ServisFirst Bancshares Annual Report 2020

Plain-text annual report

SERVISFIRST BANCSHARES, INC. 2500 Woodcrest Place Birmingham, Alabama 35209 March 10, 2021 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 April 19, 2021, at 9:00 a.m., Central Daylight Time. As a result of public health and travel guidance due to COVID-19, you also will be able to attend the annual meeting, vote and submit your questions during the annual meeting by visiting www.meetingcenter.io/288623911. We may announce alternative arrangements for the meeting, which may include switching to a virtual only meeting format, or changing the time, date or location of the annual meeting. If we take this step, we will announce any changes in advance in a press release available on our website www.servisfirstbancshares.com and filed with the Securities Exchange Commission in addition to proxy materials, and as otherwise required by applicable state law. 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, 2020. The business to be conducted at the Annual Meeting consists of (1) the election of seven 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, 2021; 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, 2021. 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 or virtually 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 or about March 10, 2021. Sincerely, Thomas A. Broughton III Chairman, President and Chief Executive Officer SERVISFIRST BANCSHARES, INC. 2500 Woodcrest Place Birmingham, Alabama 35209 NOTICE OF 2021 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 19, 2021 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 April 19, 2021, at 9:00 a.m., Central Daylight Time. This year’s Annual Meeting will also be held virtually via live webcast on the Internet at www.meetingcenter.io/288623911 for the following purposes: 1. to elect seven 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, 2021; and 4. adjournment thereof. to transact such other business as may properly come before the Annual Meeting or any postponement or 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, 2021. 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.investorvote.com/SFBS. To access the Annual Meeting virtually, please click the virtual meeting link: www.meetingcenter.io/288623911. There are two options when logging in to the virtual meeting: Join as a “Guest” or Join as a “Stockholder”. When joining a “Stockholder” a control number and password will be required. The password for the meeting is SFBS2021. Stockholders of record as of the close of business on February 22, 2021 are entitled to notice of, and to vote their shares in person or by proxy at, the Annual Meeting. Stockholders may vote during the Annual Meeting when attending virtually by providing their control number and following instructions available on the virtual meeting website during the meeting. For registered stockholders, the control number can be found on the proxy card or notice. If shares of common stock are held through an intermediary, such as a bank or broker, you must register in advance to attend the Annual Meeting virtually as a stockholder. To register, you must submit proof of proxy power (legal proxy) reflecting your company stockholdings along with your name and email address to Computershare. Requests for registration must be labeled as “Legal Proxy” and be received no later than 4:00 p.m., Central Time, on April 14, 2021. Registered stockholders will receive an email from Computershare confirming registration. By Mail: Requests for registration should be directed to Computershare at the following address: Computershare ServisFirst Bancshares, Inc. Legal Proxy P.O. Box 43001 Providence, RI 02940-3001 i By email: Forward the broker provided email, or attach an image of the legal proxy, to legalproxy@computershare.com. Anyone may attend the virtual shareholder meeting as a guest, but will not have the option to vote shares during the meeting or ask questions. Closed captioning will be provided for the duration of the virtual meeting. The proxy materials are first being made available to stockholders on or about March 10, 2021. IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD APRIL 19, 2021: Our Proxy Statement, form of proxy and 2020 Annual Report on Form 10-K are available at: www.investorvote.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 OR VIA THE VIRTUAL WEBCAST, PLEASE VOTE BY TELEPHONE OR BY INTERNET, SUBMIT VOTING INSTRUCTIONS OR SIGN, DATE AND RETURN THE PROXY CARD AS SOON AS POSSIBLE. STOCKHOLDERS OF RECORD WHO VOTE OVER THE TELEPHONE OR THE INTERNET, SUBMIT VOTING INSTRUCTIONS OR EXECUTE A PROXY CARD MAY NEVERTHELESS ATTEND THE ANNUAL MEETING, REVOKE THEIR PROXY AND VOTE THEIR SHARES IN PERSON. By Order of the Board of Directors, William M. Foshee Secretary and Chief Financial Officer Birmingham, Alabama March 10, 2021 ii Agenda and Voting Recommendations 1 Proposal 1: Election of Directors The board of directors unanimously recommends a vote FOR each director nominee. The seven director nominees presented in this proposal are recommended for election to the board of directors. Additional information about each director and his or her qualifications may be found on page 1. Name Age Director Since Thomas A. Broughton III 65 2007 J. Richard Cashio 63 2007 James J. Filler Michael D. Fuller Christopher J. Mettler 77 2007 68 45 2007 2019 Hatton C. V. Smith 70 2007 Primary Occupation Chairman, President and Chief Executive Officer of ServisFirst Bancshares, Inc. and ServisFirst Bank Retired Chief Executive Officer of TASSCO, LLC Retired Chief Executive Officer of Jefferson Iron & Metal Brokerage, Inc. Retired President of Double Oak Water Reclamation Founder and President of Sovereign Co. Retired Chief Executive Officer of Royal Cup Coffee; Chief Executive Officer of Back Forty Beer Company Manager of Tuder Investments, LLC Irma L. Tuder AC: Audit Committee CC: Compensation Committee CGNC: Corporate Governance & Nominations Committee 2018 59 Committee Memberships Independent AC CC CGNC (cid:1590) (cid:1590) (cid:1590) (cid:1590) (cid:1590) (cid:1590) 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 28. iii TABLE OF CONTENTS PROPOSAL 1: ELECTION OF DIRECTORS ................................................................................................ CORPORATE GOVERNANCE ............................................................................................................................. 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 2020 ................................................................................................................................. OWNERSHIP OF SERVISFIRST COMMON STOCK BY DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS .................................................................................................................... Delinquent Section 16(a) Reports .......................................................................................................................................... PROPOSAL 2: ADVISORY VOTE ON EXECUTIVE COMPENSATION ......................................... EXECUTIVE COMPENSATION ........................................................................................................................... Compensation Discussion and Analysis (CD&A) ................................................................................................................. Compensation Committee Report .......................................................................................................................................... Summary Compensation Table .............................................................................................................................................. Grants of Plan-Based Awards for Fiscal 2020 ....................................................................................................................... Outstanding Equity Awards at 2020 Fiscal Year-End ............................................................................................................ Option Exercises and Stock Vested for Fiscal 2020 ............................................................................................................... Pension Benefits ..................................................................................................................................................................... Nonqualified Deferred Compensation Plans .......................................................................................................................... Chief Executive Officer Pay Ratio ......................................................................................................................................... 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 2021 Annual Meeting and Voting ................................................................................... Stockholder Proposals ............................................................................................................................................................ Solicitation of Proxies ............................................................................................................................................................ 1 4 4 6 7 8 11 11 12 12 12 13 14 14 14 14 22 23 23 24 24 25 25 25 25 25 28 28 29 30 30 30 34 35 iv 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. In October 2019, our board voted to increase the size of the board to seven directors. Seven directors will be elected at the Annual Meeting to hold office until our 2022 Annual Meeting of Stockholders and until their successors are elected and have qualified. Our board has nominated the seven persons named below, all of whom currently serve as directors, for election as directors at the 2021 Annual Meeting. Other than Ms. Tuder, who began serving as a director of the bank and the company on October 15, 2018, and Mr. Mettler, who began serving as a director of the bank and the company on October 21, 2019, 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 seven 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 seven nominees receiving the most votes cast in the election of directors by holders of shares of common stock present or represented by proxy and entitled to vote at the Annual Meeting will be elected to serve as directors of the company for the next year. As a result, although shares as to which the authority to vote is withheld will be counted, such “withhold” votes will have no effect on the outcome of the election of directors, except with respect to our director resignation policy. Information regarding directors and director nominees and their ages as of the record date is as follows: Committee Memberships Name Thomas A. Broughton III Age 65 Director Since 2007 J. Richard Cashio James J. Filler 63 77 2007 2007 Michael D. Fuller Christopher J. Mettler Hatton C. V. Smith 68 45 70 2007 2019 2007 Irma L. Tuder 59 2018 Independent Primary Occupation Chairman, President and Chief Executive Officer of ServisFirst Bancshares, Inc. and ServisFirst Bank Retired Chief Executive Officer of TASSCO, LLC Retired Chief Executive Officer of Jefferson Iron & Metal Brokerage, Inc. President of Double Oak Water Reclamation Founder and President of Sovereign Co. Retired Chief Executive Officer of Royal Cup Coffee; Chief Executive Officer of Back Forty Beer Company Manager of Tuder Investments, LLC X X X X X X AC CC CGNC [M] [M] [C][M] [M] [M] [M] [M] [C][M] [C][FE][M] [M] AC: Audit Committee CC: Compensation Committee CGNC: Corporate Governance & Nominations Committee [C] Committee Chair [M] Committee Member [FE] Financial Expert SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 1 The following summarizes the business experience and background of each of our nominees. Each of the director nominees also serves as a director of the bank, and Mr. Broughton also serves as Chairman, President and Chief Executive Officer of us and the bank. Thomas A. Broughton III Age: 65 Committees: None Director Since: 2007 Bank Director Since: 2005 Position: President, CEO and Chairman 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 was named chairman of the board of the company and the bank effective January 1, 2019. Mr. Broughton has spent the entirety of his 35-year banking career in the Birmingham area. In 1985, Mr. Broughton was named President of the de novo First Commercial Bank. When First Commercial Bank was bought by Synovus Financial Corp. in 1992, Mr. Broughton continued as President and was named Chief Executive Officer of First Commercial Bank. In 1998, he became Regional Chief Executive Officer of Synovus Financial Corp., responsible for the Alabama and Florida markets. In 2001, Mr. Broughton’s Synovus region shifted, and he became Regional Chief Executive Officer for the markets of Alabama, Tennessee and parts of Georgia. He continued his work in this position until his retirement from Synovus in August 2004. Mr. Broughton’s experience in banking has afforded him opportunities to work in many areas of banking and has given him exposure to all bank functions. Mr. Broughton served on the Board of Directors of Cavalier Homes, Inc. from 1986 until 2009, when the company was sold to a subsidiary of Berkshire Hathaway. We believe that Mr. Broughton’s extensive experience in banking in Alabama and the Southeast, and, in particular, his success in building and growing new banks and developing new markets, makes him highly qualified to serve as a director. J. Richard Cashio Age: 63 Committees: Audit; Compensation; Corporate Governance and Nominations (Chair) 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 has been a private investor since his retirement in 2013. Mr. Cashio served as Chief Executive Officer of TASSCO, LLC from 2005 until his retirement in January 2014 and served as the Chief Executive Officer of Tricon Metals & Services, Inc. from 2000 until its sale in October 2013. 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: 77 Committees: Compensation Position: Lead Independent 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. In January 2019, following Mr. Broughton becoming chairman of our board of directors, Mr. Filler was appointed to serve as the board’s lead independent director. 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 2021 Annual Meeting of Stockholders and Proxy Statement Michael D. Fuller Age: 68 Committees: Audit; 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. Christopher J. Mettler Age: 45 Committees: Compensation Committee Position: Director Director Since: 2019 Bank Director Since: 2019 Mr. Mettler has served as a director of the company and the bank since October 21, 2019. Mr. Mettler is Founder and President of Sovereign Co., where he leads strategy and business development. Mr. Metter assumed a full-time role at Sovereign as of April 26, 2019. Sovereign leverages proprietary marketing attribution and artificial intelligence technology to systematically measure thousands of simultaneous marketing messages to display the most relevant products for consumers. Previously, Mr. Mettler founded two marketing and financial technology businesses, CompareCards and SnapCap, both of which were acquired in two separate transactions by LendingTree (Nasdaq: TREE). Mr. Mettler served as President of Iron Horse Holdings LLC from January 1, 2014 until November 16, 2016. Following LendingTree’s acquisition of CompareCards from Iron Horse Holdings in November 2016, Mr. Mettler transitioned to serve as a salaried employee of LendingTree through April 26, 2019. We believe Mr. Mettler’s business experience, his strong background in the financial technology sector and his prior service on our Charleston, South Carolina advisory board makes him highly qualified to serve as a director. Hatton C. V. Smith Age: 70 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. Mr. Smith retired from all positions with Royal Cup Coffee effective February 2020. He currently serves as the Chief Executive Officer of Back Forty Beer Company specializing in unique craft beers in the southeast. Mr. Smith is also involved in many different charities and has 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 in one of our largest markets make him highly qualified to serve as a director. Irma L. Tuder Age: 59 Committees: Audit (Chair); Corporate Governance and Nominations Position: Director Director Since: 2018 Bank Director Since: 2018 Ms. Tuder is currently a private investor. She is the founder, former CEO and Board Chairperson of Analytical Services, Inc. (ASI), a nationally recognized business providing management and technical solutions to federal government agencies. Ms. Tuder successfully led the acquisition of ASI by Arctic Scope Regional Corporation Federal Holding Company in 2007. Ms. Tuder has over 30 years of experience in strategic business planning and execution, executive leadership, financial management and business operations. Prior to founding ASI, Ms. Tuder spent five years as a controller in private industry and five years in public accounting. In addition to her service as a director of the company and bank, Ms. Tuder is a member of the Notre Dame Institute for Latino Studies Advisory Council, HudsonAlpha Institute for Biotechnology Board of Directors, University of Alabama in Huntsville (UAH) Foundation Board and Business School Advisory Board and chairs the St. John Paul II Catholic High School Board of Trustees. Ms. Tuder received a BBA in accountancy from the University of Notre Dame and MBA from SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 3 Troy State University in Montgomery. We believe that Ms. Tuder’s extensive background in business, finance and accounting make her highly qualified to serve as both a director and as Chair of our audit committee. The Board of Directors Unanimously Recommends a Vote “FOR” the Election of Each of the Board Nominees 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. 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.servisfirstbancshares.com under the “IR Menu” tab. Some of the principal subjects covered by our Governance Guidelines comprise: • • • • • Director Qualifications, which include: a board candidate’s independence, experience, knowledge, skills, expertise, integrity, ability to make independent analytical inquiries; his or her understanding of our business and the business environment in which we operate; and the candidate’s ability and willingness to devote adequate time and effort to board responsibilities, taking into account the candidate’s employment and other board commitments. Responsibilities of Directors, which include: acting in the best interests of all stockholders; maintaining independence; developing and maintaining a sound understanding of our business and the industry in which we operate; preparing for and attending board and board committee meetings; and providing active, objective and constructive participation at those meetings. Director Access to Management and, as Necessary and Appropriate, Independent Advisors, which covers: encouraging presentations to our board from the officers responsible for functional areas of our business and from outside consultants who are engaged to conduct periodic reviews of various aspects of our operations or the quality of certain of our assets, such as the bank’s loan portfolio. Director Orientation and Continuing Education, such as: programs to familiarize directors with any changes to our business, strategic plans, and significant financial, accounting and risk management issues; our compliance programs and conflicts policies; our code of business conduct and ethics and our corporate governance guidelines. In addition, each director is expected to participate in continuing education programs relating to developments in our business and in corporate governance. Regularly Scheduled Executive Sessions, without Management, will be held by our board, led by our Lead Independent Director, and by the Audit Committee, which meets separately with our independent auditors. 4 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 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.servisfirstbancshares.com under the “IR Menu” tab. Incentive Compensation Clawback Policy Our board has approved and adopted a Clawback Policy for recovery of incentive compensation from the company’s current and former executive officers under certain circumstances. The Clawback Policy is designed to comply with Section 10D of the Securities Exchange Act of 1934 (the “Exchange Act”) and proposed Rule 10D-1. The Clawback Policy provides that, in the event the company is required to restate financial results due to material noncompliance with any financial reporting requirement under the securities laws, the board may adjust future compensation, cancel outstanding awards, seek recoupment of previous awards and take any other remedial and recovery action permitted by law, to recoup all or a portion of any incentive compensation approved, awarded or granted to an executive officer of the company after the date of adoption of the Clawback Policy and such award, vesting or payment occurred or was received during the three completed fiscal years immediately preceding the date on which the company is required to prepare the restatement. The Clawback Policy applies when the compensation committee has determined that the incentive compensation approved, awarded or granted was predicated upon the achievement of certain financial results that were the subject of the restatement and that a lesser amount of incentive compensation would have been approved, awarded or granted to the executive officer based upon the restated financial results. In each such instance, the company will seek to recoup the amounts by which an executive officer’s incentive compensation that was awarded, vested or paid during the three-year period referenced above exceeded the amounts that would have been awarded, vested or paid based on the restated financial results. Stock Ownership of Board and Executives Long-term stock ownership is deeply engrained in our culture and reflects our board’s strong commitment to the company’s success. We have reviewed the stock ownership policies of other financial institutions, the criteria identified by certain proxy advisory firms in determining whether a stock ownership policy is “rigorous” or “robust,” and the stock ownership of our directors and executive officers. We ultimately concluded not to adopt a formal stock ownership policy at this stage of the company’s existence primarily because the current ownership levels of our long-time 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, 2020, each of our non-employee directors held common stock valued over 25 times such director’s annual retainer, our Chief Executive Officer held common stock valued at over 55 times his annual base salary, and each of our other named executive officers, with the exception of Mr. Abbott, held common stock valued at over 40 times his annual base salary. Our board annually reviews our Governance Guidelines and other governance documents and practices and modifies them as it deems appropriate. Although we will reconsider adopting stock ownership guidelines in the future, including in the event of board or management changes, we intend to operate the company in a way that we believe makes the most sense taking into account numerous factors. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 5 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 the following: (cid:120) (cid:120) (cid:120) short sales, meaning any transactions in the company’s securities whereby one may benefit from a decline in the stock price of our common stock; purchases or sales of derivative securities related to the company’s securities (puts, calls, collars, swaps forward sale contracts and similar arrangements, excluding stock options issued pursuant to employee benefit plans); and investments in exchange funds (a stock fund that allows an investor to exchange his or her holdings in company securities for units in a portfolio of securities), excluding investments in the company stock fund available under the company’s 401(k) plan. 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 relative 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.servisfirstbancshares.com under the “IR Menu” tab. During its most recent review, our board considered transactions and relationships between each director or any member of a director’s immediate family and us and the bank. Our board also considered whether there were any transactions or relationships between our company and any entity of which a director or an immediate family member of a director is an executive officer, general partner or significant equity holder. The purpose of this review was to determine whether any such relationships or transactions existed that were inconsistent with a determination that a director is independent. Independent directors must be free of any relationship with us or our management that may impair the director’s ability to make independent judgments. Our CG&N Committee has determined in its business judgment that six of the company’s seven 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. Cashio, Filler, Fuller, Mettler and Smith, and Ms. Tuder. Mr. Broughton, our Chairman, 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). 6 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 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. Our board is led by a combination of Mr. Filler, our Lead Independent Director, and Mr. Broughton, our Chairman, President and CEO, supplemented by engaged, independent committee chairs and directors. Our independent directors unanimously voted for Mr. Broughton to serve as the chairman of our board following the retirement of our prior Chairman on December 31, 2018. The board believes that the company has been well served by Mr. Broughton’s leadership since the bank’s inception in 2005 and our formation in 2007. The board further believes that Mr. Broughton’s combined role as chairman and CEO will allow him to set the overall tone and direction for the company, maintain consistency in the internal and external communication of our strategic and business priorities, and have primary responsibility for managing our operations. The board also believes that a strong, effective Lead Independent Director, like Mr. Filler, an independent board, and independent committees provide the independent leadership necessary to balance the combined chairman and CEO role and, with the formal and informal mechanisms we have in place to facilitate the work of the board and its committees, results in the board effectiveness and efficiency that our stockholders expect. Mr. Broughton’s leadership has been especially evident during the COVID-19 pandemic. While the company and bank are known for being able to make lending decisions quickly on a decentralized basis, our employees look to Mr. Broughton to set the tone for the entire company. Under his leadership, the bank handled an extraordinary number of Payroll Protection Plan (“PPP”) loans pursuant to the terms of the CARES Act for both existing bank customers and new customers. Mr. Broughton’s emphasis on customer service leveraged existing relationships and earned new banking relationships during the pandemic, as new customers were able to compare their experience with the bank against the service provided by their current bankers. We believe our board’s structure provides leadership and operational oversight, notwithstanding Mr. Broughton’s role as Chairman. Our board’s three standing committees, which are described below under “Board Committees and Their Functions”, are composed exclusively of independent directors. In addition to the board committees at the company, our bank has a separate loan committee on which all of our directors serve. We believe that this structure further reinforces the board’s role as an objective overseer of our business, operations, risk sensitivity 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. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 7 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. 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.servisfirstbancshares.com under the “IR Menu” tab. Audit Committee Compensation Committee Corporate Governance & Nominations Committee Name(1) Irma L. Tuder Michael D. Fuller James J. Filler J. Richard Cashio Christopher J. Mettler 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 2020: 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. 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 2020: 8 8 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement Functions: • • • • • Annually reviews the performance and compensation of our Chief Executive Officer, who is not present during deliberations or voting with respect to his compensation; Makes recommendations to the independent members of our board of directors with respect to the compensation of our Chief Executive Officer and all other executive officers of the company; Makes determinations, either as a committee or together with the other independent directors, regarding the performance and compensation level of our Chief Executive Officer and our other named executive officers; Establishes the compensation structure for our senior management and approves the compensation of our senior executives; and Advises and reports to our board of directors at least annually, including with respect to the company’s incentive and equity-based compensation plans, and oversees the activities of the individuals and committees responsible for administering such plans. The compensation committee has the authority, in its sole discretion, to appoint, engage, retain and terminate any compensation consultant, legal counsel or other advisor to assist in the performance of its duties, and the company is responsible for providing appropriate funding to the compensation committee for payment of reasonable compensation to any such advisor retained by the compensation committee. During fiscal 2020, our compensation committee retained McLagan to conduct a comprehensive review of our compensation programs. The committee determined that there were no conflicts between McLagan and the company or any member of 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. Corporate Governance and Nominations Committee Number of meetings in 2020: 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. Stockholder nominations should be directed to the chair of the CG&N Committee, care of our chief financial officer, at the company’s principal executive office, 2500 Woodcrest Place, Birmingham, Alabama 35209. The CG&N committee will evaluate candidates recommended by stockholders using the same criteria as for other candidates recommended by its members, other members of the board, or management. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 9 In evaluating nominees for director, the CG&N committee believes that 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. Additionally, our CG&N committee charter provides that the CG&N committee, in selecting or recommending board candidates, shall consider factors it deems appropriate, which may include diversity. The members of the CG&N committee and the board also take into account views on diversity that our stockholders may communicate to us. 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: Atlanta Region Charleston Region Jeffrey B. Baker Michael A. Bowling Paul Conley John Loud Zach Parker Brent Reid Peter McKellar Weesie Newton Skip Sawin Daniel Vallini Dothan Region Jerry Adams Charles H. Chapman III Ronald DeVane John Downs Watson Downs Steve McCarroll Charles E. Owens William C. (Bill) Thompson Huntsville Region Mobile Region Montgomery Region E. Wayne Bonner Dennis Bragg 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. Hunter Lyons Dr. John A. Jernigan Ray B. Petty Edward M. Stivers III Todd Strange G.L. Pete Taylor W. Ken Upchurch, III Alan E. Weil, Jr. Taylor Williams Nashville Region Pensacola Region Charles Robert Bone Mary Margaret Bourbeau Joe Cashia Ryan Chapman Todd Robinson Thomas M. Bizzell Bo Carter Leo Cyr Matt Durney Dr. Mark S. Greskovich Ray Russenberger Sandy Sansing 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.” 10 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement Director Attendance Our board of directors held 12 meetings in 2020. 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 or she served on the board; and (ii) the number of meetings of committees of the board of directors held during the period he or she 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. All of our directors attended the 2020 Annual Meeting via remote webcast. 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 lease arrangement 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. Any potential related party transactions are reported to our chief financial officer, who then reports such transactions to our audit committee. Our audit committee determines whether such transactions constitute related party transactions and, if so, reports those transactions to our board for consideration if such transactions are not deemed pre-approved under our policy. A copy of our policy governing related party transactions is available on our website www.servisfirstbancshares.com under the “IR Menu” tab. The aggregate amount of indebtedness from our directors and executive officers (including their affiliates and inclusive of persons serving as executive officers of the bank) to the bank as of December 31, 2020 was approximately $36.97 million, which equaled 3.72% 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 one related party in 2020 pursuant to the terms of a lease entered into 2017. Prior to entering into such lease in 2017, the company obtained, and the Board considered, a market reasonableness study, and the Board, other than the related party, approved such lease on terms consistent with the results of the market reasonableness study. Under the terms of the 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.servisfirstbancshares.com under the “IR Menu” tab. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 11 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 Chairwoman of the audit committee and will be handled in accordance with procedures established by the audit committee. DIRECTOR COMPENSATION 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, other than Ms. Tuder and Mr. Mettler, who were appointed to our and the bank’s board in October 2018 and October 2019, respectively. As of February 22, 2021, our six non-employee directors beneficially owned, collectively, approximately 5.69% of our outstanding common stock. Prior to 2019, we historically had not granted any stock options or other equity-based incentive compensation for our directors on an annual basis due to their collective substantial ownership of company stock. In 2020, the compensation committee recommended and our board approved a grant of 655 shares of restricted stock to each of our directors, which grant vests 100% on the first anniversary of the date of grant. Our restricted stock grants to directors were targeted to have a value of $20,000 based on the market price of our common stock. We seek to structure director compensation to further align the interests of directors with the interests of our stockholders. Annual Retainers and Meeting Fees In 2020, directors each received an annual cash retainer of $30,000, except that our Lead Independent Director and our Audit Committee Chairman each received a $35,000 annual retainer. Directors were paid $600 for each board meeting or board event attended, $500 for each committee meeting attended that is not held on the same day as a board meeting, and $250 for each committee meeting attended that occurs on the same day as a full board meeting. Mr. Broughton is a named executive officer, and his compensation is reflected in the Summary Compensation Table. Director Compensation for Fiscal 2020 The following table sets forth information regarding the compensation of our non-employee directors for the year ended December 31, 2020. Name (a) J. Richard Cashio Michael D. Fuller James J. Filler Christopher J. Mettler Hatton C. V. Smith Irma L. Tuder Fees earned or paid in cash (b) ($) 41,600 40,200 44,450 38,450 39,450 44,950 Stock Awards (c) ($) 20,022 20,022 20,022 20,022 20,022 20,022 Option Awards (d) ($) - - - - - - Total (h) ($) 61,622 60,222 64,472 58,472 59,472 64,972 Changes to Director Compensation for Fiscal 2021 For fiscal 2021, our CG&N committee and our compensation committee jointly recommended a change in director compensation to our board. For fiscal 2021, each of our directors will receive an annual cash retainer of $45,000. Our Lead Independent Director will receive an additional retainer of $25,000. Audit committee members will receive a retainer of $8,000, with the audit committee chair receiving an additional $10,000 retainer. compensation committee members will receive a $6,000 retainer, with the compensation committee chair receiving an additional $8,000 retainer. Members of the CG&N committee will receive a $4,000 retainer, with the chair receiving an additional $7,500 retainer. With the adoption of the increased board retainers and the new committee retainers, directors will no longer receive fees for attending board and committee meetings. In addition, Mr. Broughton will no longer receive any compensation for his service as Chairman of the board. These changes were based on the results of the market competitive analysis conducted by our independent compensation consultant and evaluated by our compensation committee in November 2020. 12 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 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 February 22, 2021 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 Irma L. Tuder Michael D. Fuller James J. Filler J. Richard Cashio Hatton C. V. Smith Christopher J. Mettler William M. Foshee Clarence C. Pouncey III(14) Rodney E. Rushing Henry F. Abbott All directors and executive officers as a group (11 persons) ___________________ Amount and Nature of Beneficial Ownership Percentage of Outstanding Common Stock (%)(2) 7,254,600 (4) 4,799,090 (4) 813,081 (6) 70,621 (7) 507,342 (8) 1,370,886 (9) 672,054 (10) 437,228 (11) 20,745 (12) 335,713 (13) 711,939 (15) 423,250 (16) 8,613 (17) 5,371,472 (18) 13.5%(4) 8.9%(4) 1.5% * * 2.53% 1.24% * * * 1.32% * * 9.93% * (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 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 54,099,004 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 26, 2021, Blackrock, Inc. reported having sole power to vote or to direct the vote of 7,184,439 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 7,254,600 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, 2020. In a Schedule 13G/A filed February 10, 2021, The Vanguard Group reported having sole power to vote or direct the vote of 0 shares of common stock, shared power to vote or direct to vote 94,812 shares of common stock, sole power to dispose or direct the disposition of 4,667,066 shares of common stock and shared power to dispose or to direct the disposition of 132,024 shares of common stock. All information in this footnote was obtained from the Schedule 13G/A filed by The Vanguard Group. Includes 54,790 shares of common stock owned by his spouse and 14,290 shares of common stock owned by his two stepchildren. Does not include 366,000 shares of common stock owned by TAB2, LLC, a limited liability company, or 300,000 shares of common stock owned by TAB3, LLC. Mr. Broughton no longer has a reportable beneficial interest in shares of common stock owned by TAB2, LLC or TAB3, LLC. Mr. Broughton disclaims beneficial ownership of common stock held by his spouse, his two stepchildren, TAB2, LLC and TAB3, LLC. Mr. Broughton has pledged 12,000 shares to Business First Bank, Baton Rouge, as security for a line of credit. Does not include an option granted on October 15, 2018 to purchase up to 25,000 shares of common stock for $35.65 per share which vests 100% on October 15, 2023. Includes 40,215 shares owned by Tuder Family, LLC, a limited liability company of which the reporting person is a member and manager. The reporting person disclaims beneficial ownership of the Tuder Family, LLC shares except to the extent of her pecuniary interest therein. Includes 93,052 shares of common stock held by Mr. Fuller’s spouse. Does not include 790,000 shares of common stock held by Tyrol, Inc., which is owned by Mr. Fuller’s adult children. Mr. Fuller resigned as a director of Tyrol, Inc. during 2019 and disclaims beneficial ownership of such shares. Includes 151,500 shares Mr. Filler owns jointly with his spouse. 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. Mr. Cashio has pledged 159,112 shares to ServisFirst Bank as security for a loan. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 13 (11) (12) (13) (14) (15) (16) (17) (18) Mr. Smith has pledged 96,999 shares to ServisFirst Bank, as security for a line of credit. Does not include an option granted to Mr. Mettler on October 21, 2019 to purchase 25,000 shares of common stock for $33.90 per share which vests 100% after five years. Includes 24,000 share held by Mr. Foshee’s spouse. Mr. Foshee disclaims beneficial ownership of such shares. Mr. Foshee has pledged 48,000 shares to Morgan Stanley and 41,500 shares to US Bank. Mr. Pouncey retired as Chief Operating Officer of the Company effective December 31, 2020. Includes 15,133 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. Mr. Pouncey has pledged 20,804 shares to Valley Bank. Includes an option to purchase 15,000 shares of common stock for $6.915 per share granted on February 10, 2014, which vested 100% on February 10, 2021. Includes an option granted to Mr. Abbott on January 25, 2016 to purchase 2,000 shares of common stock for $19.155 per share which vested 100% on January 25, 2021. Includes 17,000 shares obtainable within 60 days pursuant to the exercise of outstanding options or warrants. Delinquent Section 16(a) Reports Section 16(a) of the Exchange Act requires our Section 16 officers, directors and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership with the SEC. Mr. Broughton reported an exercise of stock options on January 31, 2020 one day late, in a Form 4 filing made February 5, 2020. Mr. Bibb Lamar reported sales of stock on February 19 and 20, 2020, in a Form 4 filing made February 25, 2020. 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 2020 Annual Meeting, approximately 97% 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 2021 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 2020. Our “named executive officers” in 2020 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 Henry F. Abbott, Senior Vice President and Chief Credit Officer 14 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement Each of our five named executive officers also held the same position with the bank during fiscal 2020. Mr. Pouncey retired from his positions with us and the bank effective December 31, 2020, and Mr. Rushing subsequently was appointed to serve as Chief Operating Officer. All of such officers are 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 Abbott, 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 compensation committee. 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. We are a bank holding company headquartered in Birmingham, Alabama. Our bank, founded in 2005, provides commercial banking services through 21 full-service banking offices and three loan production 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 six 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 $52.4 million in 2014 to approximately $170 million in 2020 —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. During 2020, we continued to experience growth in the midst of a global pandemic. At December 31, 2020, our loans had increased 17% from 2019, our total deposits had grown by 32% over 2019 and our net income increased 14% over 2019 net income. Looking forward, the compensation committee intends to strengthen the competitiveness of our compensation program in order to incentivize continuing growth in our business. 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. 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. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 15 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.” 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 our 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. 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. Historically, our compensation committee has not designated a specific peer group for this purpose, instead relying on general information about similarly sized financial institutions in similar markets. In conjunction with the market compensation analysis referenced below, the compensation committee approved a peer group for use in future compensation purposes at the end of 2020. At the 2020 Annual Meeting, approximately 97% 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. The compensation committee did not retain a compensation consultant to advise with respect to fiscal 2020 compensation; however, the compensation committee did retain McLagan (a division of Aon plc) as an independent compensation consultant during 2020 to conduct a comprehensive review of our compensation program. The purpose of this review was to evaluate the continued appropriateness of our compensation program as compared to the programs of certain peer companies, with the goal of ensuring that our pay practices mature in tandem with our business. The compensation committee has adopted changes to our compensation program for the 2021 fiscal year in light of the recommendations provided by its compensation consultant. 16 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement All of our named executive officers received stock options or restricted stock awards and were encouraged to purchase our stock when they joined the company, other than Mr. Abbott, who received restricted stock awards in 2020 in connection with his promotion to Chief Credit Officer. 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. 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 these programs tend to reward long-term service. Some of our perquisites are designed to facilitate the promotion of our business interests, such as country club memberships that are utilized by our executives to develop and maintain customer relationships. We have also, on occasion, offered specific benefits to our longest serving executives to recognize and reward their long-term service. During 2020, we entered into endorsement split-dollar agreement with certain named executive officers. The agreements provide the named executives with death benefits through bank-owned life insurance policies. 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. With the retirement of Mr. Pouncey, we only have one remaining change in control agreement with our Chief Financial Officer, Mr. Foshee. General Compensation Policies To reward both short- and long-term performance in the compensation program and in furtherance of our compensation objectives noted above, our executive officer compensation philosophy includes the following principles: Compensation should be related to performance. The compensation committee believes that a significant portion of an executive officer’s compensation should be tied not only to individual performance, but also the company’s performance measured against both financial and non-financial goals and objectives. Incentive compensation should represent a portion of an executive officer’s total compensation. The compensation committee is committed to providing competitive compensation that reflects our performance and that of the individual officer or employee. Compensation levels should be competitive. The compensation committee reviews available data to ensure that our compensation is competitive with that provided by other comparable companies. The compensation committee believes that competitive compensation enhances our ability to attract and retain executive officers. As discussed above, our compensation committee retained a compensation consultant during the 2020 fiscal year to complete a deep review of our compensation structure in order to ensure that our compensation remains competitive. Following completion of this review, our compensation committee approved a peer group for compensation purposes and utilized said peer group to determine compensation levels for 2021. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 17 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. The compensation committee historically has not made automatic equity grants each fiscal year, preferring instead to utilize such grants on an as-needed basis to provide additional long-term incentives. Such long-term equity incentives historically have not vested immediately, but rather require the officers and directors who receive such grants to earn them over a period of years with the company. As a result of the review of compensation competitiveness by McLagan, the compensation committee has adopted short-term and long-term compensation plans for its executives in 2021. 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. The limited use of equity as compensation has been based, in large part, on high levels of stock ownership by the company’s executive officers. Using the market price and the number of shares of common stock beneficially owned as of December 31, 2020, our Chief Executive Officer held common stock valued at over 55 times his annual base salary, and each of our other named executive officers, with the exception of Mr. Abbott, held common stock valued at over 40 times his annual base salary. For fiscal year 2020, an average of 45.5% of our named executive officers’ compensation was in annual short-term cash incentives which, as described below, are largely performance-based awards; however, we have reported these short-term cash incentives as bonus payments due to the flexibility retained by our compensation committee in determining final award amounts. Only Messrs. Broughton and Abbott received equity-based incentives during the 2020 fiscal year, with Mr. Broughton’s award made in connection with his board service. The following table illustrates the percentage of each named executive officer’s total compensation, as reported in the “Summary Compensation Table” below, related to base salary, annual short-term cash incentives and long-term equity-based incentives: Percentage of Total Compensation (Fiscal Year 2020)(1) Annual Base Salary Annual Short Term Cash Incentives Equity- Based Incentives Perquisites and Benefits 33.6% 55.9% 59.4% 56.2% 58.4% 60.1% 38.2% 35.7% 38.2% 18% 1.3% -% -% -% 15% 5% 5.9% 4.9% 5.6% 8.7% Named Executive Officer Thomas A. Broughton III, Principal Executive Officer (“PEO”) William M. Foshee, Principal Financial Officer (“PFO”) Clarence C. Pouncey III Rodney E. Rushing Henry F. Abbott (1) Total percentages may not equal 100% due to rounding. 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 2020 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. 18 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 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, 2020, the compensation committee elected not to increase the base salaries of our named executive officers from 2019 levels, and all base salaries remained the same for the 2020 fiscal year. None of our named executive officers have employment agreements, although two of our named executive officers have change in control agreements. Following Mr. Pouncey’s retirement, only Mr. Foshee continues to have a change in control agreement. 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, 2020, the compensation committee relied on various performance measurements for determining executive officer cash incentive compensation for the named executive officers which included, among other factors, our net income, loan growth and asset quality. Each of the performance measurements was applied and determined at the discretion of the compensation committee. The potential award level for Mr. Broughton is purely discretionary, but the potential cash award level for each of our other named executive officers is generally limited to 30% of their respective base salaries for meeting threshold goals and 50% of their respective base salaries for meeting performance targets. 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 2020, the committee established such “stretch” goals for Messrs. Foshee, Pouncey and Rushing, meaning that each such officer had the opportunity to earn cash incentive compensation of 60% or more of their respective base salaries. Mr. Abbott 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 2020. Given our performance for the 2020 fiscal year and, in particular, our executives’ exceptional performance in managing our business through the pandemic, our compensation committee made the determination to exceed the stretch goal percentage for each of Messrs. Pouncey, Foshee, Rushing and Abbott. Mr. Broughton’s incentive award was purely discretionary by our compensation committee. As a result of the review of the competitiveness of our compensation practices by McLagan, the compensation committee adopted a structured annual incentive plan with defined goals and award opportunities for each of our executive officers, including our chief executive officer, for the 2021 performance period. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 19 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 2020 performance. Name Thomas A. Broughton III William M. Foshee Clarence C. Pouncey III Rodney E. Rushing Henry F. Abbott Equity-Based Incentive Compensation 2020 Incentive Range (%) None 30-60% 30-60% 30-60% 20-30% 2020 Incentive as a Percentage of Base Salary (%) 178.67% 68.33% 60.12% 67.89% 30.77% 2020 Incentive Paid ($) $938,000 205,000 202,000 222,000 60,000 In general, we have granted stock options to our executive officers only in connection with their initial hiring, but with vesting schedules designed to enhance their retention and align their interests with those of our stockholders. These stock options generally vest within seven years from their date of grant, with many grants not beginning to vest until three years following their date of grant. However, in recognition of the contributions made by our Chief Executive Officer, Mr. Broughton has received both stock options and restricted stock awards from time to time, and is eligible to receive awards in connection with his service on our board. Mr. Broughton received a board-related grant of 655 shares of restricted stock in 2020 which vests on the one year anniversary of grant. However, beginning in 2021, Mr. Broughton will no longer receive additional compensation for his board service. Mr. Abbott received an incentive grant of 1,527 shares of restricted stock in 2020 which vests on the third anniversary of the date of grant. See “Executive Compensation — Outstanding Equity Awards at Fiscal Year-End” for a detailed description of the vesting schedules of each of the options and restricted stock awards granted to the named executive officers that were outstanding at December 31, 2020. 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. Change in Compensation Structure for 2021 Following the review of our compensation structure conducted by McLagan, the committee’s independent compensation consultant, our compensation committee made some initial changes to our compensation structure for fiscal 2021. The changes are designed to (1) ensure that the mix of pay elements reflects current market practice; (2) move executive pay levels closer to the market median, as compared to pay levels at peer companies; and (3) emphasize performance-based and at-risk pay elements, thus increasing the degree of alignment between executive pay and stockholder interests. Additionally, with the retirement of Mr. Pouncey, the compensation committee and the board named Mr. Rushing as the new Chief Operating Officer. As a result of these changes, Mr. Broughton will no longer receive separate compensation (including equity grants) for his service as a director. Changes to our executive compensation structure include three distinct elements: Annual Base Salary. Each of our named executive officers received an increase in their base salaries, effective as of their work anniversary date. The base salaries of our named executive officers were below peer group median and the increases below are the initial steps to align the salaries of our named executives with competitive market levels. Named Executive Officer Thomas A. Broughton III, Principal Executive Officer (“PEO”) William M. Foshee, Principal Financial Officer (“PFO”) Rodney E. Rushing Henry F. Abbott 2020 Annual Base Salary 2021 Annual Base Salary $525,000 300,000 327,000 195,000 $675,000 340,000 375,000 225,000 20 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement Annual Incentive Compensation. Our board and compensation committee adopted an annual incentive plan which will be administered by the committee. The annual incentive plan provides a framework for annual or short-term cash incentive award opportunities for our executive officers and key employees. Prior to or shortly after the beginning of each performance period, our compensation committee will establish the specific performance goals and designate each participant’s target award under the plan. For 2021, each of our named executive officers has been named as a participant in the annual incentive plan, with target awards approved by the committee as follows: Named Executive Officer Thomas A. Broughton III, Principal Executive Officer (“PEO”) William M. Foshee, Principal Financial Officer (“PFO”) Rodney E. Rushing Henry F. Abbott Target Award (as a % of base salary) Target Award ($) 105% 50% 50% 50% $708,750 187,500 170,000 112,500 Payouts under the annual incentive plan will range between 0-150% of the executive’s target award, depending on our achievement of the selected performance criteria. If the threshold targets are achieved, 50% of the target award would be earned while 150% of the target award would be earned if the maximum performance levels are met or exceeded. Results that fall between two performance levels (threshold and target or target and maximum) will be pro-rated, while no payout will be earned if results fall below the established thresholds. Long-Term Incentive Compensation. As part of the 2021 changes to our compensation structure, our committee intends to make awards of long-term incentives to our named executive officers annually, with those awards consisting of a mix of time- and performance-based components. For fiscal 2021, our committee granted the following time-based and performance-based awards: Named Executive Officer Time-based Restricted Stock (#) Target Performance Share Units (#) Total Target Award Value ($) Thomas A. Broughton III, Principal Executive Officer (“PEO”) William M. Foshee, Principal Financial Officer (“PFO”) Rodney E. Rushing 8,267 1,983 2,187 8,267 1,983 2,187 $709,000 188,000 170,000 The time-based restricted stock will vest one-third per year on the first three anniversaries of the grant date, provided that the executive remains employed through the applicable vesting date. The performance shares represent the opportunity to earn shares of our common stock after a three-year period, subject to the executive’s continued employment through the end of the performance period. The actual number of shares earned under the performance share units will range between 0-150%, depending on the total stockholder return (TSR) of our company over the three-year performance period ranked relative to the TSR of certain peer companies over the same period. Given his 2020 grant, Mr. Abbott did not receive a grant for 2021, but will be eligible to receive a long-term incentive award in future periods. Severance and Change in Control We do not have an employment or other agreement with Messrs. Broughton, Rushing or Abbott 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. Mr. Pouncey’s agreement terminated upon his retirement. See “Executive Compensation — Potential Payments Upon Termination or Change in Control” for more information. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 21 Key Compensation Policies and Supplemental Information 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, 2020 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 2021 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 Christopher J. Mettler 22 SERVISFIRST BANCSHARES, INC. – Notice of 2021 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) Thomas A. Broughton III 2020 2019 President and Chief 2018 Executive Officer Stock Awards (e) ($) Salary (c) ($) Bonus (d) ($) 525,000 938,000 20,022 (1) 525,000 575,000 20,022 475,000 775,000 - Change in Pension Value and Non- Qualified Deferred Compensation Earnings (h) ($) - - - Non-Equity Incentive Plan Comp (g) ($) - - - Option Awards (f) ($) - - - All Other Compensation (i) ($) 77,604 (2) 77,541 62,366 Total (j) ($) 1,560,626 1,197,563 1,312,366 Clarence C. Pouncey III 2020 2019 EVP and Chief 2018 Operating Officer 336,000 202,000 336,000 140,000 312,000 188,000 William M. Foshee EVP and Chief Financial Officer 2020 2019 2018 300,000 205,000 300,000 125,000 280,000 168,000 Rodney E. Rushing EVP and Executive for Correspondent Banking 2020 2019 2018 327,000 222,000 327,000 132,000 297,000 179,000 - - - - - - - - Henry F. Abbott SVP and Chief Credit Officer ___________________ 2020 2019 2018 195,000 60,000 50,009 (6) 195,000 40,000 175,000 37,406 24,726 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 27,800 (3) 27,968 27,793 565,800 503,968 527,793 31,702 (4) 30,842 30,835 536,702 455,842 478,835 32,827 (5) 32,690 32,719 581,827 491,690 508,719 29,124 (7) 27,256 24,305 334,133 262,256 261,437 (1) (2) (3) (4) (5) (6) (7) Represents the grant date fair value of the grants of restricted stock under our 2009 Amended and Restated Stock Incentive Plan in accordance with FASB ASC Topic 718 of awards made during 2020. A grant of 655 shares of restricted stock was made to Mr. Broughton on April 23, 2020 and was based on a grant date fair value of $30.58 per share, the closing price of our common stock on the date of grant, with a total fair value of $20,022. Please refer to Note 13 (Employee and Director Benefits) in our 2020 Annual Report on Form 10-K for a discussion of the assumptions used to calculate this amount. All Other Compensation for 2020 includes car allowance ($9,000), director’s fees ($37,200), country club allowance ($8,180), healthcare premiums ($9,280), matching contributions to 401(k) plan ($11,400), group life and long-term disability insurance premiums ($1,362) and imputed income in connection with an endorsement split-dollar agreement ($1,182). 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 2020 includes car allowance ($9,000), country club allowance ($8,158), group life and long-term disability insurance premiums ($1,362) and healthcare premiums ($9,280). All Other Compensation for 2020 includes car allowance ($9,000), matching contributions to 401(k) plan ($11,400), healthcare premiums ($9,280), group life and long-term disability insurance premiums ($1,362) and imputed income in connection with an endorsement split-dollar agreement ($660). All Other Compensation for 2020 includes car allowance ($9,000), healthcare premiums ($9,280), matching contributions to 401(k) plan ($11,400), group life and long-term disability insurance premiums ($1,362), club dues ($1,680) and imputed income from an endorsement split-dollar agreement ($497). Represents the grant date fair value of the grants of restricted stock under our 2009 Amended and Restated Stock Incentive Plan in accordance with FASB ASC Topic 718 of awards made during 2020. A grant of 1,527 shares of restricted stock was made to Mr. Abbott on May 18, 2020 and was based on a grant date fair value of $32.75 per share, the closing price of our common stock on the date of grant, with a total fair value of $50,009. Please refer to Note 13 (Employee and Director Benefits) in our 2020 Annual Report on Form 10-K for a discussion of the assumptions used to calculate this amount. All Other Compensation for 2020 includes car allowance ($5,400), healthcare premiums ($10,431), matching contributions to 401(k) plan ($9,716), group life and long-term disability insurance premiums ($1,057) and club dues ($2,520). Grants of Plan-Based Awards for Fiscal 2020 The table below sets forth information regarding grants of plan-based awards made to our named executive officers during 2020. Name (a) Thomas A. Broughton III (PEO) William M. Foshee (PFO) Clarence C. Pouncey III Rodney E. Rushing Henry F. Abbott Grant Date (b) 4/23/2020 - - - 5/18/2020 All Other Stock Awards: Number of Shares of Stock or Units (#) (i) 655 - - - 1,527 All Other Option Awards: Number of Securities Underlying Options (#) (j) - - - - - Exercise or Base Price of Option Awards ($/Sh) (k) - - - - - Grant Date Fair Value of Stock and Option Awards ($) (j) $20,022 - - - 50,009 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 23 Outstanding Equity Awards at 2020 Fiscal Year-End The below table details all outstanding equity awards as of December 31, 2020. All equity awards identified below were granted under our 2009 Amended and Restated Stock Incentive Plan. Option Awards Stock Awards Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d) - Number of Securities underlying unexercised options (#) Unexercisable (c) Option exercise price ($) (e) Option expiration date (f) Number of Shares or Units of Stock That Have Not Vested (#) (g) 655 Market Value of Shares or Units of Stock That Have Not Vested ($) (h) 26,390 Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (i) - Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (j) - Number of securities underlying unexercised options (#) Exercisable (b) - - - - 15,000 2,000 - - - - - - $ - - - - - $ 6.915 02/10/2024 - - - - - - $ 19.155 01/25/2026 $ - - - 600 1,527 - 24,174 61,523 - - - - - - - - - - - - - - - - - Name (a) Thomas A. Broughton III (CEO) (1) William M. Foshee (CFO) Clarence C. Pouncey III Rodney E. Rushing (2) Henry F. Abbott (3) ___________________ (1) (2) (3) The award of 655 shares of restricted stock made on April 23, 2020 vests 100% on April 23, 2021. The market value of this restricted stock award is based on $40.29 per share, the closing price of our common stock on December 31, 2020.. The option to purchase 15,000 shares at $6.915 per share granted to Mr. Rushing on February 10, 2014 vested 100% on February 10, 2021. Share numbers and exercise price reflect 3-for-1 stock split that occurred on July 16, 2014 and 2-for-1 stock split that occurred on December 20, 2016. The option to purchase 2,000 shares at $19.155 per share granted to Mr. Abbott on January 26, 2016 vested 100% on January 26, 2021. The award of 600 shares of restricted stock made to Mr. Abbott on February 20, 2018 vests 100% on February 20, 2023. The award of 1,527 shares made to Mr. Abbott on May 18, 2020 vests 100% on May 18, 2023. 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 market value of this restricted stock award is based on $40.29 per share, the closing price of our common stock on December 31, 2020. Option Exercises and Stock Vested for Fiscal 2020 The following table sets forth information regarding option exercises by and restricted stock vesting for our named executive officers during 2020: Name (a) Thomas A. Broughton III(1) William M. Foshee Clarence C. Pouncey III Rodney E. Rushing Henry F. Abbott ___________________ Option Awards Stock Awards Number of Shares Acquired on Exercise (#) (b) Value Realized on Exercise ($) (c) Number of Shares Acquired on Vesting (#) (d) Value Realized on Vesting ($) (e) 20,000 - - - - $403,600 - - - - 579 - - - - $15,488 - - - - (1) Mr. Broughton exercised options for 10,000 shares at a price of $15.085 per share, for 5,000 shares at a price of $15.085 per share and for 5,000 shares at a price of $15,085 per share. Based upon a value of $36.75 per share, the closing price of the company’s common stock on the date of exercise of 10,000 shares, the value realized by Mr. Broughton on the exercise of such options was $216,650. Based upon a value of $34.55, the closing price of the company’s common stock on the date of exercise of 5,000 shares, the value realized by Mr. Broughton on the exercise of such options was $97,325. Based upon a value of $33.01 per share, the closing price of the company’s common stock on the date of exercise of 5,000 shares, the value realized by Mr. Broughton on the exercise of such options was $89,625. On April 16, 2020, 579 shares of restricted stock vested. Based on a value of $26.75 per share, the closing price of the company’s common stock on the vesting date, the value realized by Mr. Broughton was $15,488. 24 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 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. 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. In order to retain comparability, we re-identified our median employee using the same methodologies and assumptions used in identifying the median employee in 2017 and 2019, by comparing all salary, matching contributions to our 401(k) plan, annual incentive compensation, long-term incentive awards vested in 2020 and our payment of insurance premiums and provision of other perquisites, as reported to the Internal Revenue Service on Form W-2 for 2020 for all of our employees (excluding our Chief Executive Officer) as of December 31, 2020. As further detailed in the paragraphs and Summary Compensation Table below, Mr. Broughton’s total annual compensation in fiscal 2020 was $1,560,626. The company has determined that the median annual compensation for all company employees, excluding Mr. Broughton, as of the same date was approximately $77,021. 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 2020 was 20.26 to 1. Effect of Compensation Policies and Practices on Risk Management and Risk-Taking Incentives There is inherent risk in the business of banking. However, we do not believe that any of our compensation policies and practices provide incentives to our employees to take risks that are reasonably likely to have a material adverse effect on us. We believe that our compensation policies and practices are consistent with those of similar bank holding companies and their banking subsidiaries and are intended to encourage and reward performance that is consistent with sound practice in the industry. Potential Payments Upon Termination or Change in Control Change in Control Agreements We have two change in control severance agreements with named executive officers, William M. Foshee and Clarence C. Pouncey III. Each of these change in control agreements was originally entered into with the bank in 2005, but each has been amended and restated to apply to a change in control of the company as well as the bank. Mr. Pouncey’s change in control severance agreement terminated upon his retirement effective December 31, 2020. Messrs. Foshee and Pouncey’s agreements generally provide for a lump sum payment (equal to two times annual base salary for Mr. Foshee and one times annual base salary for Mr. Pouncey) in the event of the termination of their respective employment by the bank or the company, other than for “cause” or upon death, disability or attainment of normal retirement date, or by the employee in certain specific instances, in each case if such termination occurs within 24 months after a change in control. These agreements are not employment agreements and do not guarantee employment for any term or period; they only apply if a change in control occurs. The size of each benefit was set through arm’s-length negotiations with each individual upon his employment and consistent with general industry standards. Each of these agreements was approved by the board of directors of the bank and the company. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 25 The term “change in control” is defined in these change in control agreements as any of the following events: • • • • a merger, consolidation or other corporate reorganization (other than a holding company reorganization) involving either the company or the bank in which we do not survive, or if we survive, our stockholders before such transaction do not own more than 50% of, respectively, (i) the common stock of the surviving entity, and (ii) the combined voting power of any other outstanding securities entitled to vote on the election of directors of the surviving entity; the acquisition, other than from us, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership of 50% or more of either the then outstanding shares of our common stock or the combined voting power of our then outstanding voting securities entitled to vote generally in the election of directors; provided, however, that neither of the following shall constitute a change in control: (i) any acquisition by us, by any of our subsidiaries, or by any employee benefit plan (or related trust) of us or our subsidiaries, or (ii) any acquisition by any corporation, entity, or group, if, following such acquisition, more than 50% of the then-outstanding voting rights of such corporation, entity or group are owned, directly or indirectly, by all or substantially all of the persons who were the owners of our common stock immediately prior to such acquisition; individuals who, as of the effective date of the change in control agreement, constituted our board of directors cease for any reason to constitute at least a majority of our board of directors, except as otherwise provided in the agreement; or approval by our stockholders of: (i) our or the bank’s complete liquidation or dissolution, or (ii) the sale or other disposition of all or substantially all our assets, other than to an entity with respect to which immediately following such sale or other disposition, more than 50% of, respectively, the then-outstanding shares of common stock of such corporation and the combined voting power of the then-outstanding voting securities of such corporation entitled to vote generally in the election of directors, is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of our outstanding common stock and our outstanding voting securities immediately prior to such sale or other disposition, in substantially the same proportions as their ownership, immediately prior to such sale or disposition, of our outstanding common stock and our outstanding securities, as the case may be. Notwithstanding the foregoing, if Section 409A of the Internal Revenue Code would apply to any payment or right arising under the change in control agreements as a result of a change in control as described above, then with respect to such right or payment the only events that would constitute a change in control will be deemed to be those events that would constitute a change in the ownership or effective control of the company, or in the ownership of a substantial portion of the assets of the company in accordance with Section 409A. The change in control payments are due in the event that we terminate Mr. Foshee or Mr. Pouncey without “cause” (as defined in the change in control agreement) any time within two years after a change in control. In addition, the change in control payment is triggered in the event that Mr. Foshee or Mr. Pouncey terminates his employment any time within two years after a change in control for any of the following reasons: (i) he is assigned to duties or responsibilities that are materially inconsistent with his position, duties, responsibilities or status immediately preceding such change in control, or a change in his reporting responsibilities or titles in effect at such time resulting in a reduction of his responsibilities or position; (ii) the reduction of his base salary or, to the extent such has been established by the board of directors or its compensation committee, target bonus (including any deferred portions thereof) or substantial reduction in his level of benefits or supplemental compensation from those in effect immediately preceding such change in control; or (iii) his transfer to a location requiring a change in residence or a material increase in the amount of travel normally required of him in connection with his employment. In addition to the cash payments set forth in the change in control agreements, any stock options and restricted stock awards granted to the affected employee will immediately vest upon a change in control. 26 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement Endorsement Split-Dollar Agreements On November 9, 2020, the bank entered into endorsement split dollar agreements with each of Messrs. Broughton, Foshee and Rushing. The agreements provide the executives with death benefits funded through bank-owned life insurance policies. The bank solely owns all of the rights, title, and interest in the life insurance policy and will control all rights of ownership with respect to the policy including, without limitation, the right to withdraw the cash value of such policy. The agreements provide Mr. Broughton with a $3,000,000 death benefit endorsement, and each of Messrs. Foshee and Rushing with a $1,500,000 death benefit endorsement. The amounts of the bank-owned life insurance policies are sufficient to fund both the death benefit endorsement to the executives’ beneficiaries and a complete return of all premiums paid on the policies to the bank. The executives’ beneficiaries designated in accordance with the terms of the agreements are entitled to the endorsed death benefit amount from the proceeds of the insurance policies, provided each such executive remains employed by the bank through the earlier of (1) such executive’s date of death or (2) the second anniversary of the effective date of the agreements; provided, however, if such executive terminates employment, other than due to death, during the period between the first and second anniversaries of the effective date, such executive’s beneficiaries shall be entitled to fifty percent (50%) of the endorsed death benefit amount. The agreements will terminate immediately upon the first to occur of the following: (1) payment of the endorsed death benefit in accordance with the terms of the agreements; or (2) termination of an executive’s employment for any reason, other than death, prior to the first anniversary of the effective date. Estimated Payments upon a Termination or Change in Control Under the change in control 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, 2020, 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 $336,000 Foshee $600,000 Furthermore, assuming we had a change in control as of December 31, 2020, as defined in either of our stock incentive plans, and further assuming that the value of the stock as of that date was $40.29 per share (the closing price on such date), 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 $40.29 per share and their respective exercise prices per share: Name Broughton Pouncey Foshee Rushing Abbott Shares Represented by Unvested Options (#) - - - 15,000 2,000 Value of Unvested Options ($) - - - $500,625 $ 42,270 Additionally, in the event Mr. Broughton’s or Mr. Abbott’s employment was terminated as of December 31, 2020 due to a change in control, all unvested shares of restricted stock held by Mr. Broughton or Mr. Abbott would become immediately vested. Mr. Broughton held 655 shares of restricted stock as of December 31, 2020, with a value of $26,390 as of such date. Mr. Abbott held 2,127 shares of restricted stock as of December 31, 2020, with a value of $85,697 as of such date. Under the endorsement split dollar agreements, assuming each of Messrs. Broughton, Foshee and Rushing died on or about December 31, 2020, none of the beneficiaries of Messrs. Broughton, Foshee or Rushing would be entitled to any endorsement death benefit under the terms of said agreements. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 27 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, 2021. 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, 2021. Independent Registered Public Accounting Firm Our consolidated balance sheet as of December 31, 2020, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2020 have been audited by Dixon Hughes Goodman LLP, our independent registered public accounting firm, as stated in their report appearing in our 2020 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, 2020. 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 ___________________ 2020 2019 $ 548,040 (1) $ 64,700 (2) $ 36,000 (3) $ 11,825 (4) $ 545,700 (1) $ 62,000 (2) $ 35,000 (3) $ 4,400 (4) (1) Consists of fees incurred in connection with the audit of the company’s financial statements, 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, real estate investment trusts and certain Tennessee public fund pledging. (3) Consists of fees incurred in connection with tax return filings for the year ended December 31, 2020 and 2019, respectively. (4) In 2020, consists of fees incurred in connection with research and consultation relating to adoption of new accounting pronouncements, CARES Act implementation, and accounting for PPP loans and executive benefits. In 2019, consists of fees incurred in connection with accounting for payment resulting from the termination of a loan guarantee program operated by the State of Alabama and certain community investment tax credits offered by the State of Tennessee. 28 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 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, 2020. 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 the applicable requirements of the PCAOB and the SEC. 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, 2020 be included in the company’s Annual Report on Form 10-K for the year ended December 31, 2020. 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: Irma L. Tuder, Chairwoman J. Richard Cashio Michael D. Fuller SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 29 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 2021 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 2021 Annual Meeting of Stockholders. What are the purposes of the Annual Meeting? At the Annual Meeting, stockholders will vote on: (1) the election of seven 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, 2021; 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. How may I attend the Annual Meeting virtually? To access the Annual Meeting virtually, please click the virtual meeting link: www.meetingcenter.io/288623911. There are two options when logging in to the virtual meeting: Join as a “Guest” or Join as a “Stockholder”. When joining a “Stockholder” a control number and password will be required. The password for the meeting is SFBS2021. Anyone may attend the virtual shareholder meeting as a guest, but will not have the option to vote shares during the meeting or ask questions. You may vote during the Annual Meeting when attending virtually by providing their control number and following instructions available on the virtual meeting website during the meeting. For registered stockholders, the control number can be found on the proxy card or notice. If shares of common stock are held through an intermediary, such as a bank or broker, you must register in advance to attend the Annual Meeting virtually as a stockholder. For instructions on how to register to attend and vote virtually when you hold your shares in a brokerage account or in your broker’s or another nominee’s name, see “How do I vote?” below. Who is entitled to vote? Stockholders of record at the close of business on February 22, 2021, 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, 54,099,004 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. 30 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 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 2021 Annual Meeting, but you must request a legal proxy from your broker or nominee and bring it to the Annual Meeting. You may cast your vote at the virtual meeting, but you must register in advance to attend the Annual Meeting virtually as a stockholder. To register, you must submit proof of proxy power (legal proxy) reflecting your company stockholdings along with your name and email address to Computershare. Requests for registration must be labeled as “Legal Proxy” and be received no later than 4:00 p.m., Central Time, on April 14, 2021. Registered stockholders will receive an email from Computershare confirming registration. By mail: Requests for registration should be directed to Computershare at the following address: Computershare ServisFirst Bancshares, Inc. Legal Proxy P.O. Box 43001 Providence, RI 02940-3001 By email: Forward the broker provided email, or attach an image of the legal proxy, to legalproxy@computershare.com. 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 or virtually at the 2021 Annual Meeting. You may vote during the Annual Meeting when attending virtually by providing your control number and following instructions available on the virtual meeting website during the meeting. For registered stockholders, the control number can be found on your proxy card or notice. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 31 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 April 16, 2021. 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 2021 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 2021 Annual Meeting, but you must present a legal proxy at the Annual Meeting. By casting your vote at the virtual meeting, but you must register in advance to attend the Annual Meeting virtually as a stockholder. You can find registration instructions above under “How do I vote?”. Attendance at the virtual meeting will not revoke any proxy you have previously granted unless you specifically so request. 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 or virtually at the 2021 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 April 16, 2021. How many shares must be present to hold the 2021 Annual Meeting? More than one-half of the Company’s outstanding common stock as of the record date must be represented at the 2021 Annual Meeting in person, virtually 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 or virtually at the Annual Meeting; Have properly submitted a proxy card or a voter instruction form, or voted by telephone or the Internet on a timely basis; or Hold your shares through a broker or otherwise in street name, and your broker uses its discretionary authority to vote your shares on Proposal Number 3. 32 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement As of the record date, 54,099,004 shares of our common stock, $0.001 par value per share, held by 510 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 or about March 10, 2021, 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 seven 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 2021, 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. SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 33 Our board of directors does not know of any matters other than the above proposals that may be brought before the Annual Meeting. If any other matters should come before the Annual Meeting, the management proxies will have discretionary authority to vote all proxies not marked to the contrary with respect to such matters in accordance with their best judgment. In particular, the management proxies will have discretionary authority to vote with respect to the following matters that may come before the Annual Meeting: (i) approval of the minutes of the prior meeting if such approval does not amount to ratification of the action or actions taken at that meeting; (ii) any proposal omitted from the Proxy Statement and form of proxy pursuant to Rules 14a-8 and 14a-9 under the Exchange Act; and (iii) matters incident to the conduct of the Annual Meeting. In connection with such matters, the management proxies will vote in accordance with their best judgment. Who pays for this proxy solicitation? We do. We are making this proxy solicitation and 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, 2020, 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, 2020 (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 February 22, 2021, 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 2022 Annual Meeting of Stockholders must provide the company with a written copy of that proposal by no later than November 10, 2021, which is 120 days before the first anniversary of the date on which the company’s proxy materials for the 2021 Annual Meeting were first made available to stockholders. However, if the date of our Annual Meeting in 2022 changes by more than 30 days from the date of our 2021 Annual Meeting, then the deadline would be a reasonable time before we begin distributing our proxy materials for our 2022 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 2022 Annual Meeting without including such proposal in the company’s proxy statement, the stockholder must notify the company in writing on or before January 24, 2022. 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. Generally, we will consider nominations to be timely if submitted no later than the date a stockholder must submit a proposal for inclusion in our proxy materials. 34 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement Solicitation of Proxies Our board of directors solicits the accompanying proxy for use at our Annual Meeting of Stockholders to be held on April 19, 2021, at 9 a.m., Central Daylight Time, at 2500 Woodcrest Place, Birmingham, Alabama 35209. This year’s meeting will also be held virtually via live webcast on the Internet at www.meetingcenter.io/288623911. The Notice of Annual Meeting of Stockholders and this Proxy Statement are being made available on or about March 10, 2021 to our stockholders of record as of the close of business on February 22, 2021, 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 March 10, 2021 SERVISFIRST BANCSHARES, INC. – Notice of 2021 Annual Meeting of Stockholders and Proxy Statement 35 This page intentionally left blank (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Our Name is Our Mission 2020 Annual Report ServisFirst Bank www.servisfirstbank.com ServisFirst Bancshares www.servisfirstbancshares.com Atlanta (cid:402) Birmingham (cid:402) Charleston (cid:402) Dothan (cid:402) Huntsville (cid:402) Mobile (cid:402) Montgomery (cid:402) Nashville (cid:402) Pensacola (cid:402) Sarasota (cid:402) Tampa Bay (cid:3) (cid:3) (cid:3) March 2021 Dear Fellow Shareholder, 2020 was shaping up to be a good, normal year until February when we heard the first reports of a strange new virus. Since then, it has been everything but normal. We have, however, seen many positive factors as a result of the pandemic. A few are outlined below: (cid:120) Our financial systems functioned normally. Early in, we were concerned there could be some system failure, but thanks to the Federal Reserve Bank, they ensured orderly routine operations. Our strong liquidity, profitability, and a solid balance sheet proved to be a distinct advantage in uncertain times. (cid:120) Our pandemic plan was very good. While we adapted it as we went along, it was sound and thorough. (cid:120) The Paycheck Protection Program (PPP) rollout by our team was outstanding! We took care of our clients and after that we took care of many other banks’ clients as well. We outperformed many of our larger competitors and we will grow our market share as a result of our team’s responsive and professional efforts. (cid:120) Liquidity surge has been historic. Our deposits have grown by $2.5 billion, or 32% as a result. These deposits will serve us well when customers resume normal borrowing after the pandemic. (cid:120) Electronic banking became the norm very quickly. DocuSign took off in a matter of weeks, and branch traffic has dropped. We will see opportunities to reduce overhead in the future due to the transition to more electronic banking services delivery options. We ended the year with a Net Income per share of $3.13, an increase of 13% over 2019. We are pleased that the Board of Directors could increase the quarterly dividend to $0.20 per share, a 14% increase. We appreciate your investment and support of our bank. We would appreciate the referral of any potential new client whether individual, commercial, or institutional. We remain committed to our culture of service and hard work to make your investment one that you can be proud of. Sincerely, Thomas A. Broughton III Chairman of the Board President and Chief Executive Officer (cid:3) Total Return Performance ServisFirst Bancshares, Inc. NASDAQ Composite NASDAQ Bank (cid:3) 300 250 200 150 100 50 e u l a V x e d n I 0 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 Index: 12/31/2015 12/31/2016 ServisFirst Bancshares, Inc. ........ NASDAQ Composite ................. NASDAQ Bank .......................... 100.00 100.00 100.00 157.88 107.50 135.03 12/31/2017 175.66 137.86 139.77 12/31/2018 137.47 132.51 114.74 12/31/2019 164.02 179.19 139.10 12/31/2020 177.96 257.38 124.32 Date (cid:3) (cid:3) SELECTED FINANCIAL DATA 2020 As of and for the years ended December 31, 2018 (Dollars in thousands except for share and per share data) 2017 2019 2016 288,725 64,666 23,080 715,203 470,749 64,703 39,086 842,682 851,545 64,748 47,785 992,852 301,797 64,832 16,477 607,604 590,184 - 97,516 360,534 223,845 120 57,822 759,399 250 78,618 451,509 100,473 6,312 56,496 538,080 250 86,213 151,849 239,524 4,459 58,900 389,022 $ 50,985 338,037 42,434 295,603 30,116 111,511 214,208 44,639 169,569 169,506 Selected Balance Sheet Data: Total Assets ............................................................. $ 11,932,654 $ 8,947,653 $ 8,007,382 $ 7,082,384 $ 6,370,448 Total Loans .............................................................. 8,465,688 7,261,451 6,533,499 5,851,261 4,911,770 Loans, net ................................................................. 8,377,746 7,184,867 6,464,899 5,791,855 4,859,877 886,688 422,375 Securities available for sale ..................................... Securities held to maturity ....................................... 62,564 250 56,855 Cash and due from banks ......................................... 93,655 Interest-bearing balances with banks ....................... 2,115,985 566,707 160,435 1,771 Federal funds sold .................................................... Mortgage loans held for sale .................................... 4,675 14,425 Premises and equipment, net.................................... 40,314 54,969 Deposits ................................................................... 9,975,724 7,530,433 6,915,708 6,091,674 5,420,311 Federal funds purchased .......................................... 355,944 55,262 Other borrowings ..................................................... 16,042 Other liabilities ........................................................ Stockholders' Equity ................................................ 522,889 Selected Income Statement Data: Interest income ......................................................... $ Interest expense ....................................................... Net interest income .................................................. Provision for credit losses ........................................ Net interest income after provision for credit losses Noninterest income .................................................. Noninterest expense ................................................. Income before income taxes .................................... Income tax expense .................................................. Net income ............................................................... Net income available to common stockholders ....... Per Common Share Data: Net income, basic ..................................................... $ Net income, diluted .................................................. Book value ............................................................... Weighted average shares outstanding: ..................... Basic ........................................................................ 53,844,482 53,530,766 53,172,695 52,887,359 52,450,896 Diluted ..................................................................... 54,219,037 54,103,074 54,169,879 54,123,957 53,608,372 Actual shares outstanding ........................................ 53,943,751 53,623,740 53,375,195 52,992,586 52,636,896 Selected Performance Ratios: Return on average assets .......................................... Return on average stockholders' equity ................... Dividend payout ratio .............................................. Net interest margin (1) ............................................. Efficiency ratio (2) ................................................... Asset Quality Ratios: Net charge-offs to average loans outstanding .......... Non-performing loans to total loans ........................ Non-performing assets to total assets....................... Allowance for credit losses to total gross loans ....... Allowance for credit 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 ......... 326,627 $ 63,948 262,679 21,402 241,277 19,440 91,875 168,842 31,902 136,940 136,877 390,803 $ 103,158 287,645 22,638 265,007 23,982 102,128 186,861 37,618 149,243 149,180 262,756 $ 35,333 227,423 23,225 204,198 17,361 84,209 137,350 44,258 93,092 93,030 212,902 25,805 187,097 13,398 173,699 17,007 79,888 110,818 29,339 81,479 81,432 1.59 % 18.55 % 22.39 % 3.31 % 30.29 % 1.73 % 19.16 % 21.76 % 3.46 % 32.77 % 1.43 % 16.38 % 11.64 % 3.68 % 34.40 % 1.88 % 20.96 % 15.04 % 3.75 % 32.57 % 0.29 % 0.19 % 0.26 % 1.02 % 0.36 % 0.22 % 0.21 % 1.04 % 0.32 % 0.50 % 0.50 % 1.05 % 0.20 % 0.43 % 0.41 % 1.05 % 3.15 $ 3.13 18.41 2.79 $ 2.76 15.71 1.76 $ 1.72 11.47 2.57 $ 2.53 13.40 83.98 % 78.80 % 27.96 % 95.08 % 84.93 % 23.64 % 95.41 % 81.48 % 23.24 % 93.48 % 86.55 % 22.52 % 1.55 1.52 9.93 212.07 % 247.03 % 463.98 % 548.79 % 1.42 % 16.64 % 10.53 % 3.42 % 39.14 % 0.11 % 0.34 % 0.34 % 1.06 % 89.66 % 80.44 % 23.64 % 307.30 % (cid:3) (cid:3) Capital Adequacy Ratios: Stockholders' Equity to total assets .......................... CET1 capital (3) ...................................................... Tier 1 capital (4) ...................................................... Total capital (5) ........................................................ Leverage ratio (6) .................................................... 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 stockholders' equity ............... 8.32 % 10.50 % 10.50 % 12.12 % 8.23 % 13.62 % 13.38 % 33.36 % 16.60 % 32.47 % 17.82 % 9.42 % 10.50 % 10.50 % 12.31 % 9.13 % 8.98 % 9.12 % 11.74 % 11.14 % 8.89 % 17.82 % 8.93 % 10.12 % 10.13 % 12.05 % 9.07 % 47.10 % 46.91 % 13.06 % 11.62 % 13.53 % 17.71 % 8.58 % 9.51 % 9.52 % 11.52 % 8.51 % 14.25 % 13.16 % 11.18 % 19.18 % 12.39 % 16.20 % 8.21 % 9.78 % 9.78 % 11.84 % 8.22 % 28.23 % 26.67 % 25.02 % 16.46 % 28.32 % 16.41 % (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 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) 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. (4) Tier 1 capital ratio includes CET1 and qualifying minority interest divided by total risk-weighted assets. (5) Total capital ratio includes Tier 1 capital plus qualifying portions of subordinated debt and allowance for credit losses (limited to 1.25% of risk-weighted assets) divided by total risk-weighted assets. (6) Tier 1 leverage ratio includes Tier 1 capital divided by average assets less intangible assets. (cid:3) (cid:3) PRINCIPAL OFFICERS: SERVISFIRST BANCSHARES, INC. Thomas A. Broughton III Chairman, 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 (cid:3) Chairman, President and Chief Executive Officer (cid:3) William M. Foshee (cid:3) Executive Vice President, Chief Financial Officer, Treasurer and Secretary(cid:3) Clarence C. Pouncey III(cid:3) Executive Vice President and (cid:3) Chief Operating Officer Henry F. Abbot Senior Vice President Chief Credit Officer G. Carlton Barker (cid:3) Executive Vice President, Montgomery (cid:3) President and Chief Executive Officer(cid:3) Gregory W. Bryant (cid:3) Executive Vice President, Tampa Bay (cid:3) President and Chief Executive Officer(cid:3) J. Hal Clemmer (cid:3) Executive Vice President, Atlanta (cid:3) President and Chief Executive Officer(cid:3) Andrew N. Kattos (cid:3) Executive Vice President, Huntsville (cid:3) President and Chief Executive Officer(cid:3) W. Bibb Lamar, Jr. (cid:3) Executive Vice President, Mobile (cid:3) President and Chief Executive Officer(cid:3) B. Harrison Morris III (cid:3) Executive Vice President, Dothan (cid:3) President and Chief Executive Officer(cid:3) Rex D. McKinney (cid:3) Executive Vice President, Pensacola (cid:3) President and Chief Executive Officer(cid:3) Rodney R. Rushing Executive Vice President, Correspondent Division Paul M. Schabacker (cid:3) Executive Vice President, (cid:3) Commercial Sales(cid:3) Thomas G. Trouche (cid:3) Executive Vice President, Charleston (cid:3) President and Chief Executive Officer(cid:3) Bradford A. Vieira(cid:3) Executive Vice President, Nashville (cid:3) President and Chief Executive Officer OFFICERS AND DIRECTORS (cid:3) BOARD OF DIRECTORS: SERVISFIRST BANCSHARES, INC. AND SERVISFIRST BANK Thomas A. Broughton III, J. Richard Cashio James J. Filler Michael D. Fuller Christopher J. Mettler Hatton C. V. Smith Irma L. Tuder SERVISFIRST BANK REGIONAL DIRECTORS ATLANTA, GEORGIA Jeffrey B. Baker Michael A. Bohling Paul Conley John Loud Zach Parker Brent Reid CHARLESTON, SOUTH CAROLINA Peter McKellar Weesie Newton Skip Sawin Daniel Vallini DOTHAN, ALABAMA Jerry Adams Charles H. Chapman Ronald Devane John Downs Watson Downs Steve McCarroll Charles Owens William C. Thompson HUNTSVILLE, ALABAMA Dennis Bragg E. Wayne Bonner Tres Childs David Mathis David Slyman Irma L. Tuder Sidney White Danny Windham Tom Young (cid:3) SERVISFIRST BANCSHARES, INC. COMMITTEES NOMINATING AND CORPORATE GOVERNANCE J. Richard Cashio Michael D. Fuller Irma L. Tuder AUDIT J. Richard Cashio Michael D. Fuller Irma L. Tuder COMPENSATION J. Richard Cashio James J. Filler Christopher J. Mettler Hatton C.V. Smith MOBILE, ALABAMA Stephen G. Crawford Lowell J. Friedman Barry E. Gritter James M. Harrison, Jr. James L. Henderson Richard D. Inge Kenneth S. Johnson John H. Lewis, Jr. Hunter Lyons MONTGOMERY, ALABAMA John Jernigan Ray B. Petty Edward M Stivers III Todd Strange Pete Taylor Ken Upchurch Alan E. Weil, Jr. Taylor Williams NASHVILLE, TENNESSEE Charles R. Bone Mary Margaret Borbeau Joseph A. Cashia Ryan Chapman Todd Robinson PENSACOLA, FLORIDA Thomas M. Bizzell Thomas B. Carter Leo J. Cyr Matthew W. Durney Mark S. Greskovich Ray Russenberger Sandy Sansing Pensacola Main Office 219 East Garden Street, Suite 100 Pensacola, Florida 32502 850.266.9100 Pensacola Cordova Office 4980 North 12th Avenue Pensacola, Florida 32504 850.266.9160 Pensacola Fort Walton 1500 Freedom Self Storage Road, Suite 12 Fort Walton Beach, Florida 32547 850.266.9145 Sarasota Loan Production Office 240 South Pineapple Ave., Suite 401 Sarasota, FL 34236 813.528.8162 Summerville Loan Production Office 100 South Main Street Suite I Summerville, SC 29483 843.414.3950 Tampa Bay Office 4221 West Boy Scout Blvd, Suite 100 Tampa, Florida 33607 813.751.0801 Atlanta Main Office 300 Galleria Parkway SE, Suite 100 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 N. 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 Columbus Loan Production Office 6400 Bradley Park Drive Suite A Columbus, Georgia 31904 762.240.9058 Dothan Main Office 4801 West Main Street Dothan, Alabama 36305 334.340.4300 (cid:3) (cid:3) (cid:3) OFFICES AND LOCATIONS 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 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 Mobile Fairhope Office 561 Fairhope Avenue, Suite 101 Fairhope, Alabama 36532 251.316.7145 Montgomery Main Office One Commerce Street, Suite 100 Montgomery, Alabama 36104 334.223.5800 Montgomery East 7256 Halcyon Park Drive Montgomery, Alabama 36117 334.223.5600 Nashville Main Office 1801 West End Avenue. Suite 850 Nashville, TN 37203 615.921.3500 (cid:3) (cid:3) STOCKHOLDER INFORMATION 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 April 19, 2021, at 9:00 AM Central Daylight Time.(cid:3)As a result of public health and travel guidance due to COVID-19, you also will be able to attend the annual meeting, vote and submit your questions during the annual meeting by visiting www.meetingcenter.io/288623911. 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 Corporate Governance and Nominating Committees by clicking on the “Investor Relations” tab. We also have direct links to our filings with the Securities and Exchange Commission (SEC), including, but not limited to, our first annual report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and any amendments to these reports. You may also obtain a copy of any such report free of charge by requesting such copy in writing to 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. 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 (cid:3) UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) (cid:1409) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020 OR (cid:1407) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______to_______ Commission file number 001-36452 SERVISFIRST BANCSHARES, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 26-0734029 (I.R.S. Employer Identification No.) 2500 Woodcrest Place, Birmingham, Alabama 35209 (Address of Principal Executive Offices) (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 Trading symbol(s) SFBS Name of exchange on which registered NASDAQ Global Select Market 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 (cid:1409) No (cid:1407) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:1407) No (cid:1409) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:1409) No (cid:1407) Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes (cid:1409) No(cid:1407) 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 definitions of “large accelerated filer,” “accelerated filer,” “small reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer (cid:1409) Accelerated filer (cid:1407) Non-accelerated filer (cid:1407) Smaller reporting company (cid:1407) Emerging growth company (cid:1407) 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 (cid:1407) Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued its audit report. Yes (cid:1409) No (cid:1407) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:1407) No (cid:1409) As of June 30, 2020, the aggregate market value of the voting common stock held by non-affiliates of the registrant, based on a stock price of $35.76 per share of Common Stock, was $1,690,486,000. 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 19, 2021 54,085,465 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 2021 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, 2020 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS ......................................................... PART I. ................................................................................................................................................................ ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. BUSINESS ............................................................................................................................................. RISK FACTORS .................................................................................................................................... UNRESOLVED STAFF COMMENTS ................................................................................................. PROPERTIES ........................................................................................................................................ LEGAL PROCEEDINGS ....................................................................................................................... MINE SAFETY DISCLOSURES .......................................................................................................... 1 2 2 23 36 37 38 38 PART II. ................................................................................................................................................................ 38 ITEM 5. ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 9. ITEM 9A. ITEM 9B. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ............................................................... SELECTED FINANCIAL DATA .......................................................................................................... MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................................................................................................... QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....................... FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................................................... CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 38 39 40 60 63 FINANCIAL DISCLOSURES ........................................................................................................... 110 CONTROLS AND PROCEDURES ....................................................................................................... 110 OTHER INFORMATION ...................................................................................................................... 110 PART III. ................................................................................................................................................................ 111 ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ................................ 111 EXECUTIVE COMPENSATION .......................................................................................................... 111 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ........................................................................................ 111 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ......................................................................................................... 111 PRINCIPAL ACCOUNTANT FEES AND SERVICES ....................................................................... 111 PART IV. ................................................................................................................................................................ 112 ITEM 15. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ............................................................. 112 FORM 10-K SUMMARY ...................................................................................................................... 114 SIGNATURES ................................................................................................................................................................ 115 i 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 “Exchange Act”). These “forward-looking statements” reflect our current views with respect to, among other things, future events and our financial performance. The words “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” “will,” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from any results expressed or implied by such forward-looking statements. These statements should be considered subject to various risks and uncertainties, and are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such risks include, without limitation: (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) the global health and economic crisis precipitated by the COVID-19 outbreak; the effects of the COVID-19 pandemic on business practices including, without limitation, work from home and similar initiatives that may result in changes in the usage of commercial real estate; the effects of adverse changes in the economy or business conditions, either nationally or in our market areas; 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 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 economic crisis and associated credit issues in industries most impacted by the COVID-19 outbreak, including but not limited to the restaurant, hospitality, travel and retail sectors; the effects of hazardous weather in our markets; the effects of competition from other financial institutions and financial service providers; (cid:404) (cid:404) (cid:404) 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; (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) our ability to attract new or retain existing deposits, or to initiate new or retain current loans; (cid:404) 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; the effects of force majeure events, including war, natural disasters, pandemics or other widespread disease outbreaks and other national or international crises; an increase in the incidence or severity of fraud, illegal payments, security breaches or other illegal acts impacting our customers; the increased regulatory and compliance burdens associated with our bank exceeding $10 billion in assets; the results of regulatory examinations; the effect of inaccuracies in our assumptions underlying the establishment of our loan loss reserves; and (cid:404) (cid:404) (cid:404) (cid:404) 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. 1 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 2016, 2017, 2018, 2019 and 2020 mean our fiscal years ended December 31, 2016, 2017, 2018, 2019 and 2020, 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 21 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, which are located in the metropolitan statistical areas (“MSAs”) of Birmingham-Hoover, Huntsville, Montgomery, Dothan, Daphne-Fairhope-Foley 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 also operate loan production offices in Columbus, Georgia, Sarasota, Florida, and Summerville, South Carolina. 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, 2020, we had total assets of approximately $11.9 billion, total loans of approximately $8.5 billion, total deposits of approximately $10.0 billion and total stockholders’ equity of approximately $992.9 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, J. Harold Clemmer – Atlanta, Bradford A. Vieira – Nashville or Gregory W. Bryant – Tampa Bay) and/or our senior management team. Rather than relying on a more 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. Certain of our subsidiaries hold and manage participations in residential mortgages and commercial real estate loans originated by our bank in Alabama, Florida, Georgia and Tennessee, respectively, and 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. 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 2 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 350 community banks located in 20 states throughout the 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, 2020, our branches averaged approximately $475.0 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 38.9% of our total loan portfolio as of December 31, 2020. 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. Local decision making has impacted how we have managed our business during the COVID-19 pandemic. Our ability to use technology-based delivery channels to service our customers in a low-contact environment played an integral part in maintaining social distancing to help prevent the spread of COVID-19. Our regional executives were able to manage their banking operations in compliance with local shut-down orders. Our employees were able to work remotely as needed. Additionally, our decentralized, local credit decision making coupled with our advanced technology-based delivery channels enabled us to offer our customers efficient and timely access to the Small Business Administration’s Paycheck Protection Program (“PPP”) loans. We made over 4,900 PPP loans with an aggregate balance of approximately $1.05 billion during the year ended December 31, 2020. Identify Opportunities in Vibrant Markets. Since opening our original banking facility in Birmingham in 2005, as of December 31, 2020, we had expanded into nine additional markets. Our focus has been to expand opportunistically when we identify a strong banking team in a market with attractive economic characteristics and market demographics where we believe we can achieve a minimum of $300 million in deposits within five years of market entry. There are two primary factors we consider when determining whether to enter a new market: (cid:404) the availability of successful, experienced bankers with strong reputations in the market; and (cid:404) the economic attributes of the market necessary to drive quality lending opportunities coupled with deposit- related characteristics of the potential market. Prior to entering a new market, historically we have identified and built a team of experienced, successful bankers with market-specific knowledge to lead the bank’s operations in that market, including a regional chief executive officer. Generally, we or members of our senior management team are familiar with these individuals based on prior work experience and reputation, and strongly believe in the ability of such individuals to successfully execute our business model. We also often assemble a non-voting advisory board of directors in our markets, comprised of members representing a broad spectrum 3 of business experience and community involvement in the market. We currently have advisory boards in each of the Huntsville, Montgomery, Dothan, Mobile, Pensacola, Nashville, 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, Daphne- Fairhope-Foley and Mobile, Alabama, Pensacola-Ferry Pass-Brent, Tampa-St. Petersburg-Clearwater and North Port- Sarasota-Bradenton, 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 2010 to 2020 (deposit data reflects totals as reported by financial institutions as of June 30th of each year) as follows: 2020 Jefferson/Shelby County, Alabama ..... $ Madison County, Alabama .................. Montgomery County, Alabama ........... Houston County, Alabama .................. Mobile County, Alabama .................... Baldwin County, Alabama .................. Escambia County, Florida ................... Hillsborough County, Florida ............. Sarasota County, Florida ..................... Cobb County, Georgia ........................ Douglas County, Georgia .................... Charleston County, South Carolina ..... Davidson County, Tennessee .............. 2010 (Dollars in Billions) 22.6 6.5 4.6 2.1 6.0 3.2 4.2 21.4 11.8 9.5 1.4 7.9 20.8 45.6 $ 9.5 7.6 3.3 8.6 5.4 5.9 38.0 16.8 18.2 2.1 14.1 50.2 Compound Annual Growth Rate 7.27% 3.87% 5.15% 4.62% 3.67% 5.37% 3.46% 5.91% 3.60% 6.72% 4.14% 5.96% 9.21% 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. 4 The following table illustrates our market share, by insured deposits, in our primary service areas at June 30, 2020 (the most recent date such numbers were reported by the FDIC), as reported by the FDIC: Market Number of Branches Our Market Deposits Total Market Deposits Ranking Market Share Percentage (Dollars in Millions) Alabama: Birmingham-Hoover MSA ................................... Huntsville MSA .................................................... Montgomery MSA ............................................... Dothan MSA ........................................................ Mobile MSA ......................................................... Daphne-Fairhope-Foley 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 ............. 3 $ 2 2 2 1 1 2 1 3,932.1 $ 52,063.5 1,065.2 10,457.9 9,400.9 3,989.4 8,758.2 5,414.8 906.1 713.0 403.8 46.4 545.6 7,629.0 325.4 101,248.1 4 3 4 1 8 20 6 30 7.55% 10.19% 9.64% 17.87% 4.61% 0.86% 7.15% 0.32% 3 610.8 193,980.5 25 0.31% 1 252.6 17,469.4 12 1.45% 1 552.2 80,992.8 19 0.68% 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, 2020, as reported by the FDIC: Alabama ........................................................... Florida ............................................................. Georgia ............................................................ South Carolina ................................................. Tennessee ........................................................ 61.8% 8.6% 7.1% 13.4% 26.0% 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, Truist 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. 5 Lending Services 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. 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. 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 36 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 6 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 $72.2 million to $593.6 million at December 31, 2020. There were $1.0 million in charge-offs on construction loans during 2020 and no charge-offs during 2019. The amount of construction loans rated as substandard decreased from $4.3 million at December 31, 2019 to $235,000 at December 31, 2020. Residential Real Estate Loans. Our residential real estate loans consist primarily of residential second mortgage loans, residential construction loans and traditional mortgage lending for one-to-four family residences. We will originate fixed-rate mortgages with long-term maturities. The majority of our fixed-rate loans are sold in the secondary mortgage market. All loans are made in accordance with our appraisal policy, with the ratio of the loan principal to the value of collateral as established by independent appraisal generally not exceeding 85%. Risks associated with these loans are generally less significant than those of other loans and involve bankruptcies, economic downturn, customer financial problems and fluctuations in the value of real estate, and homes in our primary service areas may experience significant price declines in the future. We have not made and do not expect to make any “Alt-A” or subprime loans. Consumer Loans We offer a variety of loans to retail customers in the communities we serve. Consumer loans in general carry a moderate degree of risk compared to other loans. They are generally more risky than traditional residential real estate loans but less risky than commercial loans. Risk of default is usually determined by the well-being of the local economies. During times of economic stress, there is usually some level of job loss both nationally and locally, which directly affects the ability of the consumer to repay debt. Risk on consumer-type loans is generally managed through policy limitations on debt levels consumer borrowers may carry and limitations on loan terms and amounts depending upon collateral type. Our consumer loans include home equity loans (open- and closed-end), vehicle financing, loans secured by deposits, and secured and unsecured personal loans. These various types of consumer loans all carry varying degrees of risk. Commitments and Contingencies As of December 31, 2020, we had commitments to extend credit beyond current amounts funded of $2.6 billion, had issued standby letters of credit in the amount of $66.2 million, and had commitments for credit card arrangements of $286.1 million. 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, 2020. 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. 7 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 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. 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 restrict our permissible activities and investments, impose conditions and requirements on the products and services we offer and the manner in which they are offered and sold, and require compliance with protections for loan, deposit, brokerage, fiduciary, and other customers, among other things. They also restrict our ability to repurchase stock or pay dividends, or to receive dividends from our bank subsidiary, and impose capital adequacy and liquidity requirements. These laws and regulations generally are intended to protect customers (including depositors), the FDIC’s Deposit Insurance Fund and the banking system as a whole, and generally are not intended for the protection of stockholders or other investors. The consequences of noncompliance with these, or other applicable laws or regulations, can include substantial monetary and nonmonetary sanctions. In addition, we are subject to comprehensive supervision and periodic examination by the Federal Reserve, the FDIC and the Alabama State Banking Department (the “Alabama Banking Department”), among other regulatory bodies. These examinations consider not only compliance with applicable laws, regulations and supervisory policies of the agency, but also capital levels, asset quality, risk management effectiveness, the ability and performance of management and the board of directors, the effectiveness of internal controls, earnings, liquidity and various other factors. We also will be subject to comprehensive supervision and periodic examination by the Consumer Financial Protection Bureau (the “CFPB”) with respect to most federal consumer protection laws if our total assets are greater than $10 billion for four consecutive quarters. Our total assets were greater than $10 billion at the end of the second, third, and fourth quarters of 2020, and we expect our total assets to be greater than $10 billion at the end of the first quarter of 2021. For that reason, we expect to be subject to comprehensive supervision and periodic examination by the CFPB after that date. The results of examination activity by any of our federal bank regulators potentially can result in the imposition of significant limitations on our activities and growth. These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity and take enforcement action, including the imposition of substantial monetary penalties and nonmonetary requirements, against a regulated entity where the relevant agency determines, amount other things, that such operations fail to comply with applicable law or regulations or are conducted in an unsafe or unsound manner. This supervisory framework, including the examination reports and supervisory ratings (which are not publicly available) of the agencies, could materially impact the conduct, growth and profitability of our operations. The following discussion describes select material elements of the regulatory framework that applies to us. The description is not intended to summarize all laws, regulations and supervisory policies applicable to us and is qualified in its entirety by reference to the full text of the statutes, regulations and supervisory policies described. Further, the following discussion addresses the select material elements of the regulatory framework as in effect as of the date of this annual report on Form 10-K. Legislation and regulatory action to revise federal and state banking laws and regulations, sometimes in a substantial manner, are continually under consideration by the U.S. Congress, state legislatures and federal and state regulatory agencies. Accordingly, the following discussion must be read in light of the enactment of any new federal or state banking laws or 8 regulations or any amendment or repeal of existing laws or regulations, or any change in the policies of the regulatory agencies with jurisdiction over our operations, after the date of this annual report on Form 10-K. Bank Holding Company Supervision and Regulation Because 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: (cid:404) 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; (cid:404) acquiring all or substantially all of the assets of any bank; or (cid:404) 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” and the consideration of convenience and needs of the community to be served includes the institution’s performance under the Community Reinvestment Act. Under the interstate banking and branching sections of the BHC Act, if adequately capitalized and adequately managed, we or any other bank holding company located in Alabama may purchase a bank located outside of Alabama. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Alabama may purchase a bank located inside Alabama. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. Change in Bank Control Subject to various exceptions, the BHC Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person’s or company’s acquiring “control” of a bank holding company. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. In addition, any person or group of persons must obtain the approval of the Federal Reserve 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. Permissible Activities Under the BHC Act Under the BHC Act, a bank holding company is generally permitted to engage in or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in the following activities: (cid:404) banking or managing or controlling banks; and (cid:404) 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 9 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 without posing a substantial risk to the safety and soundness of a depository institution or to the financial system generally. 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 strength to its bank subsidiaries and to take measures to preserve and protect its bank subsidiaries in situations where additional investments in a troubled bank may not otherwise be warranted. In addition, where a bank holding company has more than one bank or thrift subsidiary, each of the bank holding company’s subsidiary depository institutions is responsible for any losses to the FDIC as a result of an affiliated depository institution’s failure. As a result, a bank holding company may be required to loan money to a bank subsidiary in the form of subordinate capital notes or other instruments which qualify as capital under bank regulatory rules. However, any loans from the holding company to such subsidiary banks likely will be unsecured and subordinated to such bank’s depositors and perhaps to other creditors of the bank. Repurchase or Redemption of Securities A bank holding company is generally required to give the Federal Reserve prior written notice of any purchase or redemption of its own then-outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve order or directive, or any condition imposed by, or written agreement with, the Federal Reserve. The Federal Reserve has adopted an exception to this approval requirement for well-capitalized bank holding companies that meet certain conditions. Bank Supervision and Regulation Generally The bank is an Alabama state-chartered bank and, as such, is subject to examination and regulation by the Alabama 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 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 (including depositors), the FDIC’s Deposit Insurance Fund and the banking system as a whole, and generally is not intended 10 for the protection of stockholders or other investors. The following discussion describes the material elements of the regulatory framework that applies to the bank. Temporary Relief from Certain Asset-Based Regulatory Thresholds On November 20, 2020, federal banking regulators jointly issued an interim final rule effective December 2, 2020 to provide temporary relief for community banking organizations with less than $10 billion in total assets as of December 31, 2019. The relief came in the form of an exemption from certain regulations and reporting requirements that those institutions would otherwise become subject to as a result of a growth in asset size caused by their participation in PPP and similar federal coronavirus response programs. The interim final rule permits qualifying banks and bank holding companies to use asset data as of December 31, 2019, in order to determine whether various regulatory asset thresholds apply during the calendar years of 2020 and 2021. It also temporarily revises the instructions to various Federal Reserve regulatory reports so that qualifying entities may use their December 31, 2019, asset data to determine reporting requirements for those reports in 2020 and 2021. This means that we and the bank may, through December 31, 2021, determine the applicability of certain asset-based regulatory thresholds using our asset data as of December 31, 2019, since our total assets as of that date were less than $10 billion. In order to address certain limited instances in which regulatory burden relief would be inappropriate, federal banking regulators have reserved authority in their respective regulations to require a community banking organization to comply with a given regulatory requirement that would otherwise not be applicable to the organization pursuant to the relief provided by the interim final rule. Two prominent regulatory requirements not included in the interim final rule are the Volcker Rule and the supervisory authority of the CFPB that is triggered once an organization attains $10 billion in assets. We discuss the applicability to us of the Volcker Rule and CFPB examination below. Branching Under current Alabama law, and subject to applicable FDIC rules and regulations, 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 and assessment rate are determined each quarter. 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. The method for determining an institution's risked-based assessment rate differs for small banks and large banks. Small banks (generally, those with less than $10 billion in assets over four consecutive quarters) are assigned an individual rate based on a formula using financial data and CAMELS ratings. Large banks (generally, those with $10 billion or more in assets over four consecutive quarters) are assigned an individual rate based on a scorecard. The scorecard combines the following measures to produce a score that is converted to an assessment rate: CAMELS component ratings, financial measures used to measure a bank's ability to withstand asset-related and funding-related stress, and a measure of loss severity that estimates the relative magnitude of potential losses to the FDIC in the event of the bank's failure. Assessment rates for both large and small banks are subject to adjustment. Assessment rates: (1) decrease for issuance of long-term unsecured debt, including senior unsecured debt and subordinated debt; (2) increase for holdings of long-term unsecured or subordinated debt issued by other insured banks (the Depository Institution Debt Adjustment or DIDA); and (3) for large banks that are not well-rated or not well- capitalized, increase for significant holdings of brokered deposits. The bank expects to become subject to the large bank scorecard methodology in the second quarter of 2021, and if that occurs, its assessment rate is likely to increase as a result. 11 In addition to its risk-based insurance assessments, the FDIC also imposed Financing Corporation (“FICO”) assessments to help pay the $780 million in annual interest payments on the $8 billion of bonds issued in the late 1980’s as part of the government rescue of the savings and loan industry. The last remaining FICO bonds matured in September 2019. The final FICO assessment was collected on the March 31, 2019 FDIC invoice and we do not expect any further FICO assessments to be made. The amount the bank pays to the FDIC in assessments 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. The FDIC also has established a higher long-term target Deposit Insurance Fund ratio of 2%. We cannot predict whether, as a result of an adverse change in economic conditions or other reasons, the FDIC will take similar extraordinary actions or otherwise increase deposit insurance assessment levels in the future. Any future increases could have a negative impact on our bank’s earnings. On September 30, 2018, the Deposit Insurance Fund reserve ratio reached 1.36 percent. Banks with less than $10 billion in total assets received assessment credits for the portion of their assessments that grew the reserve ratio from 1.15% to 1.35 percent. The credit began to be applied when the reserve ratio exceeded a target 1.38 percent ratio. As the bank did not yet have $10 billion in total assets at the time of the assessment credits, we recognized a credit of $1.7 million during 2019 as a result of this credit. The FDIC may terminate its insurance of an institution's deposits if it finds that the institution has engaged in unsafe and 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. 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. 12 Federal Laws Applicable to Consumer Credit and Deposit Transactions The bank’s loan and deposit operations are subject to a number of federal consumer protection laws and regulations, including, among others: (cid:404) the Truth-In-Lending Act, as implemented by Regulation Z issued by the CFPB, governing, among other things, the disclosure of credit terms to consumers; (cid:404) 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; (cid:404) 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; (cid:404) 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; (cid:404) 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; (cid:404) 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; (cid:404) the Servicemembers’ Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; (cid:404) 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; (cid:404) 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; and (cid:404) the Truth in Savings Act, as implemented by Regulation DD issued by the CFPB, governing, among other things, the disclosure of deposit terms to consumers Additionally, the Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. 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. 13 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: (cid:404) 4.5% based upon CET1; (cid:404) 6.0% based upon tier 1 capital; and (cid:404) 8.0% based upon total regulatory capital. A minimum leverage ratio (tier 1 capital as a percentage of total assets) of 4.0% is also required under the Basel III Capital Rules. The Basel III Capital Rules additionally require institutions to retain a capital conservation buffer of 2.5% above these required minimum capital ratio levels. The capital conservation buffer, which must consist of CET1, is designed to absorb losses during periods of economic stress. Banking organizations that fail to maintain the minimum 2.5% capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers. The Basel III Capital Rules became effective as applied to us and the bank on January 1, 2015, with a phase in period that generally extended 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, 2020, the bank was well-capitalized under the regulatory framework for prompt 14 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 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, which proposed rule was still pending final approval as of fall 2018. 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. 15 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 $382.5 million in dividends as of December 31, 2020, 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. 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. 16 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. The federal banking regulators regularly issue guidance regarding cybersecurity intended to enhance cyber risk management standards among financial institutions. 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 federal laws that are designed to counter money laundering and terrorist financing, and transactions with persons, companies, or foreign governments sanctioned by the United States. These include the USA Patriot Act, the Bank Secrecy Act, the Money Laundering Control Act, and the requirements of the United States Treasury Department’s Office of Foreign Assets Control (OFAC). These statutes and related rules and regulations impose requirements and limitations on specified financial transactions and account or other relationships, including obligations of a depository institution to verify customer identity, conduct customer due diligence, report on suspicious activity file reports of transactions in currency, and conduct enhanced due diligence on certain accounts. They also prohibit us from engaging in transactions with certain designated restricted countries and persons. We are required by our regulators to maintain policies and procedures to comply with the foregoing restrictions. Failure to comply with these statutes, rules and regulations, or failure to maintain an adequate compliance program, could lead to monetary penalties and reputational damage to our bank. Our banking regulators evaluate the effectiveness of our policies and procedures when determining whether to approve certain proposed banking activities. We believe the policies and procedures implemented by our Board are sufficient to be compliant with these laws. 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, 17 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. In June 2011, the Federal Reserve implemented a rule, which includes a cap of 21 cents plus .05% of the transaction on the interchange fee for debit card issuers with $10 billion or more in assets. The Bank exceeded $10 billion in assets for the first time as of June 30, 2020. The Durbin Amendment becomes effective for us on July 1, 2022. We do not anticipate that it will have a material impact on our revenue. Furthermore, 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. Compensation Practices Our compensation practices are subject to guidance provided by federal banking regulators designed to ensure that incentive compensation arrangements at banking organizations take into account risk and are consistent with safe and sound practices. During May 2016, several financial regulators jointly issued a proposed rule designed to prohibit incentive-based compensation arrangements that could encourage inappropriate risks by providing excessive compensation or that could lead to a material financial loss. The proposed rule would require incentive-based compensation arrangements to adhere to three basic principles; (1) a balance between risk and reward, (2) effective risk management and controls, and (3) effective governance. It also would require appropriate board of directors (or committee) oversight and recordkeeping and disclosures to the appropriate agency. The proposed rule uses a tiered approach that applies its provisions to covered financial institutions according to the size of the institution. 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. Since the adoption of the final rule in 2013, U.S. financial regulators and other federal agencies have further adopted several changes to the final rule. On January 14, 2014, the agencies adopted an interim final rule permitting banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities if certain qualifications are met. On July 9, 2019, the agencies adopted a final rule excluding community banks (i.e., those banks having $10 billion or less in total consolidated assets and trading assets and liabilities of 5% or less of total consolidated assets) from the Volcker Rule. On October 8, 2019, the agencies finalized revisions to the Volcker rule that simplified and streamlined compliance 18 requirements for banking entities that do not have significant trading activities, while banking entities with significant trading activity would become subject to more stringent compliance requirements. The revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law. With the changes, the agencies expect that the universe of trades that are considered prohibited proprietary trading will remain generally the same as under the agencies' 2013 final rule. These revisions became effective on January 1, 2020, with a required compliance date of January 1, 2021. To date, the prohibitions under the Volcker Rule and the final rule adopted thereunder have not had, and we do not currently expect them to have in the future, a material effect on our businesses or revenue, but they do limit the scope of permissible activities in which we might engage. 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. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) was signed into law. In many instances the EGRRCPA increased the Dodd-Frank mandated asset thresholds, to which enhanced supervision and prudential standards are applied. Previously, bank holding companies with assets of $10 billion or more were subject to stress testing. The asset threshold has been increased to $250 billion. A number of the effects of the Dodd-Frank Act are described or otherwise accounted for in various parts of this Supervision and Regulation section. The following items provide a brief description of certain other provisions of the Dodd-Frank Act that may be relevant to us and the bank. (cid:404) 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 for four consecutive quarters. Institutions with less than $10 billion in assets for four consecutive quarters will continue to be examined for compliance with consumer laws by their primary bank regulator. We had more than $10 billion in total assets for the last three consecutive quarters of 2020 and expect to have more than $10 billion in total assets at the end of the first quarter of 2021. If that occurs, we will be subject to CFPB supervisory and enforcement authority after that date. Expenses related to regulatory compliance are likely to increase as a result. (cid:404) 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. (cid:404) The Dodd-Frank Act imposes many investor protection, corporate governance and executive compensation rules that have affected most U.S. publicly traded companies. The Dodd-Frank Act (i) requires publicly traded companies to give stockholders a non-binding vote on executive compensation and golden parachute payments; (ii) enhances independence requirements for compensation committee members; (iii) requires companies listed on national securities exchanges to adopt incentive-based compensation clawback policies for executive officers; (iv) authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials; and (v) directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks. (cid:404) 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. 19 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. In addition, we will be subject to heightened regulatory scrutiny and requirements as a result of our total assets exceeding $10 billion as of December 31, 2020 and if our total assets exceed $10 billion for four consecutive quarters ending with the first quarter in 2021. 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. In addition to regulations issued by the Alabama Banking Department and federal banking regulators, we are subject to regulations issued by other state and federal agencies with respect to certain financial products and services we offer and our operations generally. These include, for example, the SEC, various taxing authorities, and various state insurance regulators. 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. Human Capital Resources At ServisFirst Bancshares, we believe that our Employees are truly our most valuable asset and that each of us directly contributes to our continued mutual success. As of December 31, 2020, we had 493 full-time equivalent employees. We have 187 employees located in our corporate office, including sales and operations, and 312 in our regional offices and branches. Our management believes that we have good relations with our employees. Hiring, Promotion & Talent Development We are always looking to build our workforce from within and promote from our current talent pool whenever possible. When this is not the case, we look to career fairs and local colleges to network on an ongoing basis, as well as utilizing professional networking platforms, such as LinkedIn. We also have a referral bonus program for current employees, which we believe helps us to diversify our workforce at the same time. We are also committed to the continued development of our employees. Compliance, IT and other banking industry-related trainings are completed by employees throughout the year. We also aim to assist our employees with position-related training and development when available. Health and Safety The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. In response to local government and health guidelines around the COVID- 19 pandemic, glass barriers have been installed where necessary, and we regularly encourage our employees to utilize video conferencing platforms when possible. All branches and internal corporate offices have been provided with cleaning supplies and are encouraged to disinfect surface areas consistently. We maintain a social distancing policy and update our procedures as federal and state agencies make new recommendations. 20 Compensation and Benefits We provide robust compensation and benefits programs to help meet the needs of our employees. In addition to competitive salaries, these programs include annual bonuses, a 401(k) Retirement Plan, full medical, dental and vision insurance, life insurance and paid time off. As part of our compensation philosophy, we believe that we must offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent. Diversity and Inclusion We are committed to our continued efforts to increase diversity and foster an inclusive work environment that supports our employees and the communities we serve. We recruit the best people for the job regardless of gender, race, ethnicity, age, disability, sexual orientation, gender identity, cultural background or religious belief. It is our policy to fully comply with all state and federal laws applicable to discrimination in the workplace. A brief description of the background of each of our named executive officers as of December 31, 2020 is set forth below. Thomas A. Broughton, III (65) – 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 was appointed Chairman of the Board effective January 1, 2019, following the retirement of our former Chairman. 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 (64) – Mr. Pouncey 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. Mr. Pouncey retired from the Company and Bank effective December 31, 2020. William M. Foshee (66) – 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 Decatur, Alabama, from 2002 until it was acquired in 2005. Mr. Foshee is a Certified Public Accountant. Rodney E. Rushing (63) – Mr. Rushing has served as the Executive Vice President and Executive for Correspondent Banking for us and the bank since 2011. Effective January 25, 2021, Mr. Rushing was appointed to serve as our Executive Vice President and Chief Operating Officer. 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. Henry Abbott (40) – Mr. Abbott has served as Senior Vice President and Chief Credit Officer for us and the bank since April 2018. From 2013 to 2018, he served as Senior Vice President and Chief Credit Officer for our Correspondent Banking Division. Prior to joining us, Mr. Abbott was employed at BB&T (now Truist) from 2004 to 2013 in various senior lending and credit administration roles. A brief description of the background of each of our regional chief executive officers is set forth below. J. Harold Clemmer (52) – Mr. Clemmer has served as Executive Vice President and Atlanta President and Chief Executive Officer of the Bank since March, 2018. Prior to joining the Company, Mr. Clemmer held several leadership positions with Fifth Third Bank including Regional President of Tennessee and Regional President of Georgia. Mr. Clemmer has over 25 years of commercial banking experience. 21 G. Carlton Barker (72) – 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 (57) – 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 (51) – 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 currently serves as a HudsonAlpha Institute for Biotechnology Ambassador, an external advisory board member for the University of Alabama at Huntsville College of Business, and a board member for the National Children’s Advocacy Center. William Bibb Lamar, Jr. (76) – 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 (58) – 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 (44) – 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 (56) – 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 (45) – 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 Best Place to work by the Nashville Business Journal for 2016 through 2018. Mr. Vieira was personally named a Nashville Business Journal “Power Leader” in conjunction with the Bank award during the same three years. 22 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, accessible 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. ITEM 1A. RISK FACTORS. Our business, financial condition and results of operations 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 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. Mr. Pouncey retired as Chief Operating Officer at the end of fiscal 2020, and our board appointed Mr. Rushing as our Chief Operating Officer based on his long history with the bank and the continuity afforded by his appointment. With the exception of the key officers in charge of our Huntsville and Montgomery banking offices, and our Chief Financial Officer, 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 changes 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 six 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. Because our total assets exceed $10 billion, we are subject to heightened regulatory requirements, which could have an adverse effect on our financial condition or results of operations. Various federal banking laws and regulations, including rules adopted by the Federal Reserve pursuant to the requirements of the Dodd-Frank Act, impose additional requirements on bank holding companies with total assets of at least $10 billion. In addition, bank with total assets of at least $10 billion are primarily examined by the CFPB with respect to federal consumer protection laws and regulations. While we have not yet reached $10 billion in assets for four consecutive quarters, we and the bank expect to do so during fiscal 2021. Once we and the bank have exceeded $10 billion in total assets for four consecutive fiscal quarters, we will be subject to additional requirements including, but not limited to, establishing a dedicated risk committee of our Board, calculating our FDIC deposit insurance assessment using the large bank pricing rule and more frequent regulatory examinations. Regulatory relief passed by federal banking regulators in late 2020 will allow us to use our 23 December 31, 2019 total assets to delay compliance with some, but not all, of these regulatory requirements until January 1, 2022. In preparation for these additional compliance obligations, we have incurred significant expenses and expect to continue to incur expenses to address heightened regulatory requirements. These additional regulatory requirements and increased compliance expenses could have a material adverse effect on our business, financial condition and results of operations. 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, 2020, 53.3% of our loan portfolio was composed of commercial and consumer real estate loans, of which 53.3% was owner-occupied commercial or 1-4 family mortgage loans. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value after the time the credit is initially extended. A decline in real estate values, either in the regions we serve or across the country as occurred in the U.S. recession from 2007 to 2009, could impair the value of our collateral and our ability to sell the collateral upon foreclosure, which would likely require us to increase our provision for credit 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 credit losses, our profitability could be adversely affected, 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, 2020, our 10 largest borrowing relationships totaled $483.0 million in commitments (including unfunded commitments), or approximately 5.7% 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 credit 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 credit losses may be inadequate, which could have a material adverse effect on our business, financial condition, results of operations and future prospects. Our earnings are affected by our ability to make loans, and thus we could sustain significant loan losses and consequently significant net losses if we incorrectly assess the creditworthiness of our borrowers resulting in loans to borrowers who fail to repay their loans in accordance with the loan terms, 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 credit 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 credit losses, we rely on an analysis of our loan portfolio based on historical loss experience, current conditions, reasonable and supportable forecasts, 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. We believe our allowance for credit losses is adequate. Our allowance for credit losses as of December 31, 2020 was $87.9 million, or 1.04% of total gross loans. If our assumptions are inaccurate, we may incur loan losses in excess of our current allowance for credit losses and be required to make material additions to our allowance for credit 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 credit losses and could require us to materially increase our allowance for credit losses or recognize further loan charge-offs based on judgments different than those of our management. Any material increase in our allowance for credit 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. In addition, the adoption of Accounting Standards Update (“ASU”) 2016-13, as amended, effective as of January 1, 2020 impacted our methodology for estimating the allowance for credit losses. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) gave financial institutions the option to delay adoption of ASU2016-13 and we delayed our adoption of the update until December 31, 2020, with an effective retrospective adoption date of January 1, 2020. Based on prevailing economic conditions and forecasts as of the January 1, 2020 adoption date, we recorded a net $2.0 million decrease in our allowance for credit losses in connection with our adoption of ASU 2016-13. See Note 1 – Summary of Significant Accounting Policies in the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data elsewhere in this report. 24 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 identify, measure, monitor, report and analyze the types of risk to which we are subject, including liquidity risk, credit risk, market risk, legal risk, compliance risk, strategic risk, reputational risk and operational risk related to our employees, systems and vendors, among others. Any system of control and any system to reduce risk exposure, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. A failure in our internal controls could have a significant negative impact not only on our earnings, but also on our reputation with our customers, regulators and investors. In addition, a failure of our internal controls, or a circumvention of such controls, could have 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 loan relationships in excess of $5.0 million and every loan internally risk-grade as special mention or below 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 six years, including: (cid:404) the sale of $34,750,000 in 5% subordinated notes due July 15, 2025 to accredited investor purchasers in July 2015; (cid:404) the sale of $30,000,000 in 4.5% subordinated notes due November 8, 2027 to accredited investor purchasers in November 2017 and concurrent redemption of $20,000,000 in 5.5% subordinated notes due November 9, 2022; and. (cid:404) the sale of $34,750,000 in 4% subordinated notes due October 21, 2030 to accredited investor purchasers in October 2020 and concurrent redemption of $34,750,000 in 5% subordinated notes due July 15, 2025. 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. 25 Competition from financial institutions and other financial service providers may adversely affect our profitability. The banking business is highly competitive, and we experience competition in our markets from many other financial institutions. We compete with these other financial institutions both in attracting deposits and in making loans. In addition, we must attract our customer base from other existing financial institutions and from new residents. Many of these competitors have substantially greater financial resources, larger lending limits, larger branch networks and less regulatory oversight than we do, and are able to offer a broader range of products and services than we can. Our profitability depends upon our continued ability to successfully compete with an array of financial institutions in our service areas. Our ability to compete successfully will depend on a number of factors, including, among other things: (cid:404) our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound banking practices; (cid:404) the scope, relevance and pricing of products and services that we offer; (cid:404) customer satisfaction with our products and services; (cid:404) industry and general economic trends; and (cid:404) 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 26 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. 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 is 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, have been and will continue to be 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 continue 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 would 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. Additionally, our insurance may be inadequate to compensate us for losses due to a cyber-attack, hacking, or similar technology security breach. 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. A security breach related to use of third-party software or systems, or the loss or corruption of confidential customer information could adversely affect our ability to provide timely and accurate financial information in compliance with legal and regulatory requirements. Any such failures could result in sanctions from regulatory authorities, significant reputational harm and a decrease in our customers confidence in us. Additionally, security breaches or the loss, theft or corruption of customer information such as social security numbers, credit card numbers, or other information could result in customer losses, litigation, regulatory sanctions, losses in revenue, increased costs and reputational harm. Our agreements with outside third parties include indemnification obligations in the event of any such security breaches; however, there is no assurance that such third-parties will have sufficient resources to provide full indemnification of all of their customers in the event such a security breach occurs. 27 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 be able to further expand our business. 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 to primarily small to medium- sized businesses, which may expose us to greater lending risks than those faced by other banks that lend 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 may have more credit risk and higher credit losses to the extent loans are concentrated by location or industry of the borrowers or collateral. Our credit risk and credit losses could increase if our loans are concentrated to borrowers engaged in the same or similar activities or to borrowers who as a group may be uniquely or disproportionately affected by economic or market conditions. Deterioration in economic conditions, housing conditions and commodity and real estate values in certain states or locations could result in materially higher credit losses if loans are concentrated in those locations. The COVID-19 pandemic has had a disproportionate impact on the travel, lodging, entertainment and retail industries which, as of December 31, 2020, comprised 5% of our outstanding loans. Additionally, we have significant exposures to businesses in certain economic sectors such as manufacturing, real estate, insurance and healthcare, and weaknesses in those businesses may adversely impact our business, results of operations or financial condition. 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, 2020, we held $6.5 million in other real estate owned. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to: general or local economic conditions; environmental cleanup liability; neighborhood assessments; interest rates; real estate tax rates; operating expenses of the mortgaged properties; supply of, and demand for, rental units or properties; ability to obtain and maintain adequate occupancy of the properties; zoning laws; governmental and regulatory rules; fiscal policies; and natural disasters. Our inability to manage the amount of costs or size of the risks associated with the ownership of real estate could have a material adverse effect on our business, financial condition, results of operations and prospects. Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability. The federal bank regulatory agencies have indicated their view that banks with high concentrations of loans secured by commercial real estate are subject to increased risk and should hold higher capital than regulatory minimums to maintain an appropriate cushion against loss that is commensurate with the perceived risk. Because a significant portion of our loan portfolio is dependent on commercial real estate, a change in the regulatory capital requirements applicable to us as a result of these policies could limit our ability to leverage our capital, which could have a material adverse effect on our business, financial condition, results of operations and prospects. We are subject to interest rate risk, which could adversely affect our profitability. Our profitability, like that of most financial institutions, depends to a large extent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowings. We have positioned our asset portfolio to benefit in a higher or lower interest rate environment, but this may not remain true in the future. Our interest sensitivity profile was somewhat liability sensitive as of December 31, 2020, 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, 28 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 credit 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 83% of the bank’s liabilities as of December 31, 2020 were checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, 71% of the assets of the bank were loans, which cannot be called or sold in the same time frame. Our deposit accounts have seen tremendous growth during the COVID-19 pandemic and associated economic downturn, with many of our customers choosing to increase their cash reserves, even though interest rates have stayed relatively low. 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, 2020, the fair value of our investment securities portfolio was approximately $886.7 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates or instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect our business, results of operations, financial condition and prospects. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Our failure to assess any currency impairments or losses with respect to our securities could have a material adverse effect on our business, financial condition, results of operations and prospects. Deterioration in the fiscal position of the U.S. federal government and downgrades in Treasury and federal agency securities could adversely affect us and our banking operations. The long-term outlook for the fiscal position of the U.S. federal government is uncertain, as illustrated by the 2011 downgrade by certain rating agencies of the credit rating of the U.S. government and federal agencies and questions concerning the impact of the Tax Cuts and Jobs Act on the long-term fiscal position of the U.S. federal government. Certain credit rating agencies have highlighted that the U.S. federal government had the highest debt of any AAA-rated sovereign nation, and there was no credible fiscal consolidation plan in light of the economic shock caused by the COVID-19 pandemic. 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 29 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. Our transactions with other financial institutions expose us to credit risk in the event of a default of a counterparty. The soundness of many financial services companies may be closely interrelated as a result of credit, trading, clearing and other relationships between such financial services companies. 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 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 resulting from our recent growth in total assets to over $10.0 billion. This allocation of resources, as well as any failure to comply with applicable requirements, may negatively impact our financial condition and results of operations. As a bank holding company, we are subject to certain capital requirements that may limit our operations. As a bank holding company, we are subject to supervision and regulation by the Federal Reserve Bank (FRB), including risk- based and leverage capital requirements. We must maintain certain risk-based and leverage capital ratios as required by the FRB, which can change depending on certain economic conditions and our risk profile and growth plans. Compliance with the capital requirements, including leverage ratios, may limit operations that require the intensive use of capital and could adversely affect our ability to expand or maintain present business levels. Additionally, failure by our bank to meet applicable capital requirements could subject us to a variety of regulatory sanctions, up to and including termination of deposit insurance by the FDIC. 30 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 and 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. 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. 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. 31 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. We have 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. We establish reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. We may still incur legal costs for a matter even if we have 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 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. The replacement of LIBOR as an interest rate index could adversely affect our business and results of operations. As of December 31, 2020, approximately 8% of our loan portfolio is indexed to the London Interbank Offered Rate (LIBOR) to calculate interest on the loans. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to cease persuading or compelling banks to submit LIBOR rates by the end of 2021. In November of 2020, the Financial Conduct Authority announced that it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one-week and two-month LIBOR offered rates will cease after December 31, 2021; but, the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and reputation risks, banking regulators have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they will examine bank practices accordingly. Regulators are therefore discouraging banks from entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. 32 These announcements and regulatory guidance indicate that the continuation of LIBOR on the current basis cannot be guaranteed after 2021 and may cause the LIBOR benchmark to perform differently than it has in the past. Financial institutions, including our bank, have begun to transition credit and other arrangements which currently utilize LIBOR as a reference rate to new indices for interest rates. Regulators, industry groups and certain committees have, among other things, published recommended fall-back language for LIBOR-referenced financial instruments, identified recommended alternatives for certain LIBOR rates (for example, Ameribor® or the Secured Overnight Financing Rate), and proposed implementations of the recommended alternatives in floating rate instruments. It is not yet possible to predict whether these specific recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our customers may result in the incurrence of additional expense as part of the transition and may result in disputes with customers over the appropriate substitute index or indices, which could adversely affect our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business and results of operations. Risks Related to Our Common Stock The market price of our common stock may be subject to substantial fluctuations, which may make it difficult for you to sell your shares at the volume, prices and times desired. The market price of our common stock may be highly volatile, which may make it difficult for you to resell your shares at the volume, prices and times desired. There are many factors that may impact the market price and trading volume of our common stock, including, without limitation: (cid:404) actual or anticipated fluctuations in our operating results, financial condition or asset quality; (cid:404) changes in economic or business conditions; (cid:404) the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve; (cid:404) 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; (cid:404) operating and stock price performance of companies that investors deemed comparable to us; (cid:404) future issuances of our common stock or other securities; (cid:404) additions to or departures of key personnel; (cid:404) proposed or adopted changes in laws, regulations or policies affecting us; (cid:404) perceptions in the marketplace regarding our competitors and/or us; (cid:404) significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us; (cid:404) other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and (cid:404) 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 33 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, 2020, our bank could pay approximately $382.5 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. Limitations on our ability to receive dividends from our bank subsidiary could have a material adverse effect on our liquidity and ability to pay dividends on our common stock or interest and principal on our debt. Alabama and Delaware law limit the ability of others to acquire the bank, which may restrict your ability to fully realize the value of your common stock. In many cases, stockholders receive a premium for their shares when one company purchases another. Alabama and Delaware law make it difficult for anyone to purchase the bank or us without approval of our board of directors. Thus, your ability to realize the potential benefits of any sale by us may be limited, even if such sale would represent a greater value for stockholders than our continued independent operation. An investment in our common stock is not an insured deposit and is subject to risk of loss. Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and is subject to the same market forces that affect the price of common stock in any company. As a result, an investor may lose some or all of their investment in our common stock. Our corporate governance documents, and certain corporate and banking laws applicable to us, could make a takeover more difficult. Certain provisions of our certificate of incorporation, as amended (or our “charter”), and bylaws, as amended, and corporate and federal banking laws, could make it more difficult for a third party to acquire control of our organization, even if those events were perceived by many of our stockholders as beneficial to their interests. These provisions, and the corporate and banking laws and regulations applicable to us: (cid:404) 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; (cid:404) 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; (cid:404) 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; (cid:404) enable our board of directors to amend our bylaws without stockholder approval; and (cid:404) 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. 34 General Risk Factors The ongoing COVID-19 pandemic and measures intended to prevent its spread may adversely affect our business, financial condition and operations, and such effects will depend on future developments, which are highly uncertain and are difficult to predict. Global health and economic concerns relating to the COVID-19 outbreak and government actions taken to reduce the spread of the virus have had a material adverse impact on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. The pandemic has resulted in federal, state and local authorities, including those who govern the markets in which we operate, implementing numerous measures to try to contain the virus. Such measures have included travel bans and restrictions, curfews, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. While several vaccines have been approved by the U.S. Food and Drug Administration, vaccine distribution has been slow and there are concerns that more aggressive variants of the COVID-19 virus may increase and spread due to the pace of vaccinations in the United States. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act in March of 2020 and, more recently, an Omnibus COVID Relief Deal in December 2020. There can be no assurance that such steps taken by the United States government will be effective or achieve their desired results in the near future. The outbreak has adversely impacted and is likely to continue to adversely impact our workforce and operations and the operations of our customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our customers or business partners, including but not limited to: (cid:404) Credit losses resulting from financial stress experienced by our borrowers, especially those operating in industries most hard hit by government measures to contain the spread of the virus; (cid:404) Possible business disruptions experienced by our vendors and business partners in carrying out work that supports our operations; (cid:404) Heightened levels of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and increased online activity brought about by the pandemic; and, (cid:404) Operational failures due to changes in our normal business practices necessitated by our internal measures to protect our employees and government-mandated measures intended to slow the spread of the virus. These factors may exist for an extended period of time and may continue to adversely affect our business, financial condition and operations even after the COVID-19 outbreak has subsided. The extent to which the pandemic impacts our business, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. Additionally, future outbreaks of COVID-19, or other viruses, may occur. Among other relief programs, we participated in the PPP and originated almost 4,900 loans in the amount of $1.05 billion under the program during the year ended December 31, 2020. PPP loans are fixed, low interest rate loans that are guaranteed by the SBA and subject to numerous other regulatory requirements, and a borrower may apply to have all or a portion of the loan forgiven. If PPP borrowers fail to qualify for loan forgiveness, we face a heightened risk of holding these loans at unfavorable interest rates for an extended time period. While PPP loans are guaranteed by the SBA, various regulatory requirements will apply to our ability to seek recourse under the guarantees, and related procedures are currently subject to uncertainty. If a borrower defaults on a PPP loan, these requirements and uncertainties may limit our ability to fully recover against the loan guarantee or to seek full recourse against the borrower. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. Therefore, the risk factors discussed in our Annual Report on Form 10-K could be heightened, changed or be added to in the future. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see “Forward-Looking Statements” under Part 1, Item 2 above. 35 Financial disruption or a prolonged economic downturn could materially and adversely affect our business. Worldwide financial markets have recently experienced periods of extraordinary disruption and volatility, which has been exacerbated by the COVID-19 pandemic, resulting in heightened credit risk, reduced valuation of investments and decreased economic activity. Moreover, many companies have experienced reduced liquidity and uncertainty as to their ability to raise capital during such periods of market disruption and volatility. In the event that these conditions recur or result in a prolonged economic downturn, our results of operations, financial position and/or liquidity could be materially and adversely affected. Many of the other risk factors discussed herein identify risks that result from, or are exacerbated by, financial economic downturn. These include risks related to our investments portfolio, the competitive environment and regulatory developments. 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, although rates currently remain at near historic lows, which may impact our ability to generate attractive earnings through our investment portfolio. Although interest rates are low, deposit levels are high as our customers increase their cash balances in light of current economic uncertainties. 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. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. 36 ITEM 2. PROPERTIES. As of December 31, 2020, we operated through 21 banking offices and 3 loan production 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. State, MSA, Office Address City Zip Code Owned or Leased Date Opened Alabama: Birmingham-Hoover: 2500 Woodcrest Place (1) ................................................................................................ 324 Richard Arrington Jr. Boulevard North .................................................................... 5403 Highway 280, Suite 401 ......................................................................................... Total ........................................................................................................................................ Birmingham Birmingham Birmingham 35209 35203 35242 Owned Leased Leased 3 Offices Huntsville: 401 Meridian Street, Suite 100 ........................................................................................ Huntsville 1267 Enterprise Way, Suite A (1) .................................................................................... Huntsville 35801 35806 Leased Leased Total ........................................................................................................................................ 2 Offices Montgomery: 1 Commerce Street, Suite 200 ......................................................................................... Montgomery 7256 Halcyon Park Drive (1) ........................................................................................... Montgomery 36104 36117 Leased Leased Total ........................................................................................................................................ 2 Offices Dothan: 4801 West Main Street (1) ............................................................................................... Dothan 1640 Ross Clark Circle, Suite 307 ................................................................................... Dothan 36305 36301 Leased Leased Total ........................................................................................................................................ 2 Offices 3/2/2005 12/19/2005 8/15/2006 11/21/2006 8/21/2006 6/4/2007 9/26/2007 10/17/2008 2/1/2011 7/9/2012 9/3/2014 Mobile: 2 North Royal Street (1) .................................................................................................. Mobile 4400 Old Shell Road ........................................................................................................ Mobile Total ........................................................................................................................................ Daphne-Fairhope-Foley: 561 Fairhope Ave. Suite 101 (1) ...................................................................................... Total ........................................................................................................................................ Fairhope Total Offices in Alabama ........................................................................................................ Florida: Pensacola-Ferry Pass-Brent: 219 East Garden Street Suite 100 (1) ............................................................................... 4980 North 12th Avenue ................................................................................................. 1500 Freedom Self Storage Road, Suite 12 ..................................................................... Total ........................................................................................................................................ Pensacola Pensacola Ft. Walton Bch. Tampa-St. Petersburg-Clearwater: 4221 West Boy Scout Blvd. (1) ....................................................................................... Total ........................................................................................................................................ Tampa North Port-Sarasota-Bradenton: 240 South Pineapple Ave. (2) .......................................................................................... Total ........................................................................................................................................ Sarasota Total Offices in Florida .......................................................................................................... Georgia: Atlanta-Sandy Springs-Roswell: 300 Galleria Parkway SE, Suite 100 ................................................................................ Atlanta 2801 Chapel Hill Road .................................................................................................... Douglasville 2454 Kennesaw Due West Road (3) ................................................................................ Kennesaw Columbus: 6400 Bradley Park Drive, Suite A (2) .............................................................................. Total Offices in Georgia ......................................................................................................... Columbus South Carolina: Charleston-North Charleston: 701 East Bay Street Suite 503 (1) .................................................................................... 100 S Main Street Suite I (2) ........................................................................................... Total Offices in South Carolina .............................................................................................. Charleston Summerville Tennessee: Nashville: 36602 36608 Leased Leased 2 Offices 1 Office 12 Offices 3 Offices 1 Office 1 Office 5 Offices 4 Offices 2 Offices 36532 Leased 9/29/2017 32502 32504 32547 Leased Owned Leased 4/1/2011 8/27/2012 8/1/2018 33607 Leased 1/4/2016 34236 Leased 8/1/2019 30339 30135 30152 Leased Owned Owned 31904 Leased 7/1/2015 1/28/2008 12/12/2011 8/12/2020 29403 29483 Leased Leased 4/20/2015 7/1/2016 1801 West End Avenue, Suite 850 (1) ............................................................................ Nashville 37203 Leased 6/4/2013 Total Offices in Tennessee ..................................................................................................... Total Offices ........................................................................................................................... 1 Office 24 Offices (1) Offices relocated to this address. Original offices opened on date indicated. (2) Property serves as a loan production office. (3) Planned closure date of March 11, 2021 37 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. 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 19, 2021, there were 512 holders of record of our common stock. As of the close of business on February 19, 2021, the price of our common stock was $46.99 per share. Dividends On December 21, 2020, our board of directors increased our quarterly cash dividend from $0.175 per share to $0.20 per share. Subject to the board of directors’ approval and applicable regulatory requirements, we expect to continue paying cash dividends on a quarterly basis. 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 2020 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, 2020. Equity Compensation Plan Information The following table sets forth certain information as of December 31, 2020 relating to stock options granted under our 2009 Amended and Restated Stock Incentive Plan and other options or warrants issued outside of such plans, if any. All awards under our 2005 Amended and Restated Stock Incentive Plan have vested, have been exercised or have been forfeited as of December 31, 2020, and no further awards shall be made under the 2005 Plan. 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 Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Weighted- average Exercise Price of Outstanding Awards 640,950 $ - 640,950 $ 18.14 - 18.14 3,186,865 - 3,186,865 38 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,” “Adjusted Performance Data,” “Asset Quality Ratios,” “Liquidity Ratios,” “Capital Adequacy Ratios” and “Growth Ratios,” the selected historical consolidated financial data as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 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 .............................................................. 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 credit losses................................................................... Net interest income after provision for credit losses .......................... Noninterest income ............................................................................. Noninterest expense ............................................................................ Income before income taxes ............................................................... Income tax expense ............................................................................ Net income .......................................................................................... Net income available to common stockholders .................................. Per Common Share Data: Net income, basic ............................................................................... $ Net income, diluted ............................................................................. Book value .......................................................................................... Weighted average shares outstanding: Basic ................................................................................................... Diluted ................................................................................................ Actual shares outstanding ................................................................... Selected Performance Ratios: Return on average assets ..................................................................... Return on average stockholders' equity .............................................. Dividend payout ratio ......................................................................... Net interest margin (1) ........................................................................ Efficiency ratio (2) .............................................................................. Asset Quality Ratios: Net charge-offs to average loans outstanding .................................... Non-performing loans to total loans ................................................... Non-performing assets to total assets ................................................. Allowance for credit losses to total gross loans ................................. Allowance for credit 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 (3) ................................................................................. Tier 1 capital (4) ................................................................................. Total capital (5)................................................................................... Leverage ratio (6) ............................................................................... 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 stockholders' equity ......................................... $ $ 2020 11,932,654 8,465,688 8,377,746 886,688 250 93,655 2,115,985 1,771 14,425 54,969 9,975,724 851,545 64,748 47,785 992,852 389,022 50,985 338,037 42,434 295,603 30,116 111,511 214,208 44,639 169,569 169,506 As of and for the years ended December 31, 2018 (Dollars in thousands except for share and per share data) 2017 2019 $ $ 8,947,653 7,261,451 7,184,867 759,399 250 78,618 451,509 100,473 6,312 56,496 7,530,433 470,749 64,703 39,086 842,682 390,803 103,158 287,645 22,638 265,007 23,982 102,128 186,861 37,618 149,243 149,180 $ $ 8,007,382 6,533,499 6,464,899 590,184 - 97,516 360,534 223,845 120 57,822 6,915,708 288,725 64,666 23,080 715,203 326,627 63,948 262,679 21,402 241,277 19,440 91,875 168,842 31,902 136,940 136,877 $ $ 7,082,384 5,851,261 5,791,855 538,080 250 86,213 151,849 239,524 4,459 58,900 6,091,674 301,797 64,832 16,477 607,604 262,756 35,333 227,423 23,225 204,198 17,361 84,209 137,350 44,258 93,092 93,030 $ 3.15 3.13 18.41 $ 2.79 2.76 15.71 $ 2.57 2.53 13.40 $ 1.76 1.72 11.47 2016 6,370,448 4,911,770 4,859,877 422,375 62,564 56,855 566,707 160,435 4,675 40,314 5,420,311 355,944 55,262 16,042 522,889 212,902 25,805 187,097 13,398 173,699 17,007 79,888 110,818 29,339 81,479 81,432 1.55 1.52 9.93 53,844,482 54,219,037 53,943,751 53,530,766 54,103,074 53,623,740 53,172,695 54,169,879 53,375,195 52,887,359 54,123,957 52,992,586 52,450,896 53,608,372 52,636,896 1.59% 18.55% 22.39% 3.31% 30.29% 0.36% 0.22% 0.21% 1.04% 463.98% 83.98% 78.80% 27.96% 8.32% 10.50% 10.50% 12.12% 8.23% 13.62% 13.38% 33.36% 16.60% 32.47% 17.82% 1.73% 19.16% 21.76% 3.46% 32.77% 0.32% 0.50% 0.50% 1.05% 212.07% 95.41% 81.48% 23.24% 9.42% 10.50% 10.50% 12.31% 9.13% 8.98% 9.12% 11.74% 11.14% 8.89% 17.82% 1.88% 20.96% 15.04% 3.75% 32.57% 0.20% 0.43% 0.41% 1.05% 247.03% 93.48% 86.55% 22.52% 8.93% 10.12% 10.13% 12.05% 9.07% 47.10% 46.91% 13.06% 11.62% 13.53% 17.71% 1.43% 16.38% 11.64% 3.68% 34.40% 0.29% 0.19% 0.26% 1.02% 548.79% 95.08% 84.93% 23.64% 8.58% 9.51% 9.52% 11.52% 8.51% 14.25% 13.16% 11.18% 19.18% 12.39% 16.20% 1.42% 16.64% 10.53% 3.42% 39.14% 0.11% 0.34% 0.34% 1.06% 307.30% 89.66% 80.44% 23.64% 8.21% 9.78% 9.78% 11.84% 8.22% 28.23% 26.67% 25.02% 16.46% 28.32% 16.41% (1) Net interest margin is the net yield on interest earning assets and is the difference between the interest yield earned on interest-earning assets and interest rate paid on interest-bearing liabilities, divided by average earning assets. (2) Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income. 39 (3) 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. (4) Tier 1 capital ratio includes CET1 and qualifying minority interest divided by total risk-weighted assets. (5) Total capital ratio includes Tier 1 capital plus qualifying portions of subordinated debt and allowance for credit losses (limited to 1.25% of risk-weighted assets) divided by total risk-weighted assets. (6) Tier 1 leverage ratio includes Tier 1 capital divided by average assets less intangible assets. 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 21 full service banking offices located in Jefferson, Shelby, Madison, Montgomery, Mobile, Baldwin 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, Dothan, Daphne-Fairhope-Foley and Mobile, Alabama MSAs, the Pensacola-Ferry Pass-Brent and Tampa-St. Petersburg-Clearwater, Florida MSAs, the Atlanta-Sandy Springs-Roswell, Georgia MSA, the Charleston-North Charleston, South Carolina MSA and the Nashville-Davidson-Murfreesboro-Franklin, Tennessee MSA. We also operate loan production offices in Columbus, Georgia, Sarasota, Florida, and Summerville, South Carolina. 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 Credit Losses The Company assesses the adequacy of its allowance for credit losses at the end of each calendar quarter. The level of allowance is based on the Company’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and other relevant factors. The allowance is increased by a provision for credit losses, which is charged to expense, and reduced by charge-offs, net of recoveries. The allowance for credit losses is believed adequate to absorb all expected future losses to be recognized over the contractual life of the loans in the portfolio. Loans with similar risk characteristics are evaluated in pools and, depending on the nature of each identified pool, the Company utilizes a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method. The historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates and gross domestic product. Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are 40 re-evaluated each quarter by the Company and are dependent on the current economic environment among other factors. See Note 1 – Summary of Significant Accounting Policies in the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data elsewhere in this report. The expected credit losses for each loan pool are then adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative adjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions. Expected credit losses for loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis. Individual evaluations are performed for nonaccrual loans, loans rated substandard, and modified loans classified as troubled debt restructurings. Specific allocations of the allowance for credit losses are estimated on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows. Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the allowance for credit losses represented management’s best estimate of inherent losses that had been incurred within the existing portfolio of loans. The allowance for credit losses on loans included allowance allocations calculated in accordance with FASB Accounting Standards Codification (“ASC”) Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” 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. Results of Operations The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2020 and 2019 and results of operations for each of the years then ended. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K file with the SEC on February 25, 2020 (2019 FORM 10-K) for a discussion and analysis of the more significant factors that affected periods prior to 2019. Net Income Available to Common Stockholders Net income available to common stockholders was $169.5 million for the year ended December 31, 2020, compared to $149.2 million for the year ended December 31, 2019. This increase in net income is primarily attributable to an increase in net interest income, which increased $50.4 million, or 17.5%, to $338.0 million in 2020 from $287.6 million in 2019. Noninterest income increased $6.1 million, or 25.6%, to $30.1 million in 2020 from $24.0 million in 2019. Noninterest expense increased by $9.4 million, or 9.2%, to $111.5 million in 2020 from $102.1 million in 2019. Basic and diluted net income per common share were $3.15 and $3.13, respectively, for the year ended December 31, 2020, compared to $2.79 and $2.76, respectively, for the year ended December 31, 2019. Return on average assets was 1.59% in 2020, compared to 1.73% in 2019, and return on average stockholders’ equity was 18.55% in 2020, compared to 19.16% in 2019. 41 The following table presents some ratios of our results of operations for the years ended December 31, 2020, 2019 and 2018. Return on average assets ................................................. Return on average stockholders' equity ........................... Dividend payout ratio ..................................................... Average stockholders' equity to average total assets ...... 1.59% 18.55% 22.39% 8.59% 1.73% 19.16% 21.76% 9.02% 1.88% 20.96% 15.04% 8.98% For the Years Ended December 31, 2018 2019 2020 The following tables present a summary of our statements of income, including the percent change in each category, for the years ended December 31, 2020 compared to 2019, and for the years ended December 31, 2019 compared to 2018, respectively. Year Ended December 31, 2020 2019 (Dollars in Thousands) Change from the Prior Year Interest income ........................................................... $ Interest expense .......................................................... Net interest income ................................................. Provision for credit losses .......................................... Net interest income after provision for credit losses ....................................................................... Noninterest income .................................................... Noninterest expense ................................................... Income before income taxes ................................... Income taxes ............................................................... Net income .............................................................. Dividends on preferred stock ..................................... Net income available to common stockholders ...... $ 389,022 $ 50,985 338,037 42,434 295,603 30,116 111,511 214,208 44,639 169,569 63 169,506 $ 390,803 103,158 287,645 22,638 265,007 23,982 102,128 186,861 37,618 149,243 63 149,180 (0.46%) (50.58%) 17.52% 87.45% 11.55% 25.58% 9.19% 14.63% 18.66% 13.62% -% 13.63% Year Ended December 31, 2019 2018 (Dollars in Thousands) Change from the Prior Year Interest income ........................................................... $ Interest expense .......................................................... Net interest income ................................................. Provision for credit losses .......................................... Net interest income after provision for credit losses ....................................................................... Noninterest income .................................................... Noninterest expense ................................................... Income before income taxes ................................... Income taxes ............................................................... Net income .............................................................. Dividends on preferred stock ..................................... Net income available to common stockholders ...... $ 390,803 $ 103,158 287,645 22,638 265,007 23,982 102,128 186,861 37,618 149,243 63 149,180 $ 326,627 63,948 262,679 21,402 241,277 19,440 91,875 168,842 31,902 136,940 63 136,877 19.65% 61.32% 9.50% 5.78% 9.84% 23.36% 11.16% 10.67% 17.92% 8.98% -% 8.99% 42 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 $50.4 million, or 17.5%, to $338.0 million for the year ended December 31, 2020 from $287.6 million for the year ended December 31, 2019. Total interest income decreased $1.8 million, or 0.5%, to $389.0 million from $390.8 million year-over-year, while total interest expense decreased $52.2 million, or 50.6%, to $51.0 million from $103.2 million year-over-year. Average earning assets increased $1.91 billion, or 22.9%, to $10.24 billion in 2020 from $8.33 billion in 2019. All of our regional markets grew loans during 2020 when including Paycheck Protection Program (“PPP”) loans. Excluding PPP loans, all but three of our regional markets grew loans during 2020. All of our regional markets grew deposits during 2020. PPP loan origination fees recorded as an adjustment to loan yield for the year ended December 31, 2020 were $14.1 million. 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, 2020, 2019 and 2018, 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) 2020 Interest Earned / Paid Average Yield / Rate 2019 Interest Earned / Paid Average Yield / Rate Average Balance Average Balance 2018 Interest Earned / Paid Average Yield / Rate Average Balance Assets: Interest-earning assets: Loans, net of unearned income: Taxable ................................. $ 8,123,927 $ 361,370 1,274 Tax-exempt (3) ..................... 31,064 4.45 % $ 6,831,998 $ 352,996 1,338 33,131 4.10 5.17 % $ 6,104,879 $ 304,156 1,207 31,544 4.04 4.98 % 3.83 Total loans, net of unearned income (1)(2) ........................ 8,154,991 362,644 231 14,337 Mortgage loans held for sale .... Debt securities: 4.45 1.61 6,865,129 354,334 156 4,970 5.16 3.14 6,136,423 305,363 146 3,591 4.98 4.07 Taxable ................................. Tax-exempt (3) ..................... Total debt securities (4) ............ Federal funds sold ..................... Interest-bearing balances with 801,134 22,122 870 34,975 836,109 22,992 332 61,712 2.76 2.49 2.75 0.54 68,805 588,082 17,008 1,563 656,887 18,571 6,038 267,327 2.89 2.27 2.83 2.26 473,259 12,654 108,938 2,723 582,197 15,377 3,103 141,518 2.67 2.50 2.64 2.19 banks ..................................... 1,170,095 3,165 Total interest-earning assets ..... $ 10,237,244 $ 389,364 0.27 536,765 12,020 3.80 % $ 8,331,078 $ 391,119 148,907 2.24 3,094 4.69 % $ 7,012,636 $ 327,083 2.08 4.66 % Non-interest-earning assets: Cash and due from banks ......... Net premises and equipment .... Allowance for loan losses, 77,413 57,310 accrued interest and other assets..................................... 272,900 Total assets ...................... $ 10,644,867 Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand 73,226 58,419 72,875 59,087 175,881 $ 8,638,604 131,486 $ 7,276,084 77,364 deposits ................................. $ 1,059,629 $ 3,752 Savings ...................................... 274 Money market ........................... 4,519,170 25,758 836,098 15,446 Time deposits (5) ...................... Total interest-bearing deposits . 6,492,261 45,230 2,700 Federal funds purchased ........... Other borrowings ...................... 3,055 Total interest-bearing liabilities $ 7,184,531 $ 50,985 627,561 64,709 Non-interest-bearing liabilities: Non-interest-bearing checking . 2,492,500 53,874 Other liabilities ......................... 898,023 Stockholders' equity .................. 15,939 Unrealized gains on securities .. Total liabilities and 0.35 % $ 928,611 $ 7,585 0.35 320 57,078 4,038,143 67,998 0.57 702,245 15,055 1.85 5,726,077 90,958 0.70 9,076 398,679 0.43 4.72 3,124 64,684 0.71 % $ 6,189,440 $ 103,158 0.82 % $ 863,673 $ 5,365 0.56 229 53,596 3,241,474 40,162 1.68 9,746 626,332 2.14 4,785,075 55,502 1.59 5,322 270,917 2.28 4.83 3,124 64,705 1.67 % $ 5,120,697 $ 63,948 0.62 % 0.43 1.24 1.56 1.16 1.96 4.83 1.25 % 1,632,385 37,708 777,757 1,314 1,480,827 21,170 660,304 (6,914 ) stockholders' equity ..... $ 10,644,867 $ 8,638,604 $ 7,276,084 Net interest income ....................... Net interest spread ......................... Net interest margin ........................ $ 338,379 $ 287,961 $ 263,135 3.09 % 3.31 % 3.02 % 3.46 % 3.41 % 3.75 % (1) Non-accrual loans are included in average loan balances in all periods. Loan fees of $19,409, $4,744 and $3,733 are included in interest income in 2020, 2019 and 2018, respectively. (2) Accretion on acquired loan discounts of $100, $90 and $163 are included in interest income in 2020, 2019 and 2018, respectively. (3) (4) Unrealized gains (losses) of $20,117, $1,607 and $(8,808) are excluded from the yield calculation in 2020, 2019 and 2018, respectively. Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21%. 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, 2020 Compared to 2019 Increase (Decrease) in Interest Income and Expense Due to Changes in: Rate Total Volume 2019 Compared to 2018 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 61,402 $ (85) (53,028) $ 21 8,374 $ (64) 37,250 $ 62 11,590 $ 69 48,840 131 income .............................. 61,317 (53,007) 8,310 37,312 11,659 48,971 Mortgage loans held for sale ................................... 180 (105) 75 48 (38 ) 10 Debt securities: Taxable ............................. Tax-exempt ...................... Total debt securities ............. Federal funds sold ................ Interest-bearing balances with banks ........................ Total interest-earning 5,914 (830) 5,084 (2,867) (800) 137 (663) (2,839) 5,114 (693) 4,421 (5,706) 3,258 (930) 2,328 2,839 1,096 (230 ) 866 96 4,354 (1,160) 3,194 2,935 7,037 (15,892) (8,855) 8,667 259 8,926 assets ............................. 70,751 (72,506) (1,755) 51,194 12,842 64,036 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 949 93 7,282 2,640 (4,782) (139) (49,522) (2,249) (3,833) (46) (42,240) 391 10,964 3,459 1 (56,692) (9,835) (70) (45,728) (6,376) (69) 427 16 11,311 1,289 13,043 2,809 (1) 1,793 75 16,525 4,020 22,413 945 1 2,220 91 27,836 5,309 35,456 3,754 - liabilities ....................... 14,424 (66,597) (52,173) 15,851 23,359 39,210 Increase (decrease) in net interest income ..................... $ 56,327 $ (5,909) $ 50,418 $ 35,343 $ (10,517 ) $ 24,826 45 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 2019 to 2020, growth in loans was the primary driver of our volume component change. Growth in average balances of interest-bearing balances with banks was a significant contributor to our overall unfavorable volume change. The rate component was favorable as average rates paid on interest-bearing liabilities decreased 96 basis points while yields on average earning assets decreased 89 basis points. Our average rates paid on interest-bearing deposits have come back down since the Federal Reserve started lowering rates during the second half of 2019. 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 responsive to market declines in deposit rates as federal aid money has been inserted into the banking system in response to the COVID-19 outbreak. We dropped our deposit rates five times during 2020. 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 3.09% and 3.31%, respectively, for the year ended December 31, 2020, compared to 3.02% and 3.46%, respectively, for the year ended December 31, 2019. The increase in net interest spread was due to rates paid on interest-bearing liabilities decreasing by 96 basis points while average yields on interest-earning assets decreased 89 basis points. The decrease in net interest margin in 2020 was due to increases in average interest-bearing balances with banks driven higher by increasing average deposits due to the influx of federal COVID-19 relief money. Our average interest-earning assets for the year ended December 31, 2020 increased $1.91 billion, or 22.9%, to $10.24 billion from $8.33 billion for the year ended December 31, 2019. This increase in our average interest-earning assets was due to PPP loan originations and higher interest-bearing balances with banks. Our average interest-bearing liabilities increased $995.1 million, or 16.1%, to $7.18 billion for the year ended December 31, 2020 from $6.19 billion for the year ended December 31, 2019. All but one of our markets had an increase in total deposits during 2020. The ratio of our average interest-earning assets to average interest-bearing liabilities increased from 134.6% for the year ended December 31, 2019 to 142.5% for the year ended December 31, 2020, as average noninterest-bearing deposits and stockholders’ equity grew by a combined $995.0 million, or 41.3%, from 2019 to 2020. Our average interest-earning assets produced a taxable equivalent yield of 3.80% for the year ended December 31, 2020, compared to 4.69% for the year ended December 31, 2019. The average rate paid on interest-bearing liabilities was 0.71% for the year ended December 31, 2020, compared to 1.67% for the year ended December 31, 2019. Provision for Credit Losses The provision for credit losses represents the amount determined by management to be necessary to maintain the allowance for credit losses (“ACL”) at a level capable of absorbing expected credit losses over the contractual life of loans in the loan portfolio. See the section captioned “Allowance for Credit Losses” located elsewhere in this item for additional discussion related to provision for credit losses. The provision expense for credit losses was $42.4 million for the year ended December 31, 2020, an increase of $19.8 million from $22.6 million in 2019. The increase in provision expense is primarily the result of COVID-19 and its effect on overall macroeconomic conditions during 2020 as well as the implementation of ASC 326 and its current expected loss methodology. The ACL for December 31, 2020 was calculated under the current expected credit losses (“CECL”) methodology and totaled $87.9 million, or 1.04% of loans, net of unearned income. The allowance totaled $76.6 million, or 1.05% of loans, net of unearned income, at December 31, 2019 and was calculated under the incurred loss methodology. Nonperforming loans decreased to $19.0 million, or 0.22% of total loans, at December 31, 2020 from $36.1 million, or 0.50% of total loans, at December 31, 2019. During 2020, we had net charged-off loans totaling $29.6 million, compared to net charged-off loans of $22.1 million for 2019. The ratio of net charged-off loans to average loans was 0.36% for 2020 compared to 0.32% for 2019. 46 Noninterest Income Noninterest income increased $6.1 million, or 25.4%, to $30.1 million in 2020 from $24.0 million in 2019. Service charges on deposit accounts increased $0.5 million, or 7.1%, to $7.5 million in 2020 compared to 2019 due to increases in the number of accounts. Mortgage banking income increased $4.4 million, or 100.6%, to $8.7 million in 2020 compared to 2019, as decreases in interest rates drove higher loan volumes. Credit card income decreased $1.2 million, or 16.4%, to $5.9 million in 2020 compared to 2019. Spending on business credit cards decreased 6.3% from 2019 to 2020 while spending on purchase cards increased 44.3%. Purchase cards yield a lower profit margin due to their higher awards payouts. The cash surrender value of bank-owned life insurance contracts increased $2.6 million, or 68.4%, to $6.3 million in 2020 compared to 2019. We purchased multiple life insurance contracts totaling $60.7 million in 2020. Other operating income decreased $0.1 million, or 7.3%, to $1.6 million in 2020 compared to 2019. Noninterest Expense Noninterest expenses increased $9.4 million, or 9.2%, to $111.5 million for the year ended December 31, 2020 from $102.1 million for the year ended December 31, 2019. Salary and employee benefits expenses increased $3.6 million, or 6.3%, to $61.4 million in 2020 compared to 2019. We had 493 full-time equivalent employees as of December 31, 2020 compared to 500 as of December 31, 2019, a 1.5% decrease. Equipment and occupancy expense increased $798,000 or 8.6%, to $10.1 million in 2020 compared to 2019. Depreciation expense increased $460,000 year-over-year while building rental expense increased $163,000 year-over-year. Third party processing and other services increased $2.5 million or 22.6%, to $13.8 million in 2020 compared to 2019. Increased data processing expenses continue to be driven by growth in deposit accounts. Increased service charges from the Federal Reserve Bank of Atlanta are the result of increased processing of transactions by us for our correspondent banking clients. Professional services expense increased $7,000 in 2020 compared to 2019. FDIC assessments increased $1.4 million, or 46.4% to $4.4 million from 2019 to 2020. This increase was largely the result of deposit growth due to PPP in 2020 and the Small Bank Assessment Credit in 2019. Expenses on other real estate owned increased $1.7 million to $2.2 million in 2020 compared to $415,000 in 2019, primarily the result of increased write-downs upon updated appraisals received during 2020. Other operating expenses decreased $724,000, or 4.5%, to $15.5 million in 2020 compared to 2019. Changes in other operating expenses from 2019 to 2020 are detailed in Note 15, “Other Operating Income and Expenses,” to the Consolidated Financial Statements. Income Tax Expense Income tax expense was $44.6 million for the year ended December 31, 2020 compared to $37.6 million in 2019. Our effective tax rates for 2020 and 2019 were 20.84% and 20.13%, respectively. Maturities of some of our state tax credit investments at the end of 2019 contributed to the increase in our effective tax rates. 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 $248.2 million in bank-owned life insurance for certain 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. Financial Condition Assets Total assets as of December 31, 2020, were $11.93 billion, an increase of $2.99 billion, or 33.4%, over total assets of $8.95 billion as of December 31, 2019. Average assets for the year ended December 31, 2020 were $10.64 billion, an increase of $2.01 billion, or 23.2%, over average assets of $8.64 billion for the year ended December 31, 2019. Loan growth was the primary reason for the increase in ending and average total assets. Year-end 2020 loans were $8.47 billion, up $1.20 billion, or 16.6%, over year-end 2019 total loans of $7.26 billion. Total Paycheck Protection Program (“PPP”) loans at year-end 2020 were $900.5 million. During 2020, we originated over 4,900 PPP loans for our customers. 47 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 as of December 31, 2020 were $11.76 billion, or 98.6% of total assets of $11.93 billion. Earning assets as of December 31, 2019 were $8.79 billion, or 98.2% of total assets of $8.95 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, 2020, mortgage-backed securities represented 55.9% of the investment portfolio, corporate debt represented 36.5% of the investment portfolio, state and municipal securities represented 4.3% of the investment portfolio, government agency securities represented 1.7%, and U.S. Treasury securities represented 1.6% of the investment portfolio. All of our investments in mortgage-backed securities are pass-through mortgage-backed securities. We do not have currently, and did not have at December 31, 2020, any structured investment vehicles or any private-label mortgage-backed securities. The amortized cost of securities in our portfolio totaled $861.2 million at December 31, 2020, compared to $752.2 million at December 31, 2019. The following table presents the amortized cost of securities available for sale and held to maturity by type at December 31, 2020, 2019 and 2018. Debt Securities Available for Sale U.S. Treasury Securities .............................. $ Government Agency Securities ................... Mortgage-backed securities ......................... State and municipal securities ..................... Corporate debt ............................................. Total ................................................................ $ 2020 December 31, 2019 (In Thousands) 2018 13,993 $ 15,228 477,407 37,671 316,857 861,156 $ 48,923 $ 18,245 470,513 56,951 157,549 752,181 $ 58,750 18,784 309,244 106,465 102,982 596,225 Debt Securities Held to Maturity State and municipal securities ..................... $ Total ................................................................ $ 250 $ 250 $ 250 $ 250 $ - - 48 The following table presents the amortized cost of our securities as of December 31, 2020 by their stated maturities (this maturity schedule excludes security prepayment and call features), as well as the taxable equivalent yields for each maturity range. Maturity of Debt Securities - Amortized Cost At December 31, 2020: Securities Available for Sale: Less Than One Year One Year through Five Years Six Years through Ten Years (In Thousands) More Than Ten Years Total U.S. Treasury Securities ........................... $ Government Agency Securities ................ Mortgage-backed securities ...................... State and municipal securities .................. Corporate debt .......................................... Total ............................................................. $ 4,996 $ 9,188 53 16,613 - 30,850 $ 8,997 $ - $ 6,040 - 6,310 88,229 13,082 5,854 282,146 31,711 66,140 $ 376,229 $ - $ - 382,815 2,122 3,000 387,937 $ 13,993 15,228 477,407 37,671 316,857 861,156 Tax-equivalent Yield (1) U.S. Treasury Securities ........................... Government Agency Securities ................ Mortgage-backed securities ...................... State and municipal securities .................. Corporate debt .......................................... Weighted average yield ............................... Securities Held to Maturity: State and municipal securities .................. $ Total ............................................................. $ Tax-equivalent Yield (1) State and municipal securities .................. Total ............................................................. 1.83% 2.04 3.21 2.59 - 2.31% - $ - $ -% -% 1.91% 2.11 2.47 2.37 3.70 2.93% 250 $ 250 $ 3.21% 3.21% -% - 2.31 1.92 4.88 4.23% -% - 2.20 3.13 4.50 2.22% - $ - $ -% -% - $ - $ -% -% 1.89% 2.07 2.22 2.44 4.76 3.16% 250 250 3.21% 3.21% (1) Yields are presented on a fully-taxable equivalent basis using a tax rate of 21%. As of December 31, 2020, we had $1.8 million in federal funds sold, compared with $100.5 million at December 31, 2019. At year-end 2020, 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 Section 1102 of the CARES Act created the Paycheck Protection Program (“PPP”), a program administered by the SBA to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. The Company has participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for the first six months of the loan term. The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees are required. Neither the government nor lenders are permitted to charge the recipients any fees. 49 On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act (“CAA”). The CAA, among other things, extends the life of the PPP, effectively creating a second round of PPP loans for eligible businesses. The Company is participating in the CAA’s second round of PPP lending. In mid-January we opened our lending portal and have begun processing PPP loan applications. Additionally, section 541 of the CAA extends the relief provided by the CARES Act for financial institutions to suspend the GAAP accounting treatment for troubled debt restructuring to January 1, 2022. As of January 31, 2021, we have funded 593 loans under the CAA round of PPP lending, representing $123.7 million in funding. As of December 31, 2020, the Company had originated over 4,900 loans with balances in excess of $1.05 billion to new and existing customers through the PPP. To the extent the PPP loans are forgiven, this represents outside funds to our borrowers; and, especially with respect to vulnerable industries, we believe these capital injections are going to be instrumental in assisting our borrowers in navigating through the pandemic. This capital injection, along with the level of capital each borrower had just prior to COVID-19 impacting them, are critical factors in determining the staying power of our borrowers. Upon receipt of interim financial results from our borrowers, we will use that information to update our understanding of the underlying strengths or weaknesses in each individual relationship and take actions, as appropriate. As of January 31, 2021, we have received payment from the SBA on just over 1,000 of our loans totaling $220.0 million. We had total loans of approximately $8.5 billion at December 31, 2020. 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. Percentage of Total Loans Assigned to Market Birmingham, AL ......................................................................... Huntsville, AL ............................................................................. Dothan, AL ................................................................................. Montgomery, AL ........................................................................ Mobile, AL .................................................................................. Total Alabama Markets ........................................................... Pensacola, FL .............................................................................. West Florida (1) .......................................................................... Total Florida Markets .............................................................. Nashville, TN .............................................................................. Atlanta, GA ................................................................................. Charleston, SC ............................................................................ 39% 8% 9% 6% 6% 68% 6% 6% 12% 9% 7% 4% (1) West Florida represents the Tampa-St. Petersburg-Clearwater and North Port-Sarasota-Bradenton Metropolitan Areas. 50 The following table details our loans at December 31, 2020, 2019, 2018, 2017 and 2016: 2020 2019 2018 (Dollars in Thousands) 2017 2016 Commercial, financial and agricultural ........... $ 3,295,900 $ 2,696,210 $ 2,513,225 $ 2,279,366 $ 1,982,267 335,085 Real estate - construction ................................ Real estate - mortgage: 593,614 533,192 580,874 521,392 Owner-occupied commercial ....................... 1,693,428 1,587,478 1,463,887 1,328,666 1,171,719 1-4 family mortgage .................................... 536,805 621,634 830,683 Other mortgage ............................................ 2,106,184 1,747,394 1,337,068 Total real estate - mortgage ...................... 4,511,304 3,979,060 3,422,589 2,928,808 2,539,207 55,211 Total Loans .................................................. 8,465,688 7,261,451 6,533,499 5,851,261 4,911,770 (51,893) Net Loans ..................................................... $ 8,377,746 $ 7,184,867 $ 6,464,899 $ 5,791,855 $ 4,859,877 Less: Allowance for credit losses .................... Consumer ........................................................ 603,063 997,079 711,692 644,188 (87,942) (76,584) (68,600) (59,406) 64,870 64,789 62,213 64,493 The following table details the percentage composition of our loan portfolio by type at December 31, 2020, 2019, 2018, 2017 and 2016: Commercial, financial and agricultural ................ Real estate - construction ..................................... Real estate - mortgage: Owner-occupied commercial ............................ 1-4 family mortgage ......................................... Other mortgage ................................................. Total real estate - mortgage ........................... Consumer ............................................................. Total Loans ....................................................... 2020 2019 2018 2017 2016 38.93% 7.01 37.13 % 7.18 38.47% 8.16 38.96 % 9.93 40.36% 6.82 20.00 8.41 24.88 53.29 0.77 100.00% 21.86 8.87 24.07 54.80 0.89 100.00 % 22.41 9.51 20.46 52.38 0.99 100.00% 22.71 10.30 17.04 50.05 1.06 100.00 % 23.86 10.93 16.91 51.70 1.12 100.00% The following table details maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2020: Due in 1 year or less Due in 1 to 5 Due after 5 years years Total (in Thousands) Commercial, financial and agricultural ............................ $ 1,076,058 $ 2,020,059 $ Real estate - construction ................................................. 336,302 Real estate - mortgage: 192,854 199,783 $ 3,295,900 593,614 64,458 Owner-occupied commercial ........................................ 1-4 family mortgage ..................................................... Other mortgage ............................................................. Total real estate - mortgage ....................................... Consumer ......................................................................... 1,693,428 711,692 2,106,184 4,511,304 64,870 Total Loans ................................................................... $ 1,906,611 $ 5,053,890 $ 1,505,187 $ 8,465,688 (87,942 ) $ 8,377,746 Less: Allowance for loan losses ....................................... Net Loans ...................................................................... 956,742 233,173 1,477,860 2,667,775 29,754 512,901 387,397 338,319 1,238,617 2,329 223,785 91,122 290,005 604,912 32,787 Interest rate sensitivity: Fixed interest rates ........................................................ $ Floating or adjustable rates ........................................... 892,667 $ 5,439,959 3,025,729 612,520 Total ................................................................................. $ 1,906,611 $ 5,053,890 $ 1,505,187 $ 8,465,688 620,744 $ 3,926,548 $ 1,127,342 1,285,867 51 Asset Quality The following table presents a summary of changes in the allowance for credit losses over the past five fiscal years. Analysis of the Allowance for Credit Losses 2020 2019 2018 2017 2016 Allowance for credit losses: Beginning of year ............................................ $ Impact of Adoption of ASC 326 (1) ............ 76,584 $ (2,000 ) (Dollars in Thousands) 68,600 $ 59,406 $ 51,893 $ 43,419 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 ........................................... (23,936 ) (1,032 ) (15,015) - (11,428) - (13,910 ) (56 ) (3,896 ) (501 ) - (4,397 ) (203 ) (29,568 ) (3,882) (276) (2,724) (6,882) (592) (22,489) (309) (307) (426) (1,042) (283) (12,753) (522 ) (878 ) (656 ) (2,056 ) (310 ) (16,332 ) 252 32 12 128 - 140 68 492 306 3 - 13 - 13 107 429 349 112 - 46 - 46 38 545 337 168 - 64 25 89 26 620 (3,791) (815) (2) (269) (109) (380) (212) (5,198) 49 76 - 114 32 146 3 274 Net charge-offs ................................................ (29,076 ) (22,060) (12,208) (15,712 ) (4,924) Allocation from LGP .......................................... - 7,406 - - - Provision for credit losses charged to expense .... 42,434 22,638 21,402 23,225 13,398 Allowance for credit losses at end of period ....... $ 87,942 $ 76,584 $ 68,600 $ 59,406 $ 51,893 As a percent of year to date average loans: Net charge-offs ................................................ Provision for credit losses ............................... Allowance for credit losses as a percentage of: 0.36 % 0.52 % 0.32% 0.33% 0.20% 0.35% 0.29 % 0.43 % 0.11% 0.30% Year-end loans ................................................ Nonperforming assets ...................................... 1.04 % 345.53 % 1.05% 172.91% 1.05% 208.26% 1.02 % 338.96 % 1.06% 237.23% (1) Prior periods were accounted for under the incurred loss methodology and were not restated to reflect the adoption of ASC 326. 52 Effective January 1, 2020, we adopted the provisions of ASC 326, which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with the CECL model. Upon the adoption of ASC 326 the total amount of the allowance for credit losses on loans estimated using the CECL methodology decreased $2.0 million compared to the total amount of the allowance recorded as of December 31, 2019 using the prior incurred loss model. This decrease is the result of implementing a more quantitative methodology. The commercial, financial, and agricultural loan category decreased $8.2 million due to the portfolio primarily consisting of loans with generally short contractual maturities. This was partially offset by an increase of $6.2 million in the real estate – construction loan category due to the application of peer loss rates within the discounted cash flow pool reserve methodology. Peer historical loss rates were utilized to better align with loss expectations given the Company’s low historical loss experience in this category. The allowance for credit losses is established and maintained at levels needed to absorb anticipated credit losses to be recognized over the contractual life of the loans in the portfolio as of the balance sheet date. In assessing the adequacy of the allowance for credit 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, 2020. We maintain an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet within other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. The allowance for credit losses on unfunded commitments was $2.2 million at December 31, 2020. Prior to January 1, 2020, we calculated allowance for losses on unfunded loan commitments using an incurred losses methodology. At December 31, 2019, the allowance for unfunded commitments was $500,000. 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. 2020 2019 For the Years Ended December 31, 2018 2017 2016 Percentage of loans in each category to Amount total loans Percentage of loans in each category to Amount total loans Percentage of loans in each category to Amount total loans Percentage of loans in each category to Amount total loans Percentage of loans in each category to Amount total loans (Dollars in Thousands) Commercial, financial and agricultural ..... $ 36,370 Real estate – 38.93 % $ 43,666 37.13 % $ 39,016 38.47 % $ 32,880 38.96 % $ 28,872 40.36 % construction .... 16,057 7.01 2,768 7.18 3,522 8.16 4,989 9.93 5,125 6.82 Real estate – mortgage ......... 33,722 53.29 29,653 54.80 25,508 52.38 21,022 50.05 17,504 51.70 Consumer ........... 1,793 Total ............... $ 87,942 0.77 497 100.00 % $ 87,942 0.89 554 100.00 % $ 68,600 0.99 515 100.00 % $ 59,406 1.06 392 100.00 % $ 51,893 1.12 100.00 % The Company uses the discounted cash flow (“DCF”) method to estimate ACL for all loan pools except for commercial revolving lines of credit and credit cards. For all loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment rate as a loss driver. The Company also utilizes and forecasts GDP growth as a second loss driver for its agricultural and consumer loan pools. Consistent forecasts of the loss drivers are used across the loan segments. Upon implementation of CECL on January 1, 2020 and at December 31, 2020, a reasonable and supportable period of twelve months was utilized followed by a six-month straight-line reversion to long term averages. The Company leveraged economic projections from reputable and independent sources to inform its loss driver forecasts. At December 31, 2020 as compared to January 1, 2020, the Company forecasted a significantly higher national unemployment rate as well as a slightly higher national GDP growth rate. The Company expects national unemployment to remain above pre-pandemic levels over the forecast period with an improved national GDP growth rate as the economy comes back on line over the next year. 53 The Company uses loss rate methods to estimate expected credit losses for its commercial revolving lines of credit and credit card pools. The commercial revolving lines of credit pool incorporates a probability of default (“PD”) and loss given default (“LGD”) modeling approach. This approach involves estimating the pool average life and then using historical correlations of default and loss experience over time to calculate the lifetime PD and LGD. These two inputs are then applied to the outstanding pool balance as of December 31, 2020. The credit card pool incorporates a remaining life modeling approach, which utilizes an attrition-based method to estimate the remaining life of the pool. A quarterly average loss rate is then calculated using the Company’s historical loss data. The model reduces the pool balance quarterly on a straight-line basis over the estimated life of the pool. The quarterly loss rate is multiplied by the outstanding balance at each period-end resulting in an estimated loss for each quarter. The sum of estimated loss for all quarters is the total calculated reserve for the pool at December 31, 2020. Each loan pool is adjusted for qualitative factors not inherently considered in the quantitative analyses. The qualitative adjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions. PPP loans outstanding totaled $900.5 million at December 31, 2020 and are included within the Commercial, financial and agricultural loan category. No allowance for credit losses has been recorded for PPP loans as they are fully guaranteed by the SBA. The bank has procedures and processes in place intended to ensure that losses do not exceed the potential amounts documented in the bank’s analysis of loans individually evaluated and reduce potential losses in the remaining performing loans within our real estate construction portfolio. These include the following: (cid:404) We closely monitor the past due and overdraft reports on a weekly basis to identify deterioration as early as possible and the placement of identified loans on the watch list. (cid:404) We perform extensive quarterly credit reviews for all watch list/classified loans, including formulation of aggressive workout or action plans. When a workout is not achievable, we move to collection/foreclosure proceedings to obtain control of the underlying collateral as rapidly as possible to minimize the deterioration of collateral and/or the loss of its value. (cid:404) We require updated financial information, global inventory aging and interest carry analysis for existing customers to help identify potential future loan payment problems. (cid:404) 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. 54 Nonperforming Assets The table below summarizes our nonperforming assets at December 31, 2020, 2019, 2018, 2017 and 2016: 2020 2019 2018 2017 Balance Number of Loans Balance Number of Loans Balance Number of Loans Balance Number of Loans Balance 2016 Number of Loans (Dollars in Thousands) Nonaccrual loans: Commercial, financial and agricultural ............................... $ 11,709 234 Real estate - construction ............. Real estate - mortgage: Owner-occupied commercial .. 1-4 family mortgage ................ Other mortgage ....................... Total real estate - mortgage .......... Consumer ..................................... 1,259 771 - 2,030 - Total nonaccrual loans ...................... $ 13,973 22 $ 14,729 1,588 1 29 $ 10,503 997 2 16 $ 9,712 - 1 18 $ 7,282 3,268 - 4 10,826 1,440 7 1,507 - 11 13,773 - 34 $ 30,091 - 3,358 3 2,046 5 1 5,022 9 10,426 - - 40 $ 21,926 2 9 1 12 - 556 459 - 1,015 38 29 $ 10,765 2 2 - 4 1 - 74 - 74 - 23 $ 10,624 90+ days past due and accruing: Commercial, financial and agricultural............................... $ Real estate - construction ............. Real estate - mortgage: 11 - 2 $ - 201 - 3 $ - 605 - 10 $ - 12 - 3 $ - 10 - Owner-occupied commercial .. - 104 1-4 family mortgage ................ Other mortgage ....................... 4,805 4,909 Total real estate - mortgage .......... 61 Consumer ..................................... Total 90+ days past due and accruing $ 4,981 Total nonperforming loans ................ $ 18,954 Plus: Other real estate owned and repossessions ................................ 6,497 Total nonperforming assets ............... $ 25,451 Restructured accruing loans: Commercial, financial and agricultural............................... $ Real estate - construction ............. Real estate - mortgage: Owner-occupied commercial .. 1-4 family mortgage ................ Other mortgage ....................... Total real estate - mortgage .......... Consumer ..................................... Total restructured accruing loans ...... $ Total nonperforming assets and 818 - - - - - - 818 - - 873 1 4,924 1 5,797 2 25 23 29 $ 6,021 63 $ 36,112 - - 123 5 5,008 1 5,131 6 8 108 17 $ 5,844 57 $ 27,770 - - - 1 - 1 - 2 48 28 40 $ 60 69 $ 10,825 6,208 - - - - - 6,208 - 24 45 27 $ 6,263 50 $ 16,887 8,178 11 74 $ 44,290 5,169 12 69 $ 32,939 6,701 12 81 $ 17,526 4,988 12 62 $ 21,875 3 $ - 625 - 2 $ 3,073 - - 3 $ 11,438 997 - 6 $ 1 354 - - - - - - 3 $ - - - - - 625 - - - - - - - - - - 2 $ 3,073 3,664 - 850 - - - 4,514 - - - 3 $ 16,949 2 1 - 3 - 10 $ - - 204 204 - 558 13 5 - 1 - 1 - 19 1 - 1 - - 1 10 12 31 12 43 1 - - - 1 1 - 2 restructured accruing loans .......... $ 26,269 77 $ 44,915 71 $ 36,012 84 $ 34,475 72 $ 22,433 45 Ratios: Nonperforming loans to total loans ... 0.22 % 0.50 % 0.43 % 0.19 % 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 % 0.61 % 0.50 % 0.30 % 0.44 % 0.31 % 0.62 % 0.55 % 0.59 % 0.46 % 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 55 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. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments and interest. While interest continues to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As of December 31, 2020, the Company carries $5.8 million of accrued interest income on deferrals made to COVID-19 affected borrowers. At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods. 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, 2020, 2019 and 2018: Average Deposits Average for Years Ended December 31, 2019 2020 Average Balance Average Rate Paid Average Rate Average Balance Paid (Dollars in Thousands) 2018 Average Balance Average Rate Paid Types of Deposits: Non-interest-bearing demand Interest-bearing demand deposits ... Money market accounts ................. Savings accounts ............................ Time deposits under $100,000 ....... Time deposits, $100,000 and over.. Brokered time deposits ................... deposits ...................................... $ 2,492,500 1,059,629 4,519,170 77,364 85,882 682,134 68,082 Total deposits ............................. $ 8,984,761 0.35% 0.57% 0.35% 1.57% 1.90% 1.68% -% $ 1,632,385 928,611 4,038,143 57,078 91,122 611,123 - $ 7,358,462 -% $ 1,480,827 863,673 0.82% 3,241,474 1.68% 53,596 0.56% 91,653 1.74% 534,679 2.20% -% - $ 6,265,902 -% 0.62% 1.24% 0.43% 1.23% 1.61% -% The following table presents the maturities of our certificates of deposit as of December 31, 2020 and 2019. At December 31, 2020 Maturity Three months or less .............................................. $ Over three through six months ............................... Over six months through one year .......................... Over one year ......................................................... Total .................................................................... $ $100,000 and greater Less than $100,000 (In Thousands) 117,505 $ 132,828 215,578 216,617 682,528 $ 18,996 $ 18,866 23,116 74,119 135,097 $ At December 31, 2019 Maturity Three months or less .............................................. $ Over three through six months ............................... Over six months through one year .......................... Over one year ......................................................... Total .................................................................... $ $100,000 and greater Less than $100,000 (In Thousands) 95,522 $ 90,825 172,964 286,488 645,799 $ 19,192 $ 16,988 19,957 26,617 82,754 $ 56 Total 136,501 151,694 238,694 290,736 817,625 Total 114,714 107,813 192,921 313,105 728,553 Total average deposits for the year ended December 31, 2020 were $8.9 billion, an increase of $1.6 billion, or 22.1%, over total average deposits of $7.4 billion for the year ended December 31, 2019. Average noninterest-bearing deposits increased by $860,000, or 52.7%, from $1.63 billion for the year ended December 31, 2019 to $2.49 billion for the year ended December 31, 2020. Borrowed Funds We had available $923.0 million in unused federal funds lines of credit with regional banks as of December 31, 2020, compared to $767.0 million as of December 31, 2019. The increase was attributable to additional lines of credit initiated with new banks during 2020. These lines are subject to certain restrictions. Federal funds purchased from correspondent banks averaged $627.2 million, $398.2 million and $270.9 million for 2020, 2019 and 2018, respectively. We paid average interest rates on these funds of 0.43%, 2.28% and 1.96% for the same three years, respectively. The maximum amount outstanding at month-end during 2020 and 2019 was $851.5 million and $472.0 million, respectively. Stockholders’ Equity Stockholders’ equity increased $150.2 million during 2020, to $992.8 million at December 31, 2020 from $842.7 million at December 31, 2019. The increase in stockholders’ equity resulted primarily from net income of $169.5 million during the year ended December 31, 2020, less dividends paid or declared on our common stock of $39.0 million during the year ended December 31, 2020. Off-Balance Sheet Arrangements In the normal course of business, we are a party to financial credit arrangements with off-balance sheet risk to meet the financing needs of our customers. These financial credit arrangements include commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit and financial guarantees. Those credit arrangements involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial credit arrangements. All such credit arrangements bear interest at variable rates and we have no such credit arrangements which bear interest at fixed rates. Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, credit card arrangements and standby letters of credit is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on- balance sheet instruments. The following table sets forth our credit arrangements and financial instruments whose contract amounts represent credit risk as of December 31, 2020, 2019 and 2018: Commitments to extend credit ................................. $ Credit card arrangements ......................................... Standby letters of credit and financial guarantees ... Total ......................................................................... $ 2,606,258 $ 286,128 66,208 2,958,594 $ 2,303,788 $ 248,617 48,394 2,600,799 $ 1,985,801 173,613 40,590 2,200,004 2020 2019 (In Thousands) 2018 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. 57 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 Company periodically enters into derivative contracts to manage exposures to movements in interest rates. The Company purchased an interest rate cap in May of 2020 to limit exposures to increases in interest rates. The interest rate cap is not designated as a hedging instrument but rather as a stand-alone derivative. The interest rate cap has an original term of 3 years, a notional amount of $300 million and is tied to the one-month LIBOR rate with a strike rate of 0.50%. The fair value of the interest rate cap is carried on the balance sheet in other assets and the change in fair value is recognized in noninterest income each quarter. At December 31, 2020 the interest rate cap had a fair value of $139,000 and remaining term of 2.3 years. 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, 2020 and 2019 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, 2020, our gap was within such ranges. See “—Quantitative and Qualitative Analysis of Market Risk” below in Item 7A for additional information. 58 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, 2020, our liquid assets, represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $2.63 billion. Additionally, at such date we had available to us approximately $923.0 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, 2020. 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 (In Thousands) Over 5 years Contractual Obligations (1) Deposits without a stated maturity ....................... $ 9,158,099 $ 9,158,099 $ 526,890 Certificates of deposit (2) ..................................... 851,545 Federal funds purchased ....................................... Other borrowings .................................................. - 3,024 Operating lease commitments .............................. Total .................................................................. $10,905,939 $10,539,558 $ 817,625 851,545 65,000 13,670 - $ 261,235 - - 4,961 266,196 $ - $ 29,425 - - 3,181 32,606 $ - 75 - 65,000 2,504 67,579 (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, 2020, 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, 2020. In addition, the Alabama Banking Department has required that the bank maintain a leverage ratio of 8.00%. 59 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, 2020. Well- Capitalized Actual at December 31, 2020 CET 1 Capital Ratio ............................................... Tier 1 Capital Ratio ................................................ Total Capital Ratio ................................................. Leverage ratio ........................................................ 6.50% 8.00% 10.00% 5.00% 11.15% 11.16% 12.15% 8.75% For a description of capital ratios see Note 14, “Regulatory Matters” to the 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, “Summary of Significant Accounting Policies” to the Consolidated Financial Statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Like all financial institutions, we are subject to market risk from changes in interest rates. Interest rate risk is inherent in the balance sheet due to the mismatch between the maturities of rate-sensitive assets and rate-sensitive liabilities. If rates are rising, and the level of rate-sensitive liabilities exceeds the level of rate-sensitive assets, the net interest margin will be negatively impacted. Conversely, if rates are falling, and the level of rate-sensitive liabilities is greater than the level of rate- sensitive assets, the impact on the net interest margin will be favorable. Managing interest rate risk is further complicated by the fact that all rates do not change at the same pace; in other words, short term rates may be rising while longer term rates remain stable. In addition, different types of rate-sensitive assets and rate-sensitive liabilities react differently to changes in rates. To manage interest rate risk, we must take a position on the expected future trend of interest rates. Rates may rise, fall, or remain the same. Our asset liability committee develops its view of future rate trends and strives to manage rate risk within a targeted range by monitoring economic indicators, examining the views of economists and other experts, and understanding the current status of our balance sheet. Our annual budget reflects the anticipated rate environment for the next twelve months. The asset liability committee conducts a quarterly analysis of the rate sensitivity position and reports its results to our board of directors. The asset liability committee employs multiple modeling scenarios to analyze the maturities of rate-sensitive assets and liabilities. The model measures the “gap” which is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-sensitive liabilities repricing during the same period. The gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than “one,” the dollar value of assets exceeds the dollar value of liabilities; the balance sheet is “asset sensitive.” Conversely, if the value of liabilities exceeds the value of assets, the ratio is less than one and the balance sheet is “liability sensitive.” Our internal policy requires management to maintain the gap such that net interest margins will not change more than 10% if interest rates change 60 100 basis points or more than 15% if interest rates change 200 basis points. As of December 31, 2020, our gap was within such ranges. The model measures scheduled maturities in periods of three months, four to twelve months, one to five years and over five years. The chart below illustrates our rate-sensitive position at December 31, 2020. 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 (Dollars in Thousands) Total Interest-earning assets: Loans, including mortgages held for sale ........ $ 3,608,055 Securities ......................................................... 66,780 Federal funds sold ........................................... 100,473 Interest bearing balances with banks ............... 2,110,506 Total interest-earning assets ............................ $ 5,885,814 $ 1,605,932 196,700 - 4,229 $ 1,806,861 $ 3,018,287 $ 247,839 $ 8,480,113 129,046 886,938 100,473 - - 2,115,985 $ 3,513,949 $ 376,885 $11,583,509 494,412 - 1,250 Interest-bearing liabilities: Deposits: Interest-bearing checking ............................. $ 1,307,440 Money market and savings .......................... 5,061,050 134,481 Time deposits ............................................... - Federal funds purchased .................................. Other borrowings ............................................. 851,545 Total interest-bearing liabilities ....................... 7,354,516 Interest sensitivity gap ..................................... $ (1,468,702) Cumulative sensitivity gap .............................. $ (1,468,702) Percent of cumulative sensitivity Gap to total $ - - 392,408 - - 392,408 $ 1,414,453 (54,249) $ $ - $ - 290,661 - - 290,661 - $ 1,307,440 - 5,061,050 817,625 64,748 851,545 64,823 8,102,408 $ 3,223,288 $ 312,062 $ 3,481,101 - $ 3,169,039 $ 3,481,101 $ 75 64,748 - interest-earning assets .................................. (12.68%) (0.47%) 27.36% 30.05% 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. After starting the year at a rate of 1.55%, the Federal Reserve has cut its targeted federal funds rate by 145 basis points to its current rate of 0.10%. At December 31, 2020, the model shows an increase in our EVE for all upward shifts in rates. 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, 2020 0 bps -100 bps +100 bps +200 bps +300 bps +400 bps (Dollars in Thousands) Economic value of equity ............. $ Actual dollar change ..................... Percent change .............................. 992,852 $ 763,503 $ (229,349) $ 1,086,180 $ 1,163,623 $ 1,229,151 $ 1,283,758 290,906 $ 29.3% (23.1)% 170,771 $ 236,299 $ 23.8% 93,328 $ 9.4% 17.2% 61 The one-year gap ratio of negative 0.5% 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 long-range impact of unanticipated movements in interest rates. The above analysis may not on its own be an entirely accurate indicator of how net interest income or EVE will be affected by changes in interest rates. Income associated with interest earning assets and costs associated with interest bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. Our asset liability committee develops its view of future rate trends by monitoring economic indicators, examining the views of economists and other experts, and understanding the current status of our balance sheet and conducts a quarterly analysis of the rate sensitivity position. The results of the analysis are reported to our board of directors on a quarterly basis. 62 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, 2020 and 2019 .................................................................................. Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018................................. Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018 ....... Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2020, 2019 and 2018 ........... Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 .......................... Notes to Consolidated Financial Statements .............................................................................................................. Page 64 66 67 68 69 70 71 72 63 Report of Independent Registered Public Accounting Firm To the stockholders 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, 2020 and 2019, 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, 2020, 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 as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 25, 2021 expressed an unqualified opinion thereon. Adoption of New Accounting Standard As discussed in Notes 1 and 3 to the financial statements, the Company changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Accounting Standards Codification (ASC) Topic 326 Financial Instruments – Credit Losses. 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. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses on Loans As described in Notes 1 and 3 to the financial statements, the Company’s loan portfolio and the associated allowance for credit losses (“allowance”) were $8.5 billion and $87.9 million as of December 31, 2020, respectively. As described in Note 1, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326) effective January 1, 2020. The amount of the allowance represents management’s best estimate of current expected credit losses on loans considering 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 64 underlying collateral, composition of the loan portfolio, current and projected economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. As further described in Notes 1 and 3 to the financial statements, to calculate the allowance for credit losses, loans with similar risk characteristics are collectively evaluated in pools and loans that do not share similar risk characteristics are excluded from the collective pools and evaluated on an individual basis. Management evaluates each loan pool utilizing a discounted cash flow (DCF), probability of default / loss given default (“PD/LGD”) or remaining life method, depending on the nature of the loan pool. Losses are predicted over a period of time determined to be reasonable and supportable, and after such period, losses are reverted to long term historical averages. The estimated credit losses for each loan pool are then adjusted for qualitative factors not inherently considered in the quantitative analyses. Consideration is given to the following factors: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions. Estimating qualitative factor adjustments requires significant judgment and can either increase or decrease the quantitative model estimation. We identified the allowance for credit losses on loans as a critical audit matter. The principal considerations for our determination of the allowance as a critical audit matter is the subjectivity of the assumptions that management utilized in determining and applying qualitative factors in the allowance model. Furthermore, certain inputs and assumptions lack observable data and therefore, applying audit procedures required a higher degree of auditor judgment and subjectivity due to the nature and extent of audit evidence and effort required to address this matter. The primary audit procedures we performed to address this critical audit matter included: (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) We obtained an understanding of the Company’s process for establishing the allowance, including the implementation of the expected credit losses model and the qualitative factor adjustments. We utilized the assistance of internal specialists to test the appropriateness of the design and operation of the model, including evaluating the reasonableness of assumptions and judgments used in regression components and recalculating cash flows on a sample basis. We evaluated the design and tested the operating effectiveness of key controls relating to the Company’s allowance, including controls over the credit monitoring function related to loan performance, the determination of qualitative factors, and the precision of management’s review and approval of the allowance model and resulting estimate. We evaluated the reasonableness of management’s assumptions and judgments related to estimating the qualitative factors applied to each loan pool. Our evaluation included the appropriateness of the methodologies used by management to establish and estimate the qualitative factor components of the allowance and the appropriateness and completeness of risk factors used in determining the qualitative factors. We evaluated the appropriateness of assumptions used in estimating the qualitative factors, including assessing the completeness and accuracy of the data utilized, comparing the data and information utilized by management to internal and external evidence, and evaluating whether potentially new or contradictory information existed. We analyzed the total qualitative adjustment factor applied to the loan pools over the period since implementation, including changes or modifications to individual factors, in comparison to changes in the Company’s quantitatively driven expected credit losses, loan portfolios and the economy, and evaluated the appropriateness and level of the qualitative adjustment factors. We tested the completeness and accuracy of inputs as well as verified the mathematical accuracy of the allowance model, including the qualitative factor adjustments. /s/ Dixon Hughes Goodman LLP We have served as the Company's auditor since 2014. Atlanta, Georgia February 25, 2021 65 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of ServisFirst Bancshares, Inc. Opinion on Internal Control Over Financial Reporting We have audited ServisFirst Bancshares, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2020, 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 maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, 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, 2020 and 2019 and for each of the three years in the period ended December 31, 2020, and our report dated February 25, 2021, expressed an unqualified opinion on those consolidated financial statements. 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 Management’s Report 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 25, 2021 66 SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) December 31, 2020 December 31, 2019 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 at December 31, 2020 and December 31, 2019) ................................................................................................... Mortgage loans held for sale ......................................................................................... Loans ............................................................................................................................. Less allowance for credit losses .................................................................................... Loans, net ................................................................................................................... Premises and equipment, net ......................................................................................... Accrued interest and dividends receivable .................................................................... Deferred tax asset, net ................................................................................................... Other real estate owned and repossessed assets ............................................................ Bank owned life insurance contracts ............................................................................. Goodwill and other identifiable intangible assets .......................................................... Other assets ................................................................................................................... Total assets ................................................................................................................ $ 93,655 $ 2,115,985 1,771 2,211,411 886,688 250 14,425 8,465,688 (87,942) 8,377,746 54,969 36,841 31,072 6,497 276,387 13,908 22,460 11,932,654 $ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest-bearing demand .................................................................................... $ Interest-bearing .......................................................................................................... Total deposits ......................................................................................................... Federal funds purchased ................................................................................................ Other borrowings ........................................................................................................... Accrued interest and dividends payable ........................................................................ Other liabilities .............................................................................................................. Total liabilities ........................................................................................................... 2,788,772 $ 7,186,952 9,975,724 851,545 64,748 12,321 35,464 10,939,802 Stockholders' equity: Preferred stock, par value $0.001 per share; 1,000,000 authorized and 78,618 451,509 100,473 630,600 759,399 250 6,312 7,261,451 (76,584) 7,184,867 56,496 26,262 25,566 8,178 209,395 14,179 26,149 8,947,653 1,749,879 5,780,554 7,530,433 470,749 64,703 11,934 27,152 8,104,971 undesignated at December 31, 2020 and December 31, 2019 ................................ - - Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,943,751 shares issued and outstanding at December 31, 2020, and 53,623,740 shares issued and outstanding at December 31, 2019 .......................... Additional paid-in capital .......................................................................................... Retained earnings ....................................................................................................... Accumulated other comprehensive income ............................................................... Total stockholders' equity attributable to ServisFirst Bancshares, Inc. .................. Noncontrolling interest .............................................................................................. Total stockholders' equity ...................................................................................... Total liabilities and stockholders' equity .................................................................... $ 54 223,856 748,224 20,218 992,352 500 992,852 11,932,654 $ 54 219,766 616,611 5,749 842,180 502 842,682 8,947,653 See Notes to Consolidated Financial Statements. 67 SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) 2020 Year Ended December 31, 2019 2018 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 credit losses .............................................................. Net interest income after provision for credit losses ............... Noninterest income: Service charges on deposit accounts ........................................... Mortgage banking ....................................................................... Credit card income ...................................................................... Securities gains ........................................................................... Increase in cash surrender value life insurance ........................... Other operating income .............................................................. Total noninterest income ......................................................... Noninterest expenses: Salaries and employee benefits ................................................... Equipment and occupancy expense ............................................ Third party processing and other services ................................... Professional services ................................................................... FDIC and other regulatory assessments ...................................... Other real estate owned expense ................................................. Other operating expenses ............................................................ Total noninterest expenses ...................................................... Income before income taxes .................................................... Provision for income taxes ............................................................. Net income ........................................................................... Dividends on preferred stock .................................................. Net income available to common stockholders ................... $ Basic earnings per common share .................................................. $ Diluted earnings per common share ............................................... $ See Notes to Consolidated Financial Statements. 362,664 $ 22,122 739 332 3,165 389,022 45,230 5,755 50,985 338,037 42,434 295,603 7,528 8,747 5,916 - 6,310 1,615 30,116 61,414 10,070 13,778 4,242 4,354 2,163 15,490 111,511 214,208 44,639 169,569 63 169,506 $ 3.15 $ 3.13 $ 354,308 $ 17,008 1,429 6,038 12,020 390,803 90,958 12,200 103,158 287,645 22,638 265,007 7,029 4,361 7,076 27 3,746 1,743 23,982 57,783 9,272 11,234 4,235 2,975 415 16,214 102,128 186,861 37,618 149,243 63 149,180 $ 2.79 $ 2.76 $ 305,370 12,654 2,406 3,103 3,094 326,627 55,502 8,446 63,948 262,679 21,402 241,277 6,547 2,784 5,550 190 3,130 1,239 19,440 51,849 8,423 8,671 3,646 3,869 790 14,627 91,875 168,842 31,902 136,940 63 136,877 2.57 2.53 68 SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Net income ....................................................................................... $ Other comprehensive income (loss), net of tax: Unrealized net holding gains (losses) arising during period from securities available for sale, net of tax of $3,845, $2,788 and $(1,205) for 2020, 2019 and 2018, respectively ........................ Reclassification adjustment for net gains on sale of securities, Year Ended December 31, 2019 2020 2018 169,569 $ 149,243 $ 136,940 14,469 10,511 (4,531) net of tax of $6 and $3 for 2019 and 2018, respectively ........... Other comprehensive income (loss), net of tax ............................. Comprehensive income .................................................................... $ - 14,469 184,038 $ (21) 10,490 159,733 $ (12) (4,543) 132,397 See Notes to Consolidated Financial Statements. 69 - - - - - 136,940 53 $ 218,521 $ 500,868 $ (4,543 ) - (4,741 ) $ - - 502 $ (4,543 ) 136,940 715,203 SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share amounts) Year Ended December 31, Common Shares Preferred Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Retained Earnings Non- controlling Interest Total Stockholders' Equity Balance, January 1, 2018 ..................... 52,992,586 $ - $ 53 $ 217,693 $ 389,554 $ (198 ) $ 502 $ 607,604 - - - - - - - - - - (17,545 ) - - (8,018 ) (63 ) exercise of stock options ............. 353,259 - - 2,337 29,350 - - - Common dividends paid, $0.33 per share ............................................. Common dividends declared, $0.15 per share ....................................... Preferred dividends paid .................. Issue restricted shares pursuant to stock incentives, net of forfeitures ..................................... Issue shares of common stock upon 61,077 shares of common stock withheld in net settlement upon exercise of stock options ............. Stock-based compensation expense Other comprehensive loss, net of - - tax ................................................ Net income ....................................... - - Balance, December 31, 2018 ............... 53,375,195 $ Common dividends paid, $0.45 per share ............................................. Common dividends declared, $0.175 per share ........................... Preferred dividends paid .................. Issue restricted shares pursuant to stock incentives, net of forfeitures ..................................... Issue shares of common stock upon 60,419 shares of common stock withheld in net settlement upon exercise of stock options ............. Stock-based compensation expense Other comprehensive income, net of - - tax ................................................ Net income ....................................... - - Balance, December 31, 2019 ............... 53,623,740 $ Common dividends paid, $0.525 per share ....................................... Common dividends declared, $0.20 per share ....................................... Preferred dividends paid .................. Exit tax credit partnership ............ Impact of adopting ASC 326 ........... Issue restricted shares pursuant to stock incentives, net of forfeitures ..................................... Issue shares of common stock upon - - - - - - - - - - - - - $ - - - - - - - - $ - - - - - - - (2,360 ) 851 - - - - (24,053 ) - - (9,384 ) (63 ) - - (1,977 ) 1,100 - - - - - - (28,230 ) - (10,787 ) (63 ) - - - 1,124 - - - - - - - - - - - - - exercise of stock options ............. 228,381 - 1 2,122 20,164 - - - - - - - - - - - (17,545 ) - - (8,018 ) (63 ) - - - 2,337 - - (2,360 ) 851 - - - - - - - - (24,053 ) - - (9,384 ) (63 ) - - - 2,123 - - (1,977 ) 1,100 - - - - - - - - - - (28,230 ) - - (2 ) - (10,787 ) (63 ) (2 ) 1,124 - - - 3,487 - - (729 ) 1,332 exercise of stock options ............. 286,816 - - 3,487 33,195 - - - 19,484 shares of common stock withheld in net settlement upon exercise of stock options ............. Stock-based compensation expense Other comprehensive income, net of - - tax ................................................ Net income ....................................... - - Balance, December 31, 2020 ............... 53,943,751 $ - - - - - $ - - (729 ) 1,332 - - - - - 169,569 54 $ 223,856 $ 748,224 $ 14,469 - 20,218 $ - (2 ) 500 $ 14,469 169,569 992,852 70 - - - - - 149,243 54 $ 219,766 $ 616,611 $ 10,490 - 5,749 $ - - 502 $ 10,490 149,243 842,682 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 169,569 $ 149,243 $ 136,940 2020 Year Ended December 31, 2019 2018 Deferred tax benefit ......................................................................................................... Provision for credit 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 .................................................................. Gain on sale of mortgage loans held for sale .................................................................. Gain on sale of equity securities ..................................................................................... Net gain on sale of debt securities available for sale ...................................................... Net gain 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 ........................................................................ Investment in tax credit partnership and SBIC .................................................................... Increase in loans ................................................................................................................... Purchase of premises and equipment ................................................................................... Purchase of bank owned life insurance contracts ................................................................ Proceeds from sale of other real estate owned and repossessed assets ............................... Net cash used in investing activities ...................................................................... FINANCING ACTIVITIES Net increase in non-interest-bearing deposits ...................................................................... Net increase in interest-bearing deposits ............................................................................. Net increase in federal funds purchased .............................................................................. Repayment of Federal Home Loan Bank advances ............................................................ Proceeds from issuance of 4% Subordinated Notes due October 21, 2030, net of issuance cost .................................................................................................................... Redemption of 5% Subordinated Notes due July 15, 2025 ................................................. Proceeds from exercise of stock options ............................................................................. Taxes paid in net settlement of tax obligation upon exercise of stock options ................... Dividends paid on common stock ........................................................................................ Dividends paid on preferred stock ....................................................................................... Net cash provided by financing activities .............................................................. Net increase (decrease) in cash and cash equivalents .............................................................. Cash and cash equivalents at beginning of period ................................................................... Cash and cash equivalents at end of period ............................................................................. $ SUPPLEMENTAL DISCLOSURE Cash paid for: Interest ............................................................................................................................. $ Income taxes .................................................................................................................... Income tax refund ............................................................................................................ NONCASH TRANSACTIONS Other real estate acquired in settlement of loans ................................................................. $ Internally financed sale of other real estate owned ............................................................. Dividends declared ............................................................................................................... See Notes to Consolidated Financial Statements. (9,727) 42,434 3,832 (100) 271 5,605 (10,579) 1,332 387 284,881 (284,247) (8,747) - - (8) 1,861 4 (6,310) 832 191,290 (334,596) 220,993 - - (636) (1,236,698) (2,305) (60,682) 2,853 (1,411,071) 1,038,893 1,406,398 380,796 - 34,750 (34,710) 3,487 (729) (28,230) (63) 2,800,592 1,580,811 630,600 2,211,411 $ 50,598 $ 50,867 (47) 2,945 $ 40 10,787 (1,077) 22,638 3,682 (90) 270 3,095 (2,192) 1,100 1,553 135,359 (137,190) (4,361) - (27) (122) 287 8 (3,746) (4,155) 164,275 (293,832) 117,265 18,920 (250) - (754,533) (2,356) (75,000) 1,437 (988,349) 192,538 422,187 182,024 - - - 2,123 (1,977) (24,053) (63) 772,779 (51,295) 681,895 630,600 $ 101,605 $ 42,232 (86) 4,611 $ - 9,384 (14,255) 21,402 3,378 (163) 270 2,843 (3,409) 851 5,410 106,806 (99,683) (2,784) (175) (15) 21 664 163 (3,130) 13,167 168,301 (156,815) 91,787 5,736 - - (696,701) (2,300) - 3,819 (754,474) 117,015 707,019 (13,072) (200) - - 2,337 (2,360) (20,194) (63) 790,482 204,309 477,586 681,895 58,538 30,547 (2) 3,080 662 8,018 71 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, Sarasota 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. Reclassification Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or net cash flow. 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 credit losses, valuation of deferred tax assets and the fair value of financial instruments are particularly subject to change. All numbers are in thousands except share and per share data. Basis of Consolidation The consolidated financial statements include the accounts of the Company and other entities in which it has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. Cash, Due from Banks, Interest-Bearing Balances due from Financial Institutions Cash and due from banks include 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 generally required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank based on a percentage of deposits. However, in March 2020 the Federal Reserve Bank announced that it had reduced the required reserve ratio to zero percent effective March 26, 2020. The total of the Bank’s required reserve balances was $0 at December 31, 2020 and $33.9 million at December 31, 2019. Debt Securities Securities are classified as available-for-sale when they might be sold before maturity. Unrealized holding gains and losses (for which no allowance for credit losses are recorded), 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. 72 Mortgage Loans Held for Sale The Company classifies certain residential mortgage loans as held for sale. Typically, mortgage loans held for sale are sold to a third-party investor within a very short time period. The loans are sold without recourse and servicing is not retained. Net fees earned from this banking service are recorded in noninterest income. In the course of originating mortgage loans and selling those loans in the secondary market, the Company makes various representations and warranties to the purchaser of the mortgage loans. Each loan is underwritten using government agency guidelines. Any exceptions noted during this process are remedied prior to sale. These representations and warranties also apply to underwriting the real estate appraisal opinion of value for the collateral securing these loans. Under the representations and warranties, failure by the Company to comply with the underwriting and/or appraisal standards could result in the Company being required to repurchase the mortgage loan or to reimburse the investor for losses incurred (make whole requests) if such failure cannot be cured by the Company within the specified period following discovery. The Company continues to experience an insignificant level of investor repurchase demands. There were no expenses incurred as part of these buyback obligations for the years ended December 31, 2020 and 2019. Loans Loans are reported at unpaid principal balances, less unearned fees and the allowance for credit 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. Troubled debt restructurings (“TDRs”) are concessions granted to borrowers in the normal course of business, which would not otherwise be considered, where the borrowers are experiencing financial difficulty. The concessions granted most frequently for TDRs involve reductions or delays in required payments of principal and interest for a specified time, the rescheduling of payments in accordance with a bankruptcy plan or the charge-off of a portion of the loan. In some cases, the conditions of the credit also warrant nonaccrual status, even after the restructure occurs. As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of restructure. TDR loans may be returned to accrual status if there has been at least a six-month sustained period of repayment performance by the borrower. Allowance for Credit Losses As described below under Recently Adopted Accounting Pronouncements, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) effective January 1, 2020. Allowance for Credit Losses – Available-for-Sale Debt Securities: For available-for-sale debt securities in an unrealized loss position, the Company will first assess whether i) it intends to sell or ii) it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. If either case is applicable, any previously recognized allowances are charged off and the debt security’s amortized cost is written down to fair value through income. If neither case is applicable, the debt security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the debt security by a rating agency and any adverse conditions specifically related to the debt security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the debt security are compared to the amortized cost basis of the debt security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount by which the fair value is less than the amortized cost basis. Any impairment that has not been recorded through allowance for credit losses is recognized in other comprehensive income, net of tax. 73 Adjustments to the allowance are reported in the income statement as a component of credit loss expense. Available-for-sale debt securities are charged off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by the Company or when either of the aforementioned criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses. Allowance for Credit Losses – Loans: For loans the allowance for credit losses is based on the Company’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. The process is inherently subjective and subject to significant change as it requires material estimates. The allowance is increased by a provision for credit 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 credit losses. 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. Loans with similar risk characteristics are evaluated in pools and, depending on the nature of each identified pool, the Company utilizes a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method. The historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates and gross domestic product. Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each quarter by the Company and are dependent on the current economic environment among other factors. The estimated credit losses for each loan pool are then adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative adjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions. Credit losses for loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis. Individual evaluations are performed for nonaccrual loans, loans rated substandard, and modified loans classified as troubled debt restructurings. Specific allowances were estimated based on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows. The Company measures expected credit losses over the contractual term of a loan, adjusted for estimated prepayments. The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring will be executed. Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding, purchase discounts and premiums and deferred loan fees and costs. Accrued interest receivable on loans is excluded from the estimate of credit losses. Allowance for Credit Losses – Unfunded Loan Commitments: For unfunded loan commitments the allowance for credit losses is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if the Company has the unconditional right to cancel the obligation. The allowance is reported as a component of other liabilities within the consolidated balance sheets. Adjustments to the allowance for credit losses – unfunded commitments are reported in the income statement as a component of other operating expense. 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 credit 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. 74 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. Leases The Company leases certain office space and equipment under operating leases. In 2019, the Company adopted certain accounting standard updates related to accounting for leases which requires operating leases be recognized as a liability to make lease payments and as an asset representing the right to use the asset during the lease term, or “lease liability” and “right-of-use asset”, respectively. The lease liability is measured by the present value of remaining lease payments, discounted at the Company’s incremental borrowing rate. The Company reports its right-of-use assets in other assets and its lease liabilities in other liabilities. Certain of the leases include one or more renewal options that extend the initial lease term 1 to 5 years. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, a majority of renewals to extend lease terms are not included in the right-of-use assets and lease liabilities as they are not reasonably certain to be exercised. Renewal options are regularly evaluated and when they are reasonably certain to be exercised, are included in lease terms. None of the Company’s leases provide an implicit rate. The Company uses its incremental collateralized borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company does not recognize short-term leases on its balance sheet. A short-term operating lease has an original term of 12 months or less and does not have a purchase option that is likely to be exercised. Bank Owned Life Insurance (BOLI) BOLI is comprised of long-term life insurance contracts on the lives of certain current and past employees where the insurance policy benefit and ownership are retained by the employer. Its cash surrender value is an asset that the Company uses to partially offset the future cost of employee benefits. The cash surrender value accumulation on BOLI is permanently tax deferred if the policy is held to the insured person’s death and certain other conditions are met. 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, 2020 in connection with the acquisition of Metro Bancshares, Inc. in 2015. 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. 75 The Company purchased an interest rate cap in May of 2020 to limit exposures to increases in interest rates. The interest rate cap is not designated as a hedging instrument but rather as a stand-alone derivative. The interest rate cap has an original term of three years, a notional amount of $300 million and is tied to the one-month LIBOR rate with a strike rate of 0.50%. See Note 12 Derivatives for more discussion of this interest rate cap. 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, 2020 and 2019 were not material and have not been recorded. Revenue Recognition Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), provides guidance for reporting revenue from the entity’s contracts to provide goods or services to customers. The guidance requires recognition of revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of revenue-generating transactions are excluded from the scope of ASC 606, including revenue generated from financial instruments, such as securities and loans. Revenue-generating transactions that are within the scope of ASC 606, classified within non-interest income, are described as follows: • Deposit account service charges – represent service fees for monthly activity and maintenance on customer accounts. Attributes can be transaction-based, item-based or time-based. Revenue is recognized when our performance obligation is completed which is generally monthly for maintenance services or when a transaction is processed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. • Credit card rewards program membership fees – represent memberships in our credit card rewards program and are paid annually by our cardholders at the time they open an account and on each anniversary. Revenue is recognized ratably over the membership period. Other non-interest income primarily includes income on bank owned life insurance contracts, letter of credit fees and gains on sale of loans held for sale, none of which are within the scope of ASC 606. 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. 76 Stock-Based Compensation At December 31, 2020, the Company had a stock-based compensation plan for grants of equity compensation to key employees and directors. The plan has been accounted for under the provisions of FASB ASC 718-10, Compensation – Stock Compensation, with respect to employee stock options and under the provisions of FASB ASC 505-50, Equity-Based Payments to Non-Employees, with respect to non-employee stock options. Specifically, awards to employees are accounted for using the fair value-based method of accounting. Stock compensation costs are recognized prospectively for all new awards granted under the stock-based compensation plans. Compensation expense related to share options is calculated using a method that is based on the underlying assumptions of the Black-Scholes-Merton option pricing model and is charged to expense over the requisite service period (e.g. vesting period). Compensation expense related to restricted stock awards is based upon the fair value of the awards on the date of grant and is charged to earnings over the requisite service period of the award. Earnings per Common Share Basic earnings per common share are computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options and warrants. Loan Commitments and Related Financial Instruments Financial instruments, which include credit card arrangements, commitments to make loans and standby letters of credit, are issued to meet customer financing needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments such as stand-by letters of credit are considered financial guarantees in accordance with FASB ASC 460-10. The fair value of these financial guarantees is not material. The allowance for credit losses on loan commitments is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if the Company has the unconditional right to cancel the obligation. Adjustments to the allowance are reported in our income statement as a component of credit loss expenses. 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 21. 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, 2020, 2019 and 2018 was $338,000, $581,000 and $557,000, respectively. Advertising typically consists of local print media aimed at businesses that the Company targets as well as sponsorships of local events in which the Company’s clients and prospects are involved. Recently Adopted Accounting Pronouncements In June 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, ASC 326 requires 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 that affect the collectability of the reported amount. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, gave financial institutions the option to delay 77 adoption of CECL. The Company elected to delay its adoption of the update until the earlier of the date the national emergency concerning COVID-19 terminates or December 31, 2020, with an effective retrospective adoption date of January 1, 2020. Amounts reported for periods beginning on or after January 1, 2020 are presented under ASC 326, except quarterly periods in 2020, as shown in Note 23, which were not restated under CECL and all prior period information is presented in accordance with previously applicable GAAP. Based on prevailing economic conditions and forecasts as of January 1, 2020, the Company recognized a cumulative net increase to retained earnings of $1.1 million, net of tax, attributable to a decrease in the allowance for credit losses of $2.0 million, an increase in the allowance for off balance sheet credit exposures of $0.5 million, and a decrease in deferred tax assets of $0.4 million. This was the result of implementing a more quantitative methodology. The commercial, financial, and agricultural loan category decreased $8.2 million due to the portfolio primarily consisting of loans with generally short contractual maturities. This was partially offset by an increase of $6.2 million in the real estate – construction loan category due to the application of peer loss rates within the discounted cash flow pool reserve methodology. Peer historical loss rates were utilized to better align with loss expectations given the Company’s low historical loss experience in this category. See Note 3 – Loans, which shows the impact of adopting ASC 326 by loan segment. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2018. Early application of this ASU is permitted for all entities. The Company adopted the amendments in this ASU by applying the alternative transition method allowing comparative periods to not be restated and any cumulative effect adjustment to the opening balance of retained earnings to be recognized as of January 1, 2019. The Company elected the three practical expedients allowed by the amendments as follows: 1) forego an assessment of whether any existing contracts are or contain leases, 2) forego an assessment of the classification of existing leases as to whether they are operating leases or capital leases, and 3) forego an assessment of direct costs for any existing leases. Upon adoption on January 1, 2019 the Company recorded a right-of-use asset of approximately $15.3 million and lease liability of approximately $15.3 million. See Note 6 – Leases. 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 were effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption was permitted. The amendments were to 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 did not impact the Company’s Consolidated Financial Statements, as it has always amortized premiums to the first call date. In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. These amendments expand the scope of Topic 718, Compensation - Stock Compensation, which previously only included share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity – Equity-Based Payments to Non- Employees. The amendments in this ASU were effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption was permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company adopted this ASU effective January 1, 2019; however, the amendments did not have an impact on the Company’s Consolidated Financial Statements because it does not have any unvested stock-based payment awards currently outstanding to nonemployees. In July 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminated, added-to or modified certain disclosure requirements for fair value measurements. Among the changes, entities no longer are required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, however, entities are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 was effective for interim and annual reporting periods beginning after December 15, 2019. As ASU No. 2018-13 only revised disclosure requirements, it did not have a material impact on the Company’s Consolidated Financial Statements. 78 Recent Accounting Pronouncements In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The update provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The guidance is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be effective for a limited time, starting March 12, 2020 through December 31, 2022. The Company has identified a replacement reference rate established by the American Financial Exchange. This rate is based on an active market of daily fund trading among participant banks. The Company will apply the guidance provided by this ASU in transitioning to the new reference rate. In August 2020, FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Topic 815): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The update is intended to simplify accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The update removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The update also simplifies the diluted earnings per share calculation in certain areas. The update is effective for the Company for its fiscal year beginning after December 15, 2021, including interim periods within those years. Early adoption will be permitted. The Company does not currently have any convertible debt instruments outstanding so does not believe that the update will have an impact on its financial statements. NOTE 2. DEBT SECURITIES The amortized cost and fair values of available-for-sale and held-to-maturity debt securities at December 31, 2020 and 2019 are summarized as follows: Gross Gross Allowance December 31, 2020 Securities Available for Sale Amortized Unrealized Unrealized For Credit Market Value Losses Gain Cost Loss (In Thousands) U.S. Treasury Securities ....................... $ Government Agency Securities ............ Mortgage-backed securities .................. State and municipal securities .............. Corporate debt ...................................... Total ......................................................... $ Debt Securities Held to Maturity State and municipal securities .............. Total ......................................................... $ 13,993 $ 15,228 477,407 37,671 316,857 861,156 $ 364 $ 230 17,720 444 7,296 26,054 $ 250 250 $ - - $ - $ - (18 ) - (504 ) (522 ) $ - - $ December 31, 2019 Securities Available for Sale U.S Treasury Securities ........................ $ Government Agency Securities ............ Mortgage-backed securities .................. State and municipal securities .............. Corporate debt ...................................... Total ......................................................... $ Debt Securities Held to Maturity State and municipal securities .............. Total ......................................................... $ 48,923 $ 18,245 470,513 56,951 157,549 752,181 $ 291 $ 143 4,859 335 3,098 8,726 $ (4 ) $ (2 ) (1,318 ) (14 ) (170 ) (1,508 ) $ 250 250 $ - - $ - - $ - $ - - - - - $ - - $ - $ - - - - - $ - - $ 14,357 15,458 495,109 38,115 323,649 886,688 250 250 49,210 18,386 474,054 57,272 160,477 759,399 250 250 79 All mortgage-backed debt securities are issued by 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 2020 and 2019, there were no holdings of debt securities of any issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity. The amortized cost and fair value of debt securities as of December 31, 2020 and 2019 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 2020 December 31, 2019 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 ................... $ Debt securities held to maturity Due from one to five years .................... $ $ 30,797 $ 59,828 288,002 5,122 477,407 861,156 $ 31,060 $ 61,481 293,886 5,152 495,109 886,688 $ 58,722 $ 90,034 129,501 3,411 470,513 752,181 $ 58,975 91,005 131,914 3,451 474,054 759,399 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 250 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, 2020 and 2019. 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, 2020 U.S. Treasury Securities ............ $ Government Agency Securities . Mortgage-backed securities ....... State and municipal securities ... Corporate debt ........................... Total ....................................... $ December 31, 2019 U.S. Treasury Securities ............ $ Government Agency Securities . Mortgage-backed securities ....... State and municipal securities ... Corporate debt ........................... Total ....................................... $ (In Thousands) - $ - (18) - (504) (522) $ - $ - 3,667 - 59,576 63,243 $ - $ - - - - - $ - $ - - - - - $ - $ - (18) - (504) (522) $ - - 3,667 - 59,576 63,243 (4) $ (2) (1,206) (4) (170) (1,386) $ 3,012 $ 266 153,330 1,900 19,981 178,489 $ - $ - (112) (10) - (122) $ - $ - 24,911 2,647 - 27,558 $ (4) $ (2) (1,318) (14) (170) (1,508) $ 3,012 266 178,241 4,547 19,981 206,047 At December 31, 2020, no allowance for credit losses has been recognized on available for sale debt securities in an unrealized loss position as the Company does not believe any of the debt securities are credit impaired. This is based on the Company’s analysis of the risk characteristics, including credit ratings, and other qualitative factors related to available for sale debt securities. The issuers of these debt securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, the Company does not intend to sell these debt securities and it is more likely than not that the Company will not be required to sell the debt securities before recovery of their amortized cost, which may be at maturity. The unrealized losses are due to increases in market interest rates over the yields available at the time the debt securities were purchased. 80 The following table summarizes information about sales of debt securities available for sale. 2020 Years Ended December 31, 2019 (In Thousands) 2018 Sale proceeds ................................ $ Gross realized gains ...................... $ Gross realized losses ..................... Net realized gain (loss) ................. $ - $ - $ - - $ 18,920 $ 27 $ - 27 $ 5,736 15 - 15 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, 2020 and 2019 was $477.6 million and $389.9 million, respectively. NOTE 3. LOANS The loan portfolio is classified based on the underlying collateral utilized to secure each loan for financial reporting purposes. This classification is consistent with the Quarterly Report of Condition and Income filed by ServisFirst Bank with the Federal Deposit Insurance Corporation (FDIC). Commercial, financial and agricultural - Includes loans to business enterprises issued for commercial, industrial, agricultural production and/or other professional purposes. These loans are generally secured by equipment, inventory, and accounts receivable of the borrower and repayment is primarily dependent on business cash flows. Real estate – construction – Includes loans secured by real estate to finance land development or the construction of industrial, commercial or residential buildings. Repayment is dependent upon the completion and eventual sale, refinance or operation of the related real estate project. Owner-occupied commercial real estate mortgage – Includes loans secured by nonfarm nonresidential properties for which the primary source of repayment is the cash flow from the ongoing operations conducted by the party that owns the property. 1-4 family real estate mortgage – Includes loans secured by residential properties, including home equity lines of credit. Repayment is primarily dependent on the personal cash flow of the borrower. Other real estate mortgage – Includes loans secured by nonowner-occupied properties, including office buildings, industrial buildings, warehouses, retail buildings, multifamily residential properties and farmland. Repayment is primarily dependent on income generated from the underlying collateral. Consumer – Includes loans to individuals not secured by real estate. Repayment is dependent upon the personal cash flow of the borrower. In light of the U.S. and global economic crisis brought about by the COVID-19 pandemic, the Company prioritized assisting its clients through this troubled time. The CARES Act provides for Paycheck Protection Plan (“PPP”) loans to be made by banks to employers with less than 500 employees if they continue to employ their existing workers. As of December 31, 2020, the Company has funded approximately 4,900 loans for a total amount of $1.05 billion for clients under the PPP, and management expects to continue to participate in any extensions of the PPP by the Treasury Department. At December 31, 2020, unaccreted deferred loan origination fees, net of costs, related to PPP loans totaled $17.8 million. PPP loan origination fees recorded as an adjustment to loan yield for the year ended December 31, 2020 were $14.1 million. PPP loans outstanding totaled $900.5 million at December 31, 2020 and are included within the Commercial, financial and agricultural loan category in the table below. No allowance for credit losses has been recorded for PPP loans as they are fully guaranteed by the SBA. 81 The composition of loans at December 31, 2020 and 2019 is summarized as follows: Commercial, financial and agricultural ............... $ Real estate - construction .................................... Real estate - mortgage: Owner-occupied commercial ........................... 1-4 family mortgage ........................................ Other mortgage ................................................ Total real estate - mortgage ............................. Consumer ............................................................ Total Loans ...................................................... Less: Allowance for credit losses ........................ Net Loans ........................................................ $ December 31, 2020 2019 (In Thousands) 3,295,900 $ 593,614 2,696,210 521,392 1,693,428 711,692 2,106,184 4,511,304 64,870 8,465,688 (87,942) 8,377,746 $ 1,587,478 644,188 1,747,394 3,979,060 64,789 7,261,451 (76,584) 7,184,867 Changes in the allowance for credit losses during the years ended December 31, 2020, 2019 and 2018, respectively are as follows: 2020 Years Ended December 31, 2019 (In Thousands) 2018 Balance, beginning of year ......... $ Impact of adopting ASC 326 .. Loans charged off ................... Recoveries .............................. Allocation from LGP .............. Provision for credit losses ...... Balance, end of year ................... $ 76,584 $ (2,000) (29,568) 492 - 42,434 87,942 $ 68,600 $ - (22,489) 429 7,406 22,638 76,584 $ 59,406 (12,753) 545 - 21,402 68,600 As described in Note 1. Summary of Significant Accounting Policies, the Company adopted ASU 2016-13 on January 1, 2020, which introduced the CECL methodology for estimating all expected losses over the life of a financial asset. Under the CECL methodology, the allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. For loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis. For all loan segments collectively evaluated, losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable forecast period losses are reverted to long term historical averages. The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. At December 31, 2020, the Company utilized a reasonable and supportable forecast period of twelve months followed by a six-month straight-line reversion to long term averages. The Company uses the discounted cash flow (“DCF”) method to estimate ACL for all loan pools except for commercial revolving lines of credit and credit cards. For all loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment rate as a loss driver. The Company also utilizes and forecasts GDP growth as a second loss driver for its agricultural and consumer loan pools. Consistent forecasts of the loss drivers are used across the loan segments. Upon implementation of CECL on January 1, 2020 and at December 31, 2020, a reasonable and supportable period of twelve months was utilized followed by a six-month straight-line reversion to long term averages. The Company leveraged economic projections from reputable and independent sources to inform its loss driver forecasts. At December 31, 2020 as compared to January 1, 2020, the Company forecasted a significantly higher national unemployment rate as well as a slightly higher national GDP growth rate. The Company expects national unemployment to remain above pre-pandemic levels over the forecast period with an improved national GDP growth rate as the economy comes back on line over the next year. The Company uses loss rate methods to estimate expected credit losses for its commercial revolving lines of credit and credit card pools. The commercial revolving lines of credit pool incorporates a probability of default (“PD”) and loss given default (“LGD”) modeling approach. This approach involves estimating the pool average life and then using historical correlations of default and loss experience over time to calculate the lifetime PD and LGD. These two inputs are then applied to the outstanding pool balance as of December 31, 2020. The credit card pool incorporates a remaining life modeling approach, 82 which utilizes an attrition-based method to estimate the remaining life of the pool. A quarterly average loss rate is then calculated using the Company’s historical loss data. The model reduces the pool balance quarterly on a straight-line basis over the estimated life of the pool. The quarterly loss rate is multiplied by the outstanding balance at each period-end resulting in an estimated loss for each quarter. The sum of estimated loss for all quarters is the total calculated reserve for the pool at December 31, 2020. Each loan pool is adjusted for qualitative factors not inherently considered in the quantitative analyses. The qualitative adjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions. 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. During the third quarter of 2019, the Company recorded a $7.4 million payment resulting from the termination of a Loan Guarantee Program (“LGP”) operated by the State of Alabama. The payment was recorded as an increase to the allowance specifically related to loans formerly enrolled in this program, in accordance with the Company’s established allowance review and evaluation criteria. In general, loans enrolled in the program had a collateral shortfall or other enhanced credit risk. In return for the Company’s acceptance of these higher risk loans, the Company received a guarantee of up to 50% of losses in the event of a borrower’s default. These were loans that would have otherwise not met the Company’s loan underwriting criteria. The program required a 1% fee on the commitment balance at origination. As of December 31, 2020, the Company had 55 loans outstanding totaling $37.2 million that were formerly enrolled in the loan guarantee program. Of this total, $29.7 million were categorized as Pass within the Company's credit quality asset classification, $6.5 million were categorized as Special Mention and $1.0 million were categorized as Substandard. As of December 31, 2019, the Company had 71 loans outstanding totaling $42.2 million that were formerly enrolled in the loan guarantee program. Of this total, $37.0 million were categorized as Pass within the Company's credit quality asset classification, $5.2 million were categorized as Special Mention. 83 Changes in the allowance for credit losses, and allowance for loan losses, segregated by loan type, during the years ended December 31, 2020 and 2019, respectively, are as follows: Commercial, financial and Real estate - Real estate - agricultural construction mortgage Consumer Total (In Thousands) Year Ended December 31, 2020 Allowance for credit losses: Balance at December 31, 2019 .......................... $ Impact of adopting ASC 326 ......................... Charge-offs .................................................... Recoveries ..................................................... Provision ........................................................ Balance at December 31, 2020 .......................... $ 43,666 $ (8,211) (23,936) 252 24,599 36,370 $ 2,768 $ 6,212 (1,032) 32 8,077 16,057 $ 29,653 $ (966) (4,397) 140 9,292 33,722 $ 497 $ 965 (203) 68 466 1,793 $ 76,584 (2,000) (29,568) 492 42,434 87,942 Year Ended December 31, 2019 Allowance for loan losses: Balance at December 31, 2018 .......................... $ Charge-offs .................................................... Recoveries ..................................................... Allocation from LGP ..................................... Provision ........................................................ Balance at December 31, 2019 .......................... $ 39,016 $ (15,015) 306 4,905 14,454 43,666 $ 3,522 $ - 3 115 (872) 2,768 $ 25,508 $ (6,882) 13 2,386 8,628 29,653 $ 554 $ (592) 107 - 428 497 $ 68,600 (22,489) 429 7,406 22,638 76,584 The following table details the allowance for loan losses and recorded investment in loans by impairment evaluation method as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13: Commercial, financial and Real estate - Real estate - agricultural construction mortgage Consumer Total Individually Evaluated for Impairment ................ $ Collectively Evaluated for Impairment ................ 6,085 $ 37,581 (In Thousands) December 31, 2019 3,633 $ 86 $ 26,020 2,682 - $ 497 9,804 66,780 Loans: Ending Balance .................................................... $ 2,696,210 $ 521,392 $ 3,979,060 $ Individually Evaluated for Impairment ................ 17,985 20,843 517,072 3,961,075 Collectively Evaluated for Impairment ................ 2,675,367 4,320 64,789 $ 7,261,451 43,148 64,789 7,218,303 - We maintain an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet within other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. The allowance for credit losses on unfunded commitments was $2.2 million at December 31, 2020. Prior to January 1, 2020, we calculated allowance for losses on unfunded loan commitments using an incurred losses methodology. At December 31, 2019, the allowance for unfunded commitments was $500,000. 84 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 credit losses using historical losses adjusted for current economic conditions defined as follows: (cid:404) 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. (cid:404) 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. (cid:404) Substandard – loans that exhibit well-defined weakness or weaknesses that presently jeopardize debt repayment. These loans are characterized by the distinct possibility that the institution will sustain some loss if the weaknesses are not corrected. (cid:404) Doubtful – loans that have all the weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. 85 The table below presents loan balances classified by credit quality indicator, loan type and based on year of origination as of December 31, 2020: December 31, 2020 2020 2019 2018 2017 2016 Prior (In Thousands) Revolving Loans Total Commercial, financial and agricultural Pass .............................. $ 1,260,341 $ 2,551 Special Mention ........... 569 Substandard .................. - Doubtful ....................... Total Commercial, financial and agricultural ................... $ 1,263,461 $ Real estate - construction Pass .............................. $ Special Mention ........... Substandard .................. Doubtful ....................... Total Real estate - 230,931 $ - - - 332,690 $ 229,838 $ 169,616 $ 89,893 $ 137,021 $ 281 2,038 - 1,404 10,639 - 253 5,447 - 163 963 - 10 617 - 988,093 $ 3,207,492 19,610 14,948 68,798 48,525 - - 344,733 $ 230,465 $ 175,316 $ 91,019 $ 139,340 $ 1,051,566 $ 3,295,900 222,357 $ 53,981 $ 16,361 $ - - - - - - - - - 7,677 $ 13,816 $ - 235 - - - - 48,256 $ - - - 593,379 - 235 - construction .................. $ 230,931 $ 222,357 $ 53,981 $ 16,361 $ 7,677 $ 14,051 $ 48,256 $ 593,614 Owner-occupied commercial Pass .............................. $ Special Mention ........... Substandard .................. Doubtful ....................... Total Owner-occupied 351,808 $ - - - 271,645 $ 221,513 $ 198,935 $ 158,531 $ 417,743 $ 1,873 6,524 1,962 780 - - 543 - - - 12 - - - - 61,119 $ 1,681,294 9,140 2,994 - 200 240 - commercial ................... $ 351,808 $ 271,645 $ 221,525 $ 206,239 $ 159,074 $ 421,578 $ 61,559 $ 1,693,428 1-4 family mortgage Pass .............................. $ Special Mention ........... Substandard .................. Doubtful ....................... Total 1-4 family mortgage $ 179,314 $ 508 350 - 180,172 $ Other mortgage Pass .............................. $ Special Mention ........... Substandard .................. Doubtful ....................... Total Other mortgage ....... $ 470,086 $ - - - 470,086 $ Consumer 111,016 $ 70,381 $ 60,774 $ 27,985 $ 44,111 $ - - - 111,142 $ 70,381 $ 61,114 $ 28,684 $ 44,111 $ 481 218 - 105 235 - - 126 - - - - 470,092 $ 250,945 $ 368,283 $ 180,244 $ 272,722 $ 8,566 2,793 - 8,552 - - 470,142 $ 255,534 $ 379,628 $ 180,785 $ 281,288 $ - 4,589 - 541 - - - 50 - 212,616 $ 1,112 2,360 - 216,088 $ 706,197 2,206 3,289 - 711,692 68,721 $ 2,081,093 11,900 13,191 - 68,721 $ 2,106,184 - - - Pass .............................. $ Special Mention ........... Substandard .................. Doubtful ....................... Total Consumer ................ $ 20,410 $ - - - 20,410 $ 4,421 $ - - - 4,421 $ 1,551 $ 15 - - 1,566 $ 1,671 $ - - - 1,671 $ 1,031 $ 31 - - 1,062 $ 3,615 $ - - - 3,615 $ 32,125 $ - - - 32,125 $ 64,824 46 - - 64,870 Total Loans ...................... Pass .............................. $ 2,512,890 $ 1,412,221 $ 828,209 $ 815,640 $ 465,361 $ 889,028 $ 1,410,930 $ 8,334,279 42,902 Special Mention ........... 25 88,507 Substandard .................. 5,218 - Doubtful ....................... - Total Loans ...................... $ 2,516,868 $ 1,424,440 $ 833,452 $ 840,329 $ 468,301 $ 903,983 $ 1,478,315 $ 8,465,688 9,675 15,014 - 16,260 51,125 - 10,720 4,235 - 1,404 10,815 - 3,059 919 - 1,759 1,181 - 86 Loans by credit quality indicator as of December 31, 2019 were as follows: December 31, 2019 Special Mention Substandard Doubtful Pass Total (In Thousands) Commercial, financial and agricultural ..................................... $ 2,629,487 $ 512,373 Real estate - construction ................... Real estate - mortgage: Owner-occupied commercial ......... 1,555,283 1-4 family mortgage ....................... 639,959 Other mortgage .............................. 1,735,869 Total real estate - mortgage ............... 3,931,111 64,789 Consumer .......................................... Total ........................................... $ 7,137,760 $ 46,176 $ 4,731 20,547 $ 4,288 - $ 2,696,210 521,392 - 18,240 2,787 10,018 31,045 - 81,952 $ 13,955 1,442 1,507 16,904 - 41,739 $ - 1,587,478 - 644,188 - 1,747,394 - 3,979,060 64,789 - - $ 7,261,451 Nonperforming loans include nonaccrual loans and loans 90 or more days past due and still accruing. Loans by performance status as of December 31, 2020 and 2019 are as follows: December 31, 2020 Performing Nonperforming Total (In Thousands) Commercial, financial and agricultural ...................................... $ 3,284,180 $ 593,380 Real estate - construction .................... Real estate - mortgage: Owner-occupied commercial .......... 1-4 family mortgage ........................ Other mortgage ............................... Total real estate - mortgage ................ Consumer............................................ 1,692,169 710,817 2,101,379 4,504,365 64,809 Total ............................................ $ 8,446,734 $ 11,720 $ 3,295,900 593,614 234 1,259 875 4,805 6,939 61 1,693,428 711,692 2,106,184 4,511,304 64,870 18,954 $ 8,465,688 December 31, 2019 Performing Nonperforming Total (In Thousands) Commercial, financial and agricultural ...................................... $ 2,681,280 $ 519,803 Real estate - construction .................... Real estate - mortgage: Owner-occupied commercial .......... 1-4 family mortgage ........................ Other mortgage ............................... Total real estate - mortgage ................ Consumer............................................ 1,576,652 641,875 1,740,963 3,959,490 64,766 Total ................................................ $ 7,225,339 $ 14,930 $ 2,696,210 521,392 1,589 10,826 2,313 6,431 19,570 23 1,587,478 644,188 1,747,394 3,979,060 64,789 36,112 $ 7,261,451 87 Loans by past due status as of December 31, 2020 and 2019 are as follows: December 31, 2020 Past Due Status (Accruing Loans) 30-59 Days 60-89 Days 90+ Days Total Past Due Total Nonaccrual Current Total Loans Nonaccrual With No ACL Commercial, financial and agricultural .......... $ Real estate - (In Thousands) 92 $ 1,738 $ 11 $ 1,841 $ 11,709 $3,282,350 $3,295,900 $ 5,101 construction ........ - - - - 234 593,380 593,614 - Real estate - mortgage: Owner-occupied commercial ...... - 995 - 995 1,259 1,691,174 1,693,428 467 1-4 family mortgage .......... Other mortgage ... Total real estate - 61 18 1,073 - 104 4,805 1,238 4,823 771 709,683 711,692 - 2,101,361 2,106,184 mortgage .......... Consumer ............... Total ....................... $ 79 64 235 $ 2,068 13 3,819 $ 4,909 61 4,981 $ 7,056 138 9,035 $ 2,030 4,502,218 4,511,304 64,870 64,732 13,973 $8,442,680 $8,465,688 $ - December 31, 2019 Past Due Status (Accruing Loans) 512 - 979 - 6,080 30-59 Days 60-89 Days 90+ Days Total Past Due Total Nonaccrual Current Total Loans Nonaccrual With No ACL Commercial, financial and agricultural .......... $ Real estate - (In Thousands) 3,135 $ 344 $ 201 $ 3,680 $ 14,729 $2,677,801 $2,696,210 $ 1,572 construction ........ 830 - - 830 1,589 518,973 521,392 1,350 Real estate - mortgage: Owner-occupied commercial ...... 917 7,242 - 8,159 10,826 1,568,493 1,587,478 245 1-4 family mortgage .......... Other mortgage ... 1,638 - 567 - 873 4,924 3,078 4,924 1,440 639,670 644,188 1,507 1,740,963 1,747,394 Total real estate - mortgage ............. Consumer ............... Total ....................... $ 2,555 35 6,555 $ 7,809 25 8,178 $ 5,797 16,161 83 6,021 $ 20,754 $ 23 13,773 3,949,126 3,979,060 64,789 64,706 30,091 $7,210,606 $7,261,451 $ - 287 - 532 - 3,454 There was no interest earned on nonaccrual loans for the years ended December 31, 2020 and 2019. 88 Loans that no longer share similar risk characteristics with the collectively evaluated pools are estimated on an individual basis. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent gross loans held for investment by collateral type as follows: Accounts Real Estate Receivable Equipment Other Total ACL Allocation (In Thousands) Commercial, financial and agricultural .......................... $ Real estate - construction ....... Real estate - mortgage: Owner-occupied commercial ......................... 1-4 family mortgage ........... Other mortgage ................... Total ....................................... $ 19,373 $ 235 27,952 $ - 16,877 $ - 4,594 $ - 68,796 $ 235 7,142 1 2,012 3,264 13,191 38,075 $ 971 - - 28,923 $ - - - 16,877 $ 12 24 - 4,630 $ 2,995 3,288 13,191 88,505 $ 499 48 - 7,690 Prior to the adoption of ASU 2016-13, a loan was considered impaired when it was probable that the Company would be unable to collect all principal and interest payments due according to the contractual terms of the loan agreement. Individually identified impaired loans were 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 was collateral dependent. If the recorded investment in the impaired loan exceeded the measure of fair value, a valuation allowance was established as part of the allowance for loan losses. Changes to the valuation allowance were recorded as a component of the provision for loan losses. 89 The following table presents details of the Company’s impaired loans as of December 31, 2019. Loans which have been fully charged off do not appear in the tables. December 31, 2019 Unpaid Recorded Principal Investment Balance Average Recorded Recognized Related Allowance Investment in Period Interest Income With no allowance recorded: Commercial, financial and agricultural ........ $ Real estate - construction ............................. Real estate - mortgage: Owner-occupied commercial ................... 1-4 family mortgage ................................. Other mortgage ........................................ Total real estate - mortgage ......................... Consumer ..................................................... Total with no allowance recorded ................ With an allowance recorded: Commercial, financial and agricultural ........ Real estate - construction ............................. Real estate - mortgage: Owner-occupied commercial ................... 1-4 family mortgage ................................. Other mortgage ........................................ Total real estate - mortgage ......................... Consumer ..................................................... Total with allowance recorded ..................... Total Impaired Loans: Commercial, financial and agricultural ........ Real estate - construction ............................. Real estate - mortgage: Owner-occupied commercial ................... 1-4 family mortgage ................................. Other mortgage ........................................ Total real estate - mortgage ......................... Consumer ..................................................... Total impaired loans .................................... $ (In Thousands) 9,015 $ 2,731 10,563 $ 2,735 - $ - 11,284 $ 2,063 7,150 287 - 7,437 - 19,183 7,246 287 - 7,533 - 20,831 - - - - - - 7,548 289 - 7,837 - 21,184 11,828 1,589 19,307 1,589 6,085 86 19,714 1,614 7,888 1,153 1,507 10,548 - 23,965 11,028 1,153 1,507 13,688 - 34,584 2,456 176 1,001 3,633 - 9,804 13,627 1,157 1,468 16,252 - 37,580 20,843 4,320 29,870 4,324 6,085 86 30,998 3,677 15,038 1,440 1,507 17,985 - 43,148 $ 18,274 1,440 1,507 21,221 - 55,415 $ 2,456 176 1,001 3,633 - 9,804 $ 21,175 1,446 1,468 24,089 - 58,764 $ 562 126 618 2 - 620 - 1,308 395 27 301 1 21 323 - 745 957 153 919 3 21 943 - 2,053 On March 22, 2020, the Interagency Statement was issued by banking regulators that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. In accordance with such guidance, the Bank is offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. As of December 31, 2020, there were 15 loans outstanding totaling $2.8 million that have payment deferrals in connection with the COVID-19 relief provided by the CARES Act. All of these remaining deferrals were principal and interest deferrals. The CARES Act precluded all of the ServisFirst COVID-19 loan modifications from being classified as a TDR as of December 31, 2020. 90 Troubled Debt Restructurings (“TDR”) at December 31, 2020 and 2019 totaled $1.5 million and $3.4 million, respectively. 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, 2020 Pre- Post- Modification Modification Outstanding Recorded Investment Outstanding Recorded Investment Number of Contracts Troubled Debt Restructurings Commercial, financial and agricultural ............................... Real estate - construction ............. Real estate - mortgage: Owner-occupied commercial ... 1-4 family mortgage ................. Other mortgage ........................ Total real estate - mortgage ......... Consumer ..................................... (In Thousands) 2 $ 1 1 - - 1 - 4 $ 564 $ 357 611 - - 611 - 1,532 $ 564 357 611 - - 611 - 1,532 Year ended December 31, 2019 Pre- Post- Modification Modification Outstanding Outstanding Recorded Investment Recorded Investment Number of Contracts Commercial, financial and agricultural ..................................... Real estate - construction .................. Real estate - mortgage: Owner-occupied commercial ......... 1-4 family mortgage ...................... Other mortgage .............................. Total real estate - mortgage ............... Consumer .......................................... 3 $ - - - - - - 3 $ 3,415 $ - - - - - - 3,415 $ 3,415 - - - - - - 3,415 91 The following table presents TDRs by portfolio segment which defaulted during the years ended December 31, 2020 and 2019, 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, 2020 2019 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 ............................................... $ - $ - - - - - - - $ 491 - 726 - - 726 - 1,217 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, 2020 and 2019 are as follows: Years Ended December 31, 2020 2019 Balance, beginning of year ....................... $ Additions ............................................... Advances ............................................... Repayments ........................................... Removal ................................................ Balance, end of year .................................. $ (In Thousands) 24,681 $ - 41,183 (28,895) - 36,969 $ 5,428 17,794 4,861 (3,400) (2) 24,681 NOTE 4. FORECLOSED PROPERTIES Other real estate and certain other assets acquired in foreclosure are carried at the lower of the recorded investment in the loan or fair value less estimated costs to sell the property. An analysis of foreclosed properties for the years ended December 31, 2020, 2019 and 2018 follows: 2020 2019 (In Thousands) 2018 Balance at beginning of year ................................. $ Transfers from loans and capitalized expenses ..... Foreclosed properties sold ..................................... Write downs and partial liquidations ..................... Balance at end of year ........................................... $ 8,178 $ 2,985 (2,813 ) (1,853 ) 6,497 $ 5,169 $ 4,611 (1,437 ) (165 ) 8,178 $ 6,701 3,087 (3,934) (685) 5,169 92 NOTE 5. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: Land ...................................................................... $ Building ................................................................ Furniture and equipment ....................................... Leasehold improvements ...................................... Construction in progress ....................................... Total premises and equipment, cost .................. Accumulated depreciation ..................................... Total premises and equipment, net .................... $ December 31, 2020 2019 (In Thousands) 5,830 $ 36,365 27,466 10,789 867 81,317 (26,348) 54,969 $ 5,830 36,365 26,153 10,681 23 79,052 (22,556) 56,496 The provisions for depreciation charged to occupancy and equipment expense for the years ended December 31, 2020, 2019 and 2018 were $3.8 million, $3.7 million, and $3.4 million, respectively. NOTE 6. LEASES The Company leases space under non-cancelable operating leases for several of its banking offices and certain office equipment. The Company reports its right-of-use asset in other assets and its lease liabilities in other liabilities in its Consolidated Balance Sheet. Supplemental balance sheet information related to operating leases is as follows: Right-of-use assets ....................................... $ Lease liabilities ............................................. $ Weighted average remaining lease term ....... Weighted average discount rate .................... December 31, 2020 10,452 10,645 4.9 3.25% December 31, 2019 13,292 $ 13,350 $ 5.5 3.18% Lease costs during the year ended December 31, 2020 were as follows (in thousands): Operating lease cost .................................... $ Short-term lease cost ................................... Variable lease cost ...................................... Sublease income ......................................... Net lease cost ........................................... $ 2020 2019 3,476 $ 45 151 (93) 3,579 $ 3,421 65 154 (70) 3,570 The following table reconciles future undiscounted lease payments due under non-cancelable leases to the aggregate lease liability as of December 31, 2020: 2021 ............................................................................. $ 2022 ............................................................................. 2023 ............................................................................. 2024 ............................................................................. 2025 ............................................................................. Thereafter ..................................................................... Total lease payments ................................................ $ Less: imputed interest ............................................... $ Present value of operating lease liabilities ................... $ (In Thousands) 3,024 2,508 2,453 2,052 1,129 2,504 13,670 (3,024) 10,646 93 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 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 and therefore the partnerships are not consolidated in our financial statements. The amount of recorded investment in these partnerships as of December 31, 2020 and 2019 was $4.0 million and $16.6 million, respectively. None of this recorded investment was included in loans at December 31, 2020 and $12.1 million was included in loans at December 31, 2019. The company exited all three of its Alabama New Market Tax Credits investments during 2020 which resulted in the pay-off of the related recorded investment in loans. The remaining amounts are included in other assets. NOTE 8. DEPOSITS Deposits at December 31, 2020 and 2019 were as follows: December 31, 2020 2019 (In Thousands) Noninterest-bearing demand ...................... $ Interest-bearing checking ........................... Savings ....................................................... Time deposits, $250,000 and under ............ Time deposits, over $250,000 .................... Brokered time deposits ............................... $ 2,788,772 $ 6,276,910 89,418 273,301 497,323 50,000 9,975,724 $ 1,749,879 4,986,193 65,808 267,221 461,332 - 7,530,433 The scheduled maturities of time deposits at December 31, 2020 were as follows: 2021 .......................................................... $ 2022 .......................................................... 2023 .......................................................... 2024 .......................................................... 2025 .......................................................... Thereafter ................................................. Total ...................................................... $ (In Thousands) 526,890 146,765 114,470 24,062 5,363 75 817,625 At December 31, 2020 and 2019, overdraft deposits reclassified to loans were $1.4 million and $4.2 million, respectively. 94 NOTE 9. FEDERAL FUNDS PURCHASED At December 31, 2020, the Company had $851.5 million in federal funds purchased from its correspondent banks that are clients of its correspondent banking unit, compared to $385.7 million at December 31, 2019. Rates paid on these funds were between 0.15% and 0.25% as of December 31, 2020 and 1.60% and 1.67% as of December 31, 2019. At December 31, 2020, the Company had available lines of credit totaling approximately $923.0 million with various financial institutions for borrowing on a short-term basis, compared to $767.0 million at December 31, 2019. At December 31, 2020, the Company had no outstanding borrowings from these lines. NOTE 10. OTHER BORROWINGS Other borrowings are comprised of: (cid:404) $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. (cid:404) $34.75 million of the Company’s 4% Subordinated Notes due October 21, 2030, which were issued in a private placement in October 2020 and pay interest semi-annually. The Notes may not be prepaid by the Company prior to October 21, 2025. Debt is reported net of unamortized issuance costs of $64,000 and $47,000 as of December 31, 2020 and 2019, respectively. NOTE 11. SF INTERMEDIATE HOLDING COMPANY, INC., SF HOLDING 1, INC., SF REALTY 1, INC., SF FLA REALTY, INC., SF GA REALTY, INC. AND SF TN REALTY, INC. In January 2012, the Company formed SF Holding 1, Inc., an Alabama corporation, and its subsidiary, SF Realty 1, Inc., an Alabama corporation. In September 2013, the Company formed SF FLA Realty, Inc., an Alabama corporation and a subsidiary of SF Holding 1, Inc. In May 2014, the Company formed SF GA Realty, Inc., an Alabama corporation and a subsidiary of SF Holding 1, Inc. In February 2016, the Company formed SF TN Realty, Inc., an Alabama corporation and a subsidiary of SF Holding 1, Inc. Also in February 2016, the Company formed SF Intermediate Holding Company, Inc., an Alabama corporation. Immediately following the formation of SF Intermediate Holding Company, Inc., ServisFirst Bank assigned all of the outstanding capital stock of SF Holding 1, Inc. to SF Intermediate Holding Company, Inc., such that SF Holding 1, Inc. now is a wholly-owned first tier subsidiary of SF Intermediate Holding Company, Inc. SF Realty 1, SF FLA Realty, SF GA Realty and SF TN Realty all hold and manage participations in residential mortgages and commercial real estate loans originated by ServisFirst Bank and have elected to be treated as real estate investment trusts (“REIT”) for U.S. income tax purposes. SF Intermediate Holding Company, Inc., SF Holding 1, Inc., SF Realty 1, Inc., SF FLA Realty, Inc., SF GA Realty, Inc. and SF TN Realty, Inc. are all consolidated into the Company. NOTE 12. DERIVATIVES The Company periodically enters into derivative contracts to manage exposures to movements in interest rates. The Company purchased an interest rate cap in May of 2020 to limit exposures to increases in interest rates. The interest rate cap is not designated as a hedging instrument but rather as a stand-alone derivative. The interest rate cap has an original term of 3 years, a notional amount of $300 million and is tied to the one-month LIBOR rate with a strike rate of 0.50%. The fair value of the interest rate cap is carried on the balance sheet in other assets and the change in fair value is recognized in noninterest income each quarter. At December 31, 2020, the interest rate cap had a fair value of $139,000 and remaining term of 2.4 years. 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, 2020 and December 31, 2019 were not material. 95 NOTE 13. EMPLOYEE AND DIRECTOR BENEFITS The Company has a stock incentive plan, which is described below. The compensation cost that has been charged against income for the plan was approximately $1,332,000, $1,100,000 and $851,000 for the years ended December 31, 2020, 2019 and 2018, respectively. Stock Incentive Plan On March 23, 2009, the Company’s board of directors adopted the 2009 Stock Incentive Plan (the “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 Plan was amended in order to allow the Company to grant stock options for up to 5,550,000 shares of common stock. The 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, 2020, there are a total of 3,186,865 shares available to be granted under the Plan. 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. There were no grants of stock options during the year ended December 31, 2020. The assumptions used in determining the fair value of 2019 and 2018 stock option grants were as follows: Expected price volatility ....................................... Expected dividend yield ........................................ Expected term (in years) ....................................... Risk-free rate ......................................................... 40.00% 1.76% 7 1.96% 35.39% 1.24% 6 2.90% 2019 2018 The weighted average grant-date fair value of options granted during the years ended December 31, 2019 and 2018 was $12.40 and $12.76, respectively. 96 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, 2020: Outstanding at beginning of year ......... Exercised .......................................... Forfeited ........................................... Outstanding at end of year ................... 965,248 $ (306,300) (18,000) 640,950 $ 15.19 11.38 30.79 18.14 4.9 $ 2.9 6.1 4.6 $ 21,911 8,854 171 16,981 Exercisable at December 31, 2020: ......... 182,200 $ 12.86 3.5 $ 4,998 Year Ended December 31, 2019: Outstanding at beginning of year ......... Granted ............................................. Exercised .......................................... Forfeited ........................................... Outstanding at end of year ................... 1,238,748 $ 35,500 (288,800) (20,200) 965,248 $ 13.02 34.06 7.56 24.88 15.19 5.2 $ 9.6 2.5 6.2 4.9 $ 23,355 129 8,534 259 21,911 Exercisable at December 31, 2019: ......... 278,500 $ 8.28 3.0 $ 8,355 Year Ended December 31, 2018: Outstanding at beginning of year ......... Granted ............................................. Exercised .......................................... Forfeited ........................................... Outstanding at end of year ................... 1,666,834 $ 42,250 (414,336) (56,000) 1,238,748 $ 10.68 37.21 5.73 15.40 13.02 5.5 $ 9.6 2.8 6.2 5.2 $ 51,377 - 10,832 912 23,355 Exercisable at December 31, 2018: ......... 510,100 $ 7.08 3.5 $ 12,645 Exercisable options at December 31, 2020 were as follows: Range of Exercise Price Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years) - 6.00 $ 5.00 15.00 - 16.00 17.00 - 18.00 18.00 - 19.00 38.00 - 39.00 56,000 $ 89,200 26,000 10,000 1,000 182,200 $ 5.36 15.39 17.16 18.57 38.06 12.86 Aggregate Intrinsic Value (In Thousands) 1,956 2,221 602 217 2 4,998 2.0 $ 4.1 4.3 4.5 6.1 3.5 $ As of December 31, 2020, there was $691,000 of total unrecognized compensation cost related to non-vested stock options. As of December 31, 2020, non-vested stock options had a weighted average remaining time to vest of 0.7 years. 97 Restricted Stock The Company periodically grants restricted stock awards that vest upon service conditions. Dividend payments are made during the vesting period. The following table summarizes restricted stock activity: Weighted Average Grant Date Fair Value Shares Year Ended December 31, 2020: Non-vested at beginning of year ............................. Granted ................................................................ Vested ................................................................. Forfeited .............................................................. Non-vested at end of year ....................................... Year Ended December 31, 2019: Non-vested at beginning of year ............................. Granted ................................................................ Vested ................................................................. Forfeited .............................................................. Non-vested at end of year ....................................... Year Ended December 31, 2018: Non-vested at beginning of year ............................. Granted ................................................................ Vested ................................................................. Forfeited .............................................................. Non-vested at end of year ....................................... 71,290 $ 33,695 (20,178) (500) 84,307 $ 42,576 $ 36,664 (5,450) (2,500) 71,290 $ 120,676 $ 16,350 (93,200) (1,250) 42,576 $ 32.24 33.91 23.76 34.09 34.92 29.96 33.60 20.92 38.17 32.24 10.29 39.84 6.07 41.21 29.96 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, 2020, there was $1.7 million of total unrecognized compensation cost related to non-vested restricted stock. As of December 31, 2020, non-vested restricted stock had a weighted average remaining time to vest of 2.6 years. 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 $2.0 million, $1.7 million and $1.5 million for 2020, 2019 and 2018, respectively. NOTE 14. 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 $382.5 million in dividends as of December 31, 2020. 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. 98 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, 2020, that the Bank meets all capital adequacy requirements to which it is subject. In July 2013, the Federal Reserve announced its approval of a final rule to implement the regulatory capital reforms developed by the Basel Committee on Banking Supervision (“Basel III”), among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rules became effective January 1, 2015, subject to a phase-in period for certain aspects of the new rules. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization will also be required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of common equity Tier 1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The capital conservation buffer was phased in incrementally over time, beginning January 1, 2016 and becoming fully effective on January 1, 2019, and ultimately consists of an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets. At December 31, 2020 the Company and Bank exceeded such requirement. As of December 31, 2020, 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, 2020. 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, 2020: CET I Capital to Risk Weighted Assets: Consolidated......................... $ ServisFirst Bank ................... Tier I Capital to Risk Weighted Assets: Consolidated......................... ServisFirst Bank ................... Total Capital to Risk Weighted Assets: Consolidated......................... ServisFirst Bank ................... Tier I Capital to Average Assets: Consolidated......................... ServisFirst Bank ................... As of December 31, 2019: CET I Capital to Risk Weighted Assets: Consolidated......................... $ ServisFirst Bank ................... Tier I Capital to Risk Weighted Assets: Consolidated......................... ServisFirst Bank ................... Total Capital to Risk Weighted Assets: Consolidated......................... ServisFirst Bank ................... Tier I Capital to Average Assets: Consolidated......................... ServisFirst Bank ................... 958,300 1,018,031 10.50% $ 11.15% 410,816 410,766 4.50% 4.50% $ N/A 593,328 958,800 1,018,531 10.50% 11.16% 547,755 547,688 6.00% 6.00% N/A 730,250 N/A 6.50% N/A 8.00% 1,113,690 1,108,673 12.20% 12.15% 730,340 730,250 8.00% 8.00% N/A 912,813 N/A 10.00% 958,800 1,018,531 8.23% 8.75% 465,980 465,448 4.00% 4.00% N/A 581,810 N/A 5.00% 822,396 885,172 10.50% $ 11.30% 342,283 342,269 4.50% 4.50% $ N/A 494,389 822,896 885,674 10.50% 11.31% 456,377 456,359 6.00% 6.00% N/A 608,479 N/A 6.50% N/A 8.00% 964,683 962,758 12.31% 12.29% 608,502 608,479 8.00% 8.00% N/A 760,598 N/A 10.00% 822,896 885,674 9.13% 9.83% 356,012 355,998 4.00% 4.00% N/A 444,997 N/A 5.00% 99 NOTE 15. OTHER OPERATING INCOME AND EXPENSES The major components of other operating income and expense included in noninterest income and noninterest expense are as follows: 2020 Years Ended December 31, 2019 (In Thousands) 2018 Other Operating Income ATM fee income .................................................... $ Write-down in interest rate cap .............................. Gain (loss) on sale of fixed assets .......................... Other ...................................................................... Total other operating income ............................. $ Other Operating Expenses Other loan expenses ............................................... Customer and public relations ............................... 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 ........................... $ 1,747 $ (656) 9 515 1,615 $ 4,886 1,052 528 346 541 506 338 495 463 632 278 1,662 3,764 15,490 $ 1,477 $ - 5 261 1,743 $ 3,476 2,545 640 746 1,131 837 581 572 577 545 393 36 4,136 16,214 $ 876 - - 363 1,239 2,711 2,182 733 750 919 859 557 550 464 467 439 519 3,477 14,627 NOTE 16. INCOME TAXES The components of income tax expense are as follows: Current tax expense: Federal ...................................................... $ State .......................................................... Total current tax expense ....................... Deferred tax (benefit) expense: Federal ...................................................... State .......................................................... Total deferred tax (benefit) expense ...... Total income tax expense ................... $ 2020 Year Ended December 31, 2019 (In Thousands) 2018 50,016 $ 4,350 54,366 (9,342) (385) (9,727) 44,639 $ 36,683 $ 2,012 38,695 (166) (911) (1,077) 37,618 $ 43,207 2,950 46,157 (12,636) (1,619) (14,255) 31,902 100 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: Year Ended December 31, 2020 21.00% 1.51% (0.17%) (0.62%) (0.61%) (0.26%) (0.01%) 20.84% 21.00% 0.44% (0.25%) (0.42%) (0.75%) (0.09%) 0.20% 20.13% 21.00% 0.48% (0.39%) (0.39%) (1.84%) (0.07%) 0.10% 18.89% % of Pre-tax Earnings Amount (In Thousands) 44,984 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 ...................................... $ 3,230 (354) (1,325) (1,306) (563) (27) 44,639 Year Ended December 31, 2019 % of Pre-tax Earnings Amount (In Thousands) 39,241 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 ...................................... $ 822 (461) (787) (1,405) (170) 378 37,618 Year Ended December 31, 2018 % of Pre-tax Earnings Amount (In Thousands) 35,457 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 ...................................... $ 808 (655) (657) (3,118) (113) 180 31,902 101 The components of net deferred tax asset are as follows: December 31, 2020 2019 (In Thousands) Deferred tax assets: Allowance for credit losses .......................................................................................................... $ Other real estate owned................................................................................................................ Nonqualified equity awards ......................................................................................................... Nonaccrual interest ...................................................................................................................... State tax credits ............................................................................................................................ Investments .................................................................................................................................. Deferred loan fees ........................................................................................................................ Reserve for unfunded commitments ............................................................................................ Accrued bonus ............................................................................................................................. Capital loss carryforward ............................................................................................................. Lease liability .............................................................................................................................. Deferred revenue ......................................................................................................................... Differences in amounts reflected in financial statements and income tax basis of assets 21,600 $ 728 873 322 6,091 - 5,875 600 2,594 1,480 2,671 42 acquired and liabilities assumed in acquisition ........................................................................ Other deferred tax assets .............................................................................................................. Total deferred tax assets ........................................................................................................... - 885 43,761 Deferred tax liabilities: Net unrealized gain on securities available for sale ..................................................................... Depreciation ................................................................................................................................. Prepaid expenses .......................................................................................................................... Investments .................................................................................................................................. Right-of-use assets and other leasing transactions ....................................................................... Acquired intangible assets ........................................................................................................... Total deferred tax liabilities ..................................................................................................... Net deferred tax assets ..................................................................................................................... $ 5,360 4,011 543 79 2,622 74 12,689 31,072 $ 17,733 225 953 231 7,787 1,119 891 183 2,029 - - - 121 487 31,759 1,515 4,021 516 - - 141 6,193 25,566 The Company believes its net deferred tax asset is recoverable as of December 31, 2020 based on the expectation of future taxable income and other relevant considerations. 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. 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, 2017 through 2020. The Company is also currently open to audit by several state departments of revenue for the years ended December 31, 2017 through 2020. 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 $152,000 and $135,000 as of December 31, 2020 and 2019, respectively. Unrecognized income tax benefits as of December 31, 2020 and December 31, 2019, that, if recognized, would impact the effective income tax rate totaled $3,238,000 and $2,683,000 (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. 102 The following table presents a summary of the changes during 2020, 2019 and 2018 in the amount of unrecognized tax benefits that are included in the consolidated balance sheets. Balance, beginning of year .................................... $ Increases related to prior year tax positions ....... Decreases related to prior year tax positions ...... Increases related to current year tax positions .... Settlements ......................................................... Lapse of statute .................................................. Balance, end of year ............................................... $ 2020 2019 (In Thousands) 2018 2,683 $ 997 - - - (442 ) 3,238 $ 2,133 $ 998 - - - (448) 2,683 $ 1,779 799 - - - (445) 2,133 NOTE 17. COMMITMENTS AND CONTINGENCIES Loan Commitments The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, credit card arrangements, and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. A summary of the Company’s approximate commitments and contingent liabilities is as follows: Commitments to extend credit ......................... $ Credit card arrangements ................................. Standby letters of credit and financial 2020 2019 (In Thousands) 2018 2,606,258 $ 286,128 2,303,788 $ 248,617 1,985,801 173,613 guarantees ..................................................... Total .............................................................. $ 66,208 2,958,594 $ 48,394 2,600,799 $ 40,590 2,200,004 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 18. 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. 103 NOTE 19. 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. The difference in earnings per share under the two-class method was not significant at December 31, 2020, 2019 and 2018. 2020 Year Ended December 31, 2019 (Dollar Amounts In Thousands Except Per Share Amounts) 2018 Earnings Per Share Weighted average common shares outstanding ............................... Net income available to common stockholders ............................... $ Basic earnings per common share ................................................... $ 53,844,482 169,506 $ 3.15 53,530,766 149,180 $ 2.79 $ 53,172,695 136,877 2.57 Weighted average common shares outstanding ............................... Dilutive effects of assumed conversions and exercise of stock 53,844,482 53,530,766 53,172,695 options and warrants .................................................................... 374,555 572,308 997,184 Weighted average common and dilutive potential common shares outstanding ................................................................................... Net income available to common stockholders ............................... $ Diluted earnings per common share ................................................ $ 54,219,037 169,506 $ 3.13 $ 54,103,074 149,180 $ 2.76 $ 54,169,879 136,877 2.53 NOTE 20. RELATED PARTY TRANSACTIONS As more fully described in Note 3, the Company had outstanding loan balances to related parties as of December 31, 2020 and 2019 in the amount of $37.0 million and $24.7 million, respectively. Related party deposits totaled $12.8 million and $5.9 million at December 31, 2020 and 2019, respectively. NOTE 21. FAIR VALUE MEASUREMENT Measurement of fair value under U.S. GAAP establishes a hierarchy that prioritizes observable and unobservable inputs used to measure fair value, as of the measurement date, into three broad levels, which are described below: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and also considers counterparty credit risk in its assessment of fair value. Debt Securities. Where quoted prices are available in an active market, securities are classified within Level 1 of the hierarchy. Level 1 securities include highly liquid government securities such as U.S. Treasuries and exchange-traded equity securities. For securities traded in secondary markets for which quoted market prices are not available, the Company generally relies on pricing services provided by independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing service regarding their methods of price discovery. Securities measured with these techniques are classified within Level 2 of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow calculations using inputs observable in the market where available. Examples include U.S. government agency securities, mortgage-backed 104 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. Derivative instruments. The fair values of derivatives are determined based on a valuation pricing model using readily available observable market parameters such as interest rate curves, adjusted for counterparty credit risk. These measurements are classified as level 2 within the valuation hierarchy. Loans Individually Evaluated. Loans individually evaluated are measured and reported at fair value when full payment under the loan terms is not probable. Loans individually evaluated 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. Loans individually evaluated are subject to nonrecurring fair value adjustment upon initial recognition or subsequent individually evaluation. A portion of the allowance for credit losses is allocated to loans individually evaluated if the value of such loans is deemed to be less than the unpaid balance. The range of fair value adjustments and weighted average adjustments as of December 31, 2020 was 0% to 56% and 22.3%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2019 was 0% to 30% and 5.6%, respectively. Loans individually evaluated 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 to write-down individually evaluated loans that are measured at fair value on a nonrecurring basis was $26.6 million and $22.9 million during the years ended December 31, 2020 and 2019, respectively. Other Real Estate Owned and Repossessed Assets. Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure and repossessed assets 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 or repossession are charged to the allowance for credit losses subsequent to foreclosure or repossession. 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. The range of fair value adjustments and weighted average adjustment as of December 31, 2020 was 5% to 27% and 12.5%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2019 was 5% to 10% and 8.0%, respectively. These measurements are classified as Level 3 within the valuation hierarchy. Net losses on the sale and write-downs of OREO of $2.5 million and $432,000 was recognized during the years ended December 31, 2020 and 2019, 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 was one residential real estate loan foreclosure for $209,000 classified as OREO as of December 31, 2020, compared to $103,000 as of December 31, 2019. No residential real estate loan were in the process of being foreclosed as of December 31, 2020. 105 The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of December 31, 2020 and December 31, 2019: Fair Value Measurements at December 31, 2020 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Total - $ - - - - - - - $ 14,357 $ 15,458 495,109 38,115 323,650 886,689 139 886,828 $ - $ - - - - - - - $ 14,357 15,458 495,109 38,115 323,650 886,689 139 886,828 Assets Measured on a Recurring Basis: Available-for-sale securities: U.S. Treasury securities .......................... $ Government agency securities ................ Mortgage-backed securities .................... State and municipal securities................. Corporate debt ........................................ Total available-for-sale debt securities ... Interest rate cap derivative ......................... Total assets at fair value ......................... $ Assets Measured on a Recurring Basis: Available-for-sale securities U.S. Treasury securities .......................... $ Government agency securities ................ Mortgage-backed securities .................... State and municipal securities................. Corporate debt ........................................ Total assets at fair value ......................... $ Fair Value Measurements at December 31, 2019 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Total - $ - - - - - $ 49,210 $ 18,386 474,054 57,272 160,477 759,399 $ - $ - - - - - $ 49,210 18,386 474,054 57,272 160,477 759,399 106 The carrying amount and estimated fair value of the Company’s financial instruments were as follows: Fair Value Measurements at December 31, 2020 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Measured on a Nonrecurring Basis: Loans individually evaluated ................................ $ Other real estate owned and repossessed assets .... Total assets at fair value .................................... - - - (In Thousands) - $ - - $ 80,817 $ 6,497 87,314 $ Total 80,817 6,497 87,314 Fair Value Measurements at December 31, 2019 Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 3) (Level 2) (Level 1) Assets Measured on a Nonrecurring Basis: Loans individually evaluated ................................ $ Other real estate owned and repossessed assets .... Total assets at fair value .................................... $ - $ - - $ (In Thousands) - $ - - $ 33,344 $ 8,178 41,522 $ Total 33,344 8,178 41,522 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. December 31, 2020 2019 Carrying Amount Fair Value Carrying Amount Fair Value (In Thousands) Financial Assets: Level 1 Inputs: Cash and cash equivalents .......................... $ 2,209,640 $ 2,209,640 $ 530,127 $ 530,127 Level 2 Inputs: Federal funds sold ....................................... Mortgage loans held for sale ....................... 1,771 14,425 1,771 14,497 100,473 6,312 100,473 6,322 Level 3 Inputs: Debt securities held to maturity .................. 250 Loans, net .................................................... 8,377,746 8,387,718 7,184,867 7,132,542 250 250 250 Financial Liabilities: Level 2 Inputs: Deposits ...................................................... $ 9,975,724 $ 9,987,665 $ 7,530,433 $ 7,534,984 Federal funds purchased ............................. 470,749 65,048 Other borrowings ........................................ 470,749 64,703 851,545 65,560 851,545 64,748 107 NOTE 22. PARENT COMPANY FINANCIAL INFORMATION The following information presents the condensed balance sheet of the Company as of December 31, 2020 and 2019 and the condensed statements of income and cash flows for the years ended December 31, 2020, 2019 and 2018. CONDENSED BALANCE SHEETS (In Thousands) December 31, 2020 December 31, 2019 ASSETS Cash and due from banks ....................................................................................... $ Investment in subsidiary ......................................................................................... Other assets ............................................................................................................ Total assets ......................................................................................................... $ 14,685 $ 1,052,083 1,119 1,067,887 $ 10,071 904,958 1,238 916,267 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Other borrowings .................................................................................................... $ Other liabilities ....................................................................................................... Total liabilities .................................................................................................... Stockholders' equity: Preferred stock, par value $0.001 per share; 1,000,000 authorized and 64,748 $ 10,787 75,535 64,703 9,384 74,087 undesignated at December 31, 2020 and December 31, 2019 ............................ - - Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,943,751 shares issued and outstanding at December 31, 2020 and 53,623,740 shares issued and outstanding at December 31, 2019 ...................... Additional paid-in capital ....................................................................................... Retained earnings ................................................................................................... Accumulated other comprehensive income ............................................................ Total stockholders' equity ................................................................................... Total liabilities and stockholders' equity ................................................................ $ 54 223,856 748,224 20,218 992,352 1,067,887 $ 54 219,766 616,611 5,749 842,180 916,267 CONDENSED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 and 2018 (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 ....... $ 2020 2019 2018 45,000 $ - 45,000 2,936 2,936 127,442 169,506 - 169,506 $ 37,000 $ - 37,000 2,930 2,930 115,110 149,180 - 149,180 $ 23,000 176 23,176 2,933 2,933 116,634 136,877 - 136,877 108 STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 (In Thousands) Operating activities Net income .......................................................................... $ Adjustments to reconcile net income to net cash provided by operating activities: 2020 2019 2018 169,506 $ 149,180 $ 136,877 Other ............................................................................ Equity in undistributed earnings of subsidiary ............. Net cash provided by operating activities ........................ 204 (127,442) 42,268 38 (115,110 ) 34,108 (1,181) (116,634) 19,062 Investing activities Other ............................................................................ Net cash used in investing activities ................................ - - (1,000 ) (1,000 ) Financing activities Proceeds from issuance of subordinated notes ............. Redemption of subordinated notes ............................... Dividends paid on common stock ................................ Net cash used in 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 ............................ $ 34,710 (34,750) (37,614) (37,654) 4,614 10,071 14,685 $ - - (32,071 ) (32,071 ) 1,037 9,034 10,071 $ 275 275 - - (20,194) (20,194) (857) 9,891 9,034 NOTE 23. 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. 2020 Quarter Ended (Dollars in thousands, except per share data) March 31 June 30 September 30 December 31 Interest income ............................................. $ Interest expense ............................................ Net interest income ....................................... Provision for credit losses (1) ....................... Net income available to common stockholders .................................................. Net income per common share, basic ........... $ Net income per common share, diluted ........ $ 96,767 $ 19,127 77,640 13,584 34,778 0.65 $ 0.64 $ 95,080 $ 11,846 83,234 10,283 40,417 0.75 $ 0.75 $ 96,110 $ 11,028 85,082 12,284 43,362 0.80 $ 0.80 $ 101,065 8,984 92,081 6,283 50,949 0.94 0.94 2019 Quarter Ended (Dollars in thousands, except per share data) March 31 June 30 September 30 December 31 Interest income ............................................. $ Interest expense ............................................ Net interest income ....................................... Provision for credit losses (1) ....................... Net income available to common stockholders .................................................. Net income per common share, basic ........... $ Net income per common share, diluted ........ $ 93,699 $ 24,921 68,778 4,885 35,010 0.65 $ 0.65 $ 97,787 $ 27,702 70,085 4,884 35,602 0.67 $ 0.66 $ 101,130 $ 28,125 73,005 6,985 37,563 0.70 $ 0.69 $ 98,187 22,410 75,777 5,884 41,005 0.77 0.76 (1) The first three quarters of 2020 and all of 2019 were estimated and recorded under the incurred loss methodology and not restated for the adoption of ASC 326. The Company elected to delay the adoption of CECL as allowed under the CARES Act. 109 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, 2020. 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, 2020. 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, 2020, 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, 2020, management assessed the effectiveness of our internal control over financial reporting based on criteria for effective internal control over financial reporting established in “Internal Control – Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2020, based on those criteria. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, 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. 110 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 2021 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 available on our website at www.servisfirstbank.com. We will disclose any amendments or waivers, including implicit waivers, of the Code of Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on our website. 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 2021 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 2021 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 2021 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 2021 Annual Meeting of Stockholders. 111 ITEM 15. Exhibits, Financial Statement Schedules (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, 2020 and 2019 .................................................................... Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018 .................. Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018 .......................................................................................................................................................... Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2020, 2019 and 2018 .......................................................................................................................................................... Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 ............ Notes to Consolidated Financial Statements ................................................................................................ Page 64 66 67 68 69 70 71 72 (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 4.3 10.1* 10.2* 10.3* 10.4* 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). Description of Capital Stock (incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K, filed on February 25, 2020). 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). 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). 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). 112 10.5* 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* 10.12* 10.13 10.14 10.15 10.16* 10.17* 10.18* 10.19* 10.20* 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). 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). 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). Note Purchase Agreement, dated October 21, 2020, 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 October 22, 2020). 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). 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). 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). 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). Second Amendment to the ServisFirst Bancshares, Inc. Amended and Restated 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed September 17, 2018). Third 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 April 30, 2019). Form of Nonqualified Stock Option Award (Revised 2019)(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, filed April 30, 2019). Form of Restricted Stock Award Agreement (Revised 2019)(incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q, filed April 30, 2019). Endorsement Split-Dollar Agreement with Thomas A. Broughton III dated November 9, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed November 13, 2020. 113 10.21* 10.22* 21 23 24 Endorsement Split-Dollar Agreement with William M. Foshee dated November 9, 2020 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed November 13, 2020. Endorsement Split-Dollar Agreement with Rodney E. Rushing dated November 9, 2020 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed November 13, 2020. List of Subsidiaries Consent of Dixon Hughes Goodman LLP Power of Attorney 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Schema Documents 101.CAL Inline XBRL Calculation Linkbase Document 101.LAB Inline XBRL Label Linkbase Document 101.PRE Inline XBRL Presentation Linkbase Document 101.DEF Inline XBRL Definition Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * denotes management contract or compensatory plan or arrangement ITEM 16. FORM 10-K SUMMARY None. 114 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SERVISFIRST BANCSHARES, INC. By: /s/Thomas A. Broughton, III Thomas A. Broughton, III President and Chief Executive Officer Dated: February 25, 2021 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date /s/Thomas A. Broughton, III Thomas A. Broughton, III /s/ William M. Foshee William M. Foshee Chairman, President, Chief Executive Officer and Director (Principal Executive Officer) Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) February 25, 2021 February 25, 2021 * Director February 25, 2021 Irma L. Tuder * Director February 25, 2021 Michael D. Fuller * Director February 25, 2021 James J. Filler * Director February 25, 2021 Joseph R. Cashio * Director February 25, 2021 Hatton C. V. Smith * Director February 25, 2021 Christopher J. Mettler _________________ *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 25, 2021 115

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