated ....................................... 509,359
ServisFirst Bank ................................. 561,108
9.78% 312,350
10.78% 312,309
6.00%
6.00%
N/A
416,413
Total Capital to Risk Weighted Assets:
Consolidated ....................................... 616,415
ServisFirst Bank ................................. 613,501
11.84% 416,467
11.79% 416,413
8.00%
8.00%
N/A
520,516
Tier I Capital to Average Assets:
Consolidated ....................................... 509,359
ServisFirst Bank ................................. 561,108
8.22% 247,777
9.06% 247,760
4.00%
4.00%
N/A
309,700
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%
91
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:
2017
Years Ended December 31,
2016
(In Thousands)
2015
Other Operating Income
ATM fee income ........................................................................................... $
Gain (loss) on sale of other real estate owned ...............................................
Gain (loss) on sale of fixed assets .................................................................
Other .............................................................................................................
Total other operating income .................................................................... $
Other Operating Expenses
Data processing ............................................................................................. $
Other loan expenses ......................................................................................
Customer and public relations .......................................................................
Bank service charges .....................................................................................
Sales and use tax ...........................................................................................
Write-down investment in tax credit partnerships .........................................
Telephone......................................................................................................
Donations and contributions .........................................................................
Marketing ......................................................................................................
Supplies .........................................................................................................
Fraud and forgery losses ...............................................................................
Directors fees ................................................................................................
Postage ..........................................................................................................
Other operational losses ................................................................................
Other .............................................................................................................
Total other operating expenses ................................................................. $
1,175 $
33
1
354
1,563 $
5,454 $
2,170
1,695
1,522
1,167
1,081
990
744
716
595
515
472
441
167
5,085
22,814 $
1,061 $
18
1,399
556
3,034 $
4,832 $
1,510
1,594
1,341
781
2,519
740
769
544
555
206
407
377
264
4,478
20,917 $
916
(136)
(27)
331
1,084
4,293
2,086
1,211
961
380
3,966
680
605
562
492
92
406
338
126
3,902
20,100
NOTE 18. INCOME TAXES
The components of income tax expense are as follows:
2017
Year Ended December 31,
2016
(In Thousands)
2015
Current tax expense:
Federal .......................................................................................................... $
State ..............................................................................................................
Total current tax expense ..........................................................................
Deferred tax expense (benefit):
Federal ..........................................................................................................
State ..............................................................................................................
Total deferred tax (benefit) .......................................................................
Total income tax expense ..................................................................... $
27,952 $
2,258
30,210
17,073
(3,025)
14,048
44,258 $
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
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 ..........................................................................................................................
Enacted tax rate change ..................................................................................................................
Other ..............................................................................................................................................
Effective income tax and rate ......................................................................................................... $
92
Year Ended December 31, 2017
Amount
% of Pre-tax Earnings
(In Thousands)
48,073
35.00 %
43
(1,356)
(1,096)
(4,278)
(234)
3,108
(2)
44,258
0.03 %
(0.99 )%
(0.80 )%
(3.11 )%
(0.17 )%
2.26 %
- %
32.22 %
Year Ended December 31, 2016
% of Pre-tax
Earnings
Amount
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 ..................................................................................................... $
(In Thousands)
38,786
35.00%
254
(1,322)
(978)
(4,788)
(2,652)
39
29,339
0.23%
(1.20)%
(0.88)%
(4.32)%
(2.40)%
0.04%
26.47%
Year Ended December 31, 2015
% of Pre-tax
Earnings
Amount
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:
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:
REIT dividend .........................................................................................................................
Depreciation ............................................................................................................................
Prepaid expenses .....................................................................................................................
Acquired intangible assets.......................................................................................................
Total deferred tax liabilities ................................................................................................
Net deferred tax assets ................................................................................................................. $
(In Thousands)
31,152
35.00%
146
(1,308)
(917)
3
(3,600)
(11)
25,465
0.16%
(1.47)%
(1.03)%
-%
(4.04)%
(0.01)%
28.61%
December 31,
2017
2016
(In Thousands)
14,905 $
232
927
178
5,688
1,296
866
125
1,521
175
-
65
431
26,409
9,706
3,240
164
277
13,387
13,022 $
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
The Company believes its net deferred tax asset is recoverable as of December 31, 2017 based on the expectation of future
taxable income and other relevant considerations.
93
Pursuant to ASC 740-10-30-2 Income Taxes, deferred tax assets and liabilities are measured using enacted tax rates applicable
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. On December 22, 2017, the President of the United States signed the “Act to provide for reconciliation pursuant to titles II
and V of the concurrent resolution on the budget for fiscal year 2018” (referred to as the “Tax Cuts and Jobs Act” or the Act). The
Act provides for a reduction in the corporate tax rate from a maximum tax rate of 35% to a flat tax rate of 21% effective for tax
years beginning after December 31, 2017. As a result, the Company revalued its deferred tax assets and liabilities as of December
31, 2017, and recorded the effect of this change as a component of tax expense. The tax expense recorded related to the change
in the enacted federal tax rate as of December 31, 2017 is $3,108,000. Notwithstanding the foregoing, management is still
analyzing certain aspects of the new law and refining its calculations, which could affect the measurement of these assets and
liabilities or give rise to new deferred tax amounts.
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, 2014 through 2017. The Company is also currently open to audit by several state
departments of revenue for the years ended December 31, 2014 through 2017. The audit periods differ depending on the date the
Company began business activities in each state. Currently, there are no years for which the Company filed a federal or state
income tax return that are under examination by the IRS or any state department of revenue.
Accrued interest and penalties on unrecognized income tax benefits totaled $116,000 and $94,000 as of December 31, 2017 and
2016, respectively. Unrecognized income tax benefits as of December 31, 2017 and December 31, 2016, that, if recognized,
would impact the effective income tax rate totaled $1,779,000 and $1,375,000 (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 2017, 2016 and 2015 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 ........................................................................................
Enacted tax rate change .....................................................................
Lapse of statute ..................................................................................
Balance, end of year .............................................................................. $
NOTE 19. COMMITMENTS AND CONTINGENCIES
Loan Commitments
2017
2016
(In Thousands)
1,173 $
364
-
-
-
-
(162)
1,375 $
1,375 $
365
-
-
-
315
(276 )
1,779 $
2015
804
369
-
-
-
-
-
1,173
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:
2017
2016
(In Thousands)
2015
Commitments to extend credit ............................................................... $ 1,945,171 $ 1,667,015 $ 1,409,425
62,462
Credit card arrangements .......................................................................
38,224
Standby letters of credit and financial guarantees .................................
Total .................................................................................................. $ 2,114,974 $ 1,808,684 $ 1,510,111
128,149
41,654
100,678
40,991
94
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.
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.
Year Ended December 31,
2016
(Dollar Amounts In Thousands Except Per Share Amounts)
2017
2015
Earnings Per Share .......................................................
Weighted average common shares outstanding ............
Net income available to common stockholders ............ $
Basic earnings per common share ................................ $
52,887,359
93,030 $
1.76
52,450,896
81,432 $
1.55 $
51,426,466
63,260
1.23
Weighted average common shares outstanding ............
Dilutive effects of assumed conversions and exercise
52,887,359
52,450,896
51,426,466
of stock options and warrants ...................................
1,236,598
1,157,476
1,458,642
Weighted average common and dilutive potential
common shares outstanding......................................
Net income available to common stockholders ............ $
Diluted earnings per common share ............................. $
54,123,957
93,030 $
1.72 $
53,608,372
81,432 $
1.52 $
52,885,108
63,260
1.20
NOTE 22. RELATED PARTY TRANSACTIONS
As more fully described in Note 4, the Company had outstanding loan balances to related parties as of December 31, 2017 and
2016 in the amount of $8.4 million and $10.8 million, respectively. Related party deposits totaled $7.0 million and $7.9 million
at December 31, 2017 and 2016, 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.
95
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.
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 $13,253,000 and $7,424,000 during the years ended December 31, 2017 and 2016, 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 $227,000 and $585,000 was recognized during the years ended December 31, 2017 and 2016, 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.
There were no residential real estate loan foreclosures classified as OREO as of December 31, 2017, compared to $189,000 as
of December 31, 2016.
No residential real estate loans were in the process of being foreclosed as of December 31, 2017.
96
The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as
of December 31, 2017 and December 31, 2016:
Fair Value Measurements at December 31, 2017 Using
Quoted Prices in
Active Markets
for Identical
Significant
Unobservable
Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
Observable
Significant
Other
Total
Assets Measured on a Recurring Basis:
Available-for-sale securities:
(In Thousands)
U.S. Treasury and government sponsored agencies ...................... $
Mortgage-backed securities ..........................................................
State and municipal securities .......................................................
Corporate debt ..............................................................................
Total assets at fair value ................................................................ $
- $
-
-
-
- $
55,356 $
276,498
134,849
64,877
531,580 $
- $
-
-
6,500
6,500 $
55,356
276,498
134,849
71,377
538,080
Fair Value Measurements at December 31, 2016 Using
Quoted Prices in
Active Markets
for Identical
Significant
Unobservable
Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
Observable
Significant
Other
Total
Assets Measured on a Recurring Basis:
Available-for-sale securities
(In Thousands)
U.S. Treasury and government sponsored agencies ...................... $
Mortgage-backed securities ..........................................................
State and municipal securities .......................................................
Corporate debt ..............................................................................
Total assets at fair value ................................................................ $
- $
-
-
-
- $
46,254 $
227,190
139,930
9,001
422,375 $
- $
-
-
-
- $
46,254
227,190
139,930
9,001
422,375
The carrying amount and estimated fair value of the Company’s financial instruments were as follows:
Fair Value Measurements at December 31, 2017 Using
Quoted Prices in
Active Markets
for Identical
Significant
Unobservable
Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
Observable
Significant
Other
Assets Measured on a Nonrecurring Basis:
Impaired loans .............................................................................. $
Other real estate owned and repossessed assets ............................
Total assets at fair value ...........................................................
-
-
-
(In Thousands)
- $
-
- $
34,901 $
6,701
41,602 $
Total
34,901
6,701
41,602
Fair Value Measurements at December 31, 2016 Using
Quoted Prices in
Active Markets
for Identical
Significant
Unobservable
Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
Observable
Significant
Other
Assets Measured on a Nonrecurring Basis:
Impaired loans .............................................................................. $
Other real estate owned .................................................................
Total assets at fair value ........................................................... $
- $
-
- $
(In Thousands)
- $
-
- $
37,437 $
4,988
42,425 $
Total
37,437
4,988
42,425
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:
97
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.
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, 2017 and December 31, 2016 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.
98
December 31,
2017
2016
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(In Thousands)
Financial Assets:
Level 1 Inputs:
Cash and cash equivalents ............................................................ $
238,062 $
238,062 $
623,562 $
623,562
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 .............................................
531,580 $
-
1,034
239,524
4,459
127,519
531,580 $
-
1,034
239,524
4,459
127,519
422,375 $
25,052
1,024
160,435
4,675
114,388
422,375
25,431
1,024
160,435
4,736
114,388
Level 3 Inputs:
Debt securities available for sale .................................................. $
Debt securities held to maturity ....................................................
Loans, net ......................................................................................
6,500 $
250
5,791,855
6,500 $
250
5,747,342
- $
37,512
4,859,877
-
37,871
4,872,689
Financial Liabilities:
Level 2 Inputs:
Deposits ........................................................................................ $
Federal funds purchased ...............................................................
Other borrowings ..........................................................................
6,091,674 $
301,797
64,832
6,086,085 $
301,797
65,921
5,420,311 $
355,944
55,262
5,417,320
355,944
54,203
NOTE 24. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheet of the Company as of December 31, 2017 and 2016 and the
condensed statements of income and cash flows for the years ended December 31, 2017, 2016 and 2015.
CONDENSED BALANCE SHEETS
(In Thousands)
December 31,
2017
December 31,
2016
ASSETS
Cash and due from banks ............................................................................................................................. $
Investment in subsidiary ...............................................................................................................................
Other assets ..................................................................................................................................................
Total assets .............................................................................................................................................. $
9,891 $
665,192
368
675,451 $
6,060
574,261
375
580,696
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, 2017, and
December 31, 2016 ..................................................................................................................................
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at December 31,
2017 and December 31, 2016 ..................................................................................................................
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 52,992,586 shares issued
and outstanding at December 31, 2017 and 52,636,896 shares issued and outstanding at December 31,
2016 .........................................................................................................................................................
Additional paid-in capital .............................................................................................................................
Retained earnings .........................................................................................................................................
Accumulated other comprehensive (loss) income ........................................................................................
Total stockholders' equity ........................................................................................................................
Total liabilities and stockholders' equity ...................................................................................................... $
64,632 $
3,717
68,349
54,663
3,521
58,184
-
-
-
-
53
217,693
389,554
(198)
607,102
675,451 $
53
215,932
307,151
(624)
522,512
580,696
99
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 and 2015
(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 ................................................. $
2017
2016
2015
6,500 $
2
6,502
2,260
2,260
88,788
93,030
-
93,030 $
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
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In Thousands)
2017
2016
2015
93,030 $
81,432 $
63,493
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
(314)
(88,788)
3,928
-
-
-
-
Proceeds from issuance of subordinated notes ..........................................
Redemption of subordinated notes ............................................................
Redemption of preferred stock ..................................................................
Dividends paid on common stock .............................................................
Dividends paid on preferred stock .............................................................
Net cash provided by financing activities .....................................................
Increase (decrease) in cash and cash equivalents ..............................................
Cash and cash equivalents at beginning of year ................................................
Cash and cash equivalents at end of year .......................................................... $
29,943
(20,000)
-
(10,040)
-
(97)
3,831
6,060
9,891 $
NOTE 25. SUBSEQUENT EVENTS
1,442
(81,138)
1,736
(36,000)
-
-
(36,000)
-
-
-
(7,858)
-
(7,858)
(42,122)
48,182
6,060 $
(271)
(45,095)
18,127
-
(20,926)
736
(20,190)
34,750
-
(40,000)
(5,883)
(233)
(11,366)
(13,429)
61,611
48,182
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, 2017, and events which occurred
subsequent to December 31, 2017 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.
100
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 ............................................. $
59,517 $
7,465
52,052
4,986
22,519
0.42 $
0.41 $
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 ............................................. $
49,961 $
5,782
44,179
2,059
19,956
0.38 $
0.37 $
2017 Quarter Ended
(Dollars in thousands, except per share data)
March 31
June 30
2016 Quarter Ended
(Dollars in thousands, except per share data)
March 31
June 30
September 30 December 31
72,060
10,652
61,408
9,055
21,119
0.40
0.39
67,641 $
9,245
58,396
4,803
25,259
0.48 $
0.47 $
63,538 $
7,971
55,567
4,381
24,133
0.46 $
0.45 $
September 30 December 31
56,200
7,091
49,109
4,075
21,714
0.41
0.40
54,691 $
6,773
47,918
3,464
20,909
0.40 $
0.39 $
52,050 $
6,159
45,891
3,800
18,853
0.36 $
0.36 $
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, 2017.
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, 2017.
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, 2017, that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
under Exchange Act Rules 13a-15(f) and 14d-14(f). Our internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
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.
As of December 31, 2017, 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
101
determined that the Company maintained effective internal control over financial reporting as of December 31, 2017, based on
those criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, 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.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
We respond to this Item by incorporating by reference the material responsive to this Item in our definitive proxy statement to
be filed with the Securities and Exchange Commission in connection with our 2018 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 2018 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 2018 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 2018 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
We respond to this Item by incorporating by reference the material responsive to this Item in our definitive proxy statement to
be filed with the Securities and Exchange Commission in connection with our 2018 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 Independent Registered Public Accounting Firm on Internal Control over Financial Reporting ........................................
Consolidated Balance Sheets at December 31, 2017 and 2016 ...........................................................................................................
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015 ..........................................................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015 ................................
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2017, 2016 and 2015 .....................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015 ...................................................
Notes to Consolidated Financial Statements .......................................................................................................................................
62
63
64
65
66
67
68
69
Page
102
(b) The following exhibits are furnished with this Annual Report on Form 10-K
EXHIBIT NO. NAME OF EXHIBIT
2.1
3.1
3.2
3.3
4.1
4.2
Plan of Reorganization and Agreement of Merger dated August 29, 2007 (incorporated by reference to Exhibit
2.1 to the Company’s Registration Statement on Form 10, filed on March 28, 2008).
Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.3 to the Company’s
Current Report on Form 8-K, filed June 24, 2016).
Certificate of Elimination of the Senior-Non Cumulative Perpetual Preferred Stock, Series A (incorporated
by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K/A, filed on June 28, 2016).
Bylaws (Restated for SEC filing purposes only) (incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K, filed on April 4, 2014).
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration
Statement on Form 10, filed on March 28, 2008).
Revised Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K, filed on September 15, 2008, Commission File No. 0-53149).
10.1
2005 Amended and Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Company’s Registration Statement on Form 10, filed on March 28, 2008).
10.2
10.3
Amended and Restated Change in Control Agreement with William M. Foshee dated March 5, 2014
(incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K, filed on March 7,
2014).
Amended and Restated Change in Control Agreement with Clarence C. Pouncey III dated March 5, 2014
(incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K, filed on March 7,
2014).
10.4
Employment Agreement of Andrew N. Kattos dated April 27, 2006 (incorporated by reference to Exhibit 10.4
to the Company’s Registration Statement on Form 10, filed on March 28, 2008).
10.5
Employment Agreement of G. Carlton Barker dated February 1, 2007 (incorporated by reference to Exhibit
10.5 to the Company’s Registration Statement on Form 10, filed on March 28, 2008).
10.6
2009 Amended and Restated Stock Incentive Plan (incorporated by reference to Appendix A to the
Company’s Definitive Proxy Statement on Schedule 14A, filed on March 18, 2014).
10.7
10.8
10.9
10.10
Note Purchase Agreement, dated July 15, 2015 between the Company and the purchasers party thereto
(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on July 20,
2015).
Note Purchase Agreement, dated November 8, 2017, between ServisFirst Bancshares, Inc. and certain
accredited investors (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-
K, filed on November 9, 2017).
First Amendment to the ServisFirst Bancshares, Inc. Amended and Restated 2009 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed November
1, 2016).
First Amendment to the ServisFirst Bancshares, Inc. Amended and Restated 2005 Stock Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed November
1, 2016).
103
10.11
10.12
10.13
Form of Nonqualified Stock Option Award pursuant to the ServisFirst Bancshares, Inc. Amended and
Restated 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly
Report on Form 10-Q, filed November 1, 2016).
Form of Restricted Stock Award Agreement pursuant to the ServisFirst Bancshares, Inc. Amended and
Restated 2009 Stock Incentive Plan (incorporated by reference to Exhibit 4.4 to the Company’s Registration
Statement on Form S-8, filed June 17, 2014).
Loan Agreement, dated as of September 1, 2016, by and between ServisFirst Bancshares, Inc. and NexBank
SSB (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed
September 2, 2016).
10.14
Revolving Promissory Note dated as of September 1, 2016 (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K, filed September 2, 2016).
10.15
Pledge and Security Agreement dated as of September 1, 2016 by and between ServisFirst Bancshares, Inc.
and NexBank SSB (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-
K, filed September 2, 2016).
11
14
21
23
24
31.1
31.2
32.1
32.2
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 (incorporated by reference to Exhibit 14 to the Company’s
Annual Report on Form 10-K, filed on March 10, 2009).
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
ITEM 16. FORM 10-K SUMMARY.
None.
104
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, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
Signature
Title
/s/ Thomas A. Broughton, III
Thomas A. Broughton, III
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date
February 28, 2018
/s/ William M. Foshee
William M. Foshee
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
February 28, 2018
Stanley M. Brock
Michael D. Fuller
James J. Filler
Joseph R. Cashio
*
*
*
*
*
Chairman of the Board
February 28, 2018
Director
Director
Director
Director
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
Hatton C. V. Smith
_________________
*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, 2018
(b) The following exhibits are furnished with this Annual Report on Form 10-K
EXHIBIT INDEX
EXHIBIT NO.
21
23
24
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
NAME OF EXHIBIT
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
105
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