As filed with the Securities and Exchange Commission on March 17, 2014
Registration No. 333-193401
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO FORM S-3 ON
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SERVISFIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 6022 | 26-0734029 |
(State or other jurisdiction of | (Primary Standard Industrial | (I.R.S. Employee |
incorporation or organization) | Classification Code Number) | Identification Number) |
850 Shades Creek Parkway, Suite 200
Birmingham, Alabama 35209
(205) 949-0302
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Thomas A. Broughton, III
President and Chief Executive Officer
ServisFirst Bancshares, Inc.
850 Shades Creek Parkway, Suite 200
Birmingham, Alabama 35209
(205) 949-0302
(Name, address, including zip code, and telephone number including area code, of agent for service)
Copies to:
Paul S. Ware | David W. Ghegan |
J. Andrew Robison | Troutman Sanders LLP |
Bradley Arant Boult Cummings LLP | 600 Peachtree Street, N.E. Suite 5200 |
1819 Fifth Avenue North | Atlanta, Georgia 30308-2216 |
Birmingham, Alabama 35203 | (404) 885-3000 |
(205) 521-8000 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer | ¨ | Accelerated filer | x |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company | ¨ |
CALCULATION OF REGISTRATION FEE
Proposed | Proposed | |||||||||||||||
Amount | Maximum | Maximum | ||||||||||||||
to be | Offering Price | Aggregate | Amount of | |||||||||||||
Title of Shares to be Registered | Registered | Per Share | Offering Price(1)(2) | Registration Fee(3) | ||||||||||||
Common Stock, par value $0.001 per share | - | - | $72,000,000 | $9,273.60 | ||||||||||||
(1) | Includes shares of common stock that the underwriters have the option to purchase pursuant to their over-allotment option. |
(2) | Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933. |
(3) | Previously paid. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed or supplemented. We may not sell any of the securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell the securities described herein and we are not soliciting offers to buy the securities described herein in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MARCH 17, 2014
[ ] Shares
PROSPECTUS
Common Stock
This prospectus relates to the initial public offering of ServisFirst Bancshares, Inc.’s common stock. We are offering [ ] shares of our common stock.
Prior to this offering, there has been no established public market for our common stock. We currently estimate that the initial public offering price per share of our common stock will be between $[ ] and $[ ] per share. We have applied to list our common stock on The Nasdaq Global Market under the symbol “SFBS”.
See “Risk Factors,” beginning on page 19, for a discussion of certain risks that you should consider before making an investment decision to purchase our common stock.
Per Share | Total | |||||||
Initial public offering price | $ | [ ] | $ | [ ] | ||||
Underwriting discount(1) | $ | [ ] | $ | [ ] | ||||
Proceeds to us, before expenses | $ | [ ] | $ | [ ] |
(1) See “Underwriting” for additional information regarding the underwriting discount and certain expenses payable to the underwriters by us.
We have granted the underwriters an option to purchase up to an additional [ ] shares of our common stock at the initial public offering price less the underwriting discount, within 30 days from the date of this prospectus, to cover over-allotments.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The shares of our common stock that you purchase in this offering will not be savings accounts, deposits or other obligations of any of our bank or non-bank subsidiaries and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
The underwriters expect to deliver the shares of our common stock against payment in New York, New York on [ ], 2014.
_________________________
Sandler O’Neill + Partners, L.P. |
Raymond James
_________________________
Prospectus dated , 2014
TABLE OF CONTENTS
Incorporation of Certain Information by Reference | 1 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS | 1 |
PROSPECTUS SUMMARY | 2 |
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION | 16 |
RISK FACTORS | 19 |
USE OF PROCEEDS | 37 |
DIVIDEND POLICY | 37 |
CAPITALIZATION | 37 |
DILUTION | 38 |
PRICE RANGE OF OUR COMMON STOCK | 39 |
BUSINESS | 39 |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 51 |
MANAGEMENT | 73 |
PRINCIPAL STOCKHOLDERS | 78 |
DESCRIPTION OF CAPITAL STOCK | 80 |
SHARES ELIGIBLE FOR FUTURE SALE | 85 |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS | 86 |
SUPERVISION AND REGULATION | 87 |
CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF COMMON STOCK | 101 |
UNDERWRITING | 104 |
LEGAL MATTERS | 107 |
EXPERTS | 107 |
WHERE YOU CAN FIND MORE INFORMATION | 107 |
INDEX TO FINANCIAL STATEMENTS | F-1 |
About this Prospectus
We and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.
No action is being taken in any jurisdiction outside the United States to permit a public offering of our securities or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about, and to observe, any restrictions as to the offering and the distribution of this prospectus applicable to those jurisdictions. Unless otherwise expressly stated or the context otherwise requires, all information in this prospectus assumes that the underwriters have not exercised their option to purchase additional shares of common stock.
Market Data
Market data used in this prospectus has been obtained from independent industry sources and publications as well as from research reports prepared for other purposes. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. We have not independently verified the data obtained from these sources. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus.
Incorporation of Certain Information by Reference
We file annual, quarterly, and current reports, proxy statements and other information with the SEC. The SEC allows us to “incorporate by reference” certain information that we file with it into this prospectus. This means we can disclose important information to you by referring you to those documents, which we filed separately with the SEC. The information we incorporate by reference is an important part of this prospectus and should be reviewed by you. We incorporate herein by reference our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on March 7, 2014, as amended by our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013, filed with the SEC on March 17, 2014, except to the extent that any information contained therein is deemed “furnished” in accordance with SEC rules.
Any statement contained in a document that is incorporated by reference will be modified or superseded for all purposes to the extent that a statement contained in this prospectus modifies or is contrary to that previous statement. Any statement so modified or superseded will not be deemed a part of this prospectus except as so modified or superseded.
Upon request, we will provide to each person, including any beneficial owner, to whom a prospectus is delivered, a copy of any or all of the reports or documents that have been incorporated by reference in this prospectus but not delivered with this prospectus. You may request a copy of any of these filings at no cost, by writing or telephoning us at the following address or telephone number:
ServisFirst Bancshares, Inc.
850 Shades Creek Parkway, Suite 200
Birmingham, Alabama 35209
Attention: Chief Financial Officer
Telephone: (205) 949-0302
These filings may also be accessed through our website at http://www.servisfirstbank.com or as described under the section titled “Where You Can Find More Information.” The contents of our website are not incorporated by reference herein or otherwise a part of this prospectus.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
When used in this prospectus and the documents incorporated herein the words or phrases “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” “will,” or similar expressions are intended to identify "forward-looking statements" within the meaning of such term in the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including, without limitation, changes in economic conditions in the market areas of the bank, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the market areas of the bank, borrowers defaulting on the repayment of loans and competition. These risks could cause actual results to differ materially from what we have anticipated or projected. These risk factors and uncertainties should be carefully considered by potential investors. See the “Risk Factors” section of this prospectus and Part I, Item 1.A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, as well as elsewhere in our periodic and current reports filed with the SEC, for discussion relating to risk factors impacting us. Investors should not place undue reliance on any forward-looking statement, which speaks only as of the date on which it was made. The factors described in this prospectus could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods.
Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that, while our management believes such assumptions or bases are reasonable and are made in good faith, assumed facts or bases can vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, an expectation or belief is expressed as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished. We do not intend to, and specifically disclaim any obligation to, update any forward-looking statements.
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to purchase common stock in this offering. You should read the entire prospectus carefully, including the section titled “Risk Factors,” our consolidated financial statements and the related notes thereto, and management’s discussion and analysis of financial condition and results of operations, before making an investment decision. Unless we state otherwise or the context otherwise requires, references in this prospectus to “we,” “our,” “us,” “the Company” and “ServisFirst” refer to ServisFirst Bancshares, Inc. and its subsidiaries, including ServisFirst Bank, which we sometimes refer to as “ServisFirst Bank,” “the bank,” “our bank subsidiary,” or “our bank,” except that such terms refer to only ServisFirst Bancshares, Inc. and not its subsidiaries in the section entitled “Description of Capital Stock.”
Overview
We are a bank holding company, headquartered in Birmingham, Alabama. Our wholly-owned subsidiary, ServisFirst Bank, provides commercial banking services through 12 full-service banking offices located in Alabama and the panhandle of Florida, as well as a loan production office in Nashville, Tennessee. Through 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, 2013, our balance sheet was highlighted by total assets of approximately $3.5 billion, total loans of approximately $2.9 billion, total deposits of approximately $3.0 billion and total stockholders’ equity of approximately $297 million.
We operate 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. 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 this approach more appropriately addresses our customers’ banking needs and reflects a superior delivery strategy for commercial banking services. Our strategy allows us to deliver targeted, high quality customer service, while achieving significantly lower efficiency ratios relative to the banking industry, as evidenced by our efficiency ratios of 45.54%, 41.54% and 38.78% as of December 31, 2011, 2012 and 2013, respectively.
We believe our balance sheet and business lines reflect our focus, and that the execution of our business model has driven our success, including, for the years ended December 31, 2011, 2012 and 2013, respectively:
· | organic deposit growth of 21.90%, 17.15% and 20.23%; |
· | organic loan growth of 31.38%, 29.20% and 21.02%; |
· | earnings per share growth of 24.30%, 41.36% and 14.03%; and |
· | return on average common equity of 17.01%, 19.41% and 18.30%. |
Our disciplined and centralized risk and credit platform, we believe, has allowed us to achieve these levels of growth and financial performance, while maintaining exceptional asset quality, including, for the years ended December 31, 2011, 2012 and 2013, respectively:
· | non-performing assets to total assets ratios of 1.06%, 0.69% and 0.64%; and |
· | net charge-offs to average loans ratios of 0.32%, 0.24% and 0.33%. |
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Our History
Our bank was founded by our President and Chief Executive Officer, Thomas A. Broughton, III, and commenced banking operations in May 2005 following an initial capital raise of $35 million, the largest capital raise by a de novo bank in the history of Alabama. We were incorporated as a Delaware corporation in August 2007 for the purpose of acquiring all of the common stock of our bank, and in November 2007 our holding company became the sole shareholder of the bank by virtue of a plan of reorganization and agreement of merger. In May 2008, following our filing of a registration statement on Form 10 with the Securities and Exchange Commission (the “SEC”), we became a reporting company within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”) and have been filing annual, quarterly, and current reports, proxy statements and other information with the SEC since 2008.
Since inception, our bank has achieved significant growth, all of which has been generated organically. We achieved total asset milestones of $1 billion in 2008, $2 billion in 2011 and $3 billion in 2013. In addition to total asset milestones, we have opened offices in six new markets, and raised an aggregate of approximately $55.1 million to support our growth in these new locations through five separate private placements of our common stock to predominately local, individual investors.
Our Business Strategy
We are a full service commercial bank focused on providing competitive products, state of the art technology and quality service. Our business philosophy is to operate as a metropolitan community bank emphasizing prompt, personalized customer service to the individuals and businesses located in our primary markets. We aggressively market to our target customers, which include privately held businesses with $2 million to $250 million in annual sales, professionals and affluent consumers whom we believe are underserved by the larger regional banks operating in our markets. We also seek to capitalize on the extensive relationships that our management, directors, advisory directors and stockholders have with the businesses and professionals in our markets. We believe this philosophy has attracted, and will continue to attract, valuable customers and capture market share historically controlled by other financial institutions operating in our markets.
Focus on Core Banking Business. We deliver a broad array of core banking products to our customers. 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 in turn leads to greater operational efficiency. Additionally, our centralized technology and process infrastructure contribute to our low operating costs. We believe this combination of products, operating efficiency and technology make us attractive to customers in our markets. In addition, in 2011 we began providing correspondent banking services to various smaller community banks in our markets, and currently act as a correspondent bank to approximately 150 community banks located throughout the southeastern United States. We provide a source of clearing and liquidity to our correspondent bank customers, as well as a wide array of account, credit, settlement and international services. We believe this service is of a scale and quality that is unique for a bank our size and provides us with a solid revenue stream and supplemental low cost source of funds.
Commercial Bank Emphasis. We have historically focused on people as opposed to places. This strategy translates into a smaller number of brick and mortar branch locations relative to our size, but larger overall branch sizes in terms of total deposits. As a result, our branches average approximately $251 million in total deposits, and our branches that have been open at least three years average approximately $341 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 44.7% of our total loan portfolio as of December 31, 2013. We believe our commercial and industrial lending expertise will fuel our continued loan growth in the future.
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Scalable, Decentralized Business Model. We emphasize local decision-making by experienced bankers supported by centralized risk and credit oversight. We believe that the delivery by our bankers of in-market customer decisions, coupled with risk and credit support from our corporate headquarters, allows us to serve our borrowers and depositors directly and in person, while managing risk centrally and on a uniform basis. We intend to continue our growth by repeating this scalable model in each market in which we are able to identify a strong banking team. Our goal in each market is to employ the highest quality bankers in that market. We then empower those bankers to implement our operating strategy, grow our customer base and provide the highest level of customer service possible. We focus on a geographic model of organizational structure as opposed to a line of business model employed by most regional banks. This structure assigns significant responsibility and accountability to our regional chief executive officers, who we believe will drive our growth and success. We have developed a business culture whereby our management team, from the top down, is actively involved in sales, which we believe is a key differentiator from our competition.
Identify Opportunities in Vibrant Markets. Since opening our original banking facility in Birmingham in 2005, we have expanded into six additional markets. Our focus has been to expand opportunistically when we identify a strong banking team in a market with attractive economic characteristics and market demographics where we believe we can achieve a minimum of $300 million in deposits within five years of market entry. There are two primary factors we consider when determining whether to enter a new market:
· | the availability of successful, experienced bankers with strong reputations in the market; and |
· | the economic attributes of the market necessary to drive quality lending opportunities coupled with deposit-related characteristics of the potential market. |
Prior to entering a new market, we identify and build a team of experienced, successful bankers with market-specific knowledge to lead the bank’s operations in that market, including a regional chief executive officer. Generally, we or members of our senior management 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 assemble a non-voting advisory board of directors in each market, comprised of directors representing a broad spectrum of business experience and community involvement in the market. We currently have advisory boards in each of the Huntsville, Montgomery, Dothan, Mobile and Pensacola markets. While we currently have a loan production office in Nashville, Tennessee with three experienced bankers (one of whom was hired in January 2014), we anticipate expanding this office into a full-service branch in the future, assuming that we are able to identify and retain a full team of experienced bankers whom we believe can successfully effect our strategy.
In connection with opening a full-service banking office in a new market, historically we have raised capital through private placements to investors in the local market, many of whom are also customers of our bank in such market. We believe that having many of our customers who are also stockholders provides us with a strong source of core deposits, aligns our and our customers’ interests, and fosters a platform for developing and maintaining the long-term banking relationships we seek.
To date, we have not supplemented our organic deposit and loan growth with traditional mergers or acquisitions. However, we view our organic growth strategy as a form of acquisition strategy, insofar as we have successfully hired qualified teams of experienced bankers in each new market we have entered, and have built significantly sized franchises in those markets within a short time following our entry into the new market. We believe that our success in attracting these teams of bankers has allowed us to achieve growth attributes similar to competitors that have chosen to execute traditional mergers or acquisitions, but without the addition of goodwill and resulting capital pressures attendant to traditional merger and acquisition strategies. In addition to organic expansion, we may seek to expand through targeted acquisitions. Although we have not yet identified any specific acquisition opportunity that meets our strict requirements, including a limited number of branches serving a vibrant market with a strong deposit base, a premier banking team with individuals whom we believe can execute our business model, and available at a price that we believe provides attractive risk-adjusted returns, we routinely evaluate potential acquisition opportunities that we believe would be complementary to our business. We do not, however, have any immediate plans, arrangements or understandings relating to any acquisition, and we do not believe an acquisition is necessary to successfully execute our business model.
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Our Markets
Our primary markets are broadly defined as the metropolitan statistical areas (“MSAs”) of Birmingham-Hoover, Huntsville, Montgomery, Dothan and Mobile, Alabama, Pensacola-Ferry Pass-Brent, Florida, and Nashville, Tennessee. We draw most of our deposits from, and conduct most of our lending transactions in, these markets.
Although we may in the future identify additional new markets to enter, we believe that the long-term growth potential of each of our current markets is substantial, and that we have the ability to continue to grow organically by increasing our market share in these markets. We further believe that many local affluent professionals and small business owners will prefer to conduct their banking with local, independent institutions that offer a higher level of personalized service.
The following table illustrates our market share, by insured deposits as of the dates indicated, in our primary markets:
Our Market Deposits | ||||||||||||||||||||||||||
Market(1) | Date Opened | Total Branches | June 30, 2013(2) | December 31, 2013 | Total Market Deposits(2) | Rank(2) | Market Share %(2) | |||||||||||||||||||
Alabama: | ||||||||||||||||||||||||||
Birmingham-Hoover | May 2005 | 3 | $ | 1,217.3 | $ | 1,380.0 | (3) | $ | 30,175.1 | 5 | 4.03% | |||||||||||||||
Huntsville | August 2006 | 2 | 540.8 | 579.5 | 6,805.7 | 5 | 7.95% | |||||||||||||||||||
Montgomery | June 2007 | 2 | 374.2 | 432.3 | 7,810.1 | 7 | 4.79% | |||||||||||||||||||
Dothan | September 2008 | 2 | 327.1 | 358.6 | 2,883.9 | 3 | 11.34% | |||||||||||||||||||
Mobile | July 2012(4) | 1 | 15.2 | 43.1 | 6,041.6 | 18 | 0.25% | |||||||||||||||||||
Florida: | ||||||||||||||||||||||||||
Pensacola-Ferry Pass-Brent | April 2011 | 2 | 202.9 | 227.2 | 4,638.0 | 8 | 4.38% | |||||||||||||||||||
Tennessee: | ||||||||||||||||||||||||||
Nashville | April 2013 | — | (5) | — | (5) | — | (5) | 40,800.5 | —(5) | —(5) |
(1) Represents metropolitan statistical areas (MSAs).
(2) As reported by the FDIC as of June 30, 2013.
(3) Includes approximately $19.7 million in deposits attributable to our loan production office in Nashville, Tennessee.
(4) Opened in July 2012 as a loan production office and in May 2013 converted to a full service branch.
(5) Opened as a loan production office.
Birmingham. Birmingham, the largest city in Alabama, is located in central Alabama 146 miles west of Atlanta, Georgia and 148 miles southwest of Chattanooga, Tennessee. The Birmingham-Hoover MSA’s economy consists of a diverse mixture of traditional and emerging employment sectors. While metals manufacturing is an important historical sector, finance, insurance and healthcare services and distribution are the region’s core economic sectors, and biological and medical technology, entertainment and diverse manufacturing have been identified as the region’s emerging economic sectors. Large corporations headquartered or with a major presence in the region include Protective Life, HealthSouth Corporation, Vulcan Materials Company and AT&T. Additionally, The University of Alabama at Birmingham (UAB) is Alabama’s largest employer, and Birmingham is home to the largest nonprofit independent research laboratory in the southeastern United States, the Southern Research Institute.
Huntsville. We believe that Huntsville, located in northern Alabama mid-way between Birmingham and Nashville, Tennessee, offers substantial growth as one of the strongest technology economies in the nation, with over 300 companies performing sophisticated government, commercial and university research. Huntsville has one of the highest concentrations of engineers and Ph.D.’s in the United States and has a number of major government programs, including NASA and the U.S. Army. Huntsville also has one of the highest concentrations of Inc. 5000 companies in the United States and a number of offices of Fortune 500 companies. Major employers in Huntsville include the U.S. Army/Redstone Arsenal, the Boeing Company, NASA/Marshall Space Flight Center, Intergraph Corporation, ADTRAN, Inc., Northrop Grumman, Cinram, SAIC, DirecTV, Lockheed Martin and Toyota Motor Manufacturing of Alabama.
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Montgomery. Montgomery, which is Alabama’s capital, is located in south central Alabama between Birmingham and Mobile, Alabama. In addition to housing many Alabama government agencies, Montgomery is also home to Maxwell Gunter Air Force Base, which employs more than 12,500 people and includes Air University, the worldwide center for U.S. Air Force leadership and education. In 2005, Hyundai Motor Manufacturing Alabama opened its Montgomery manufacturing plant, which was built with an initial capital investment of over $1.4 billion, and has experienced subsequent expansions. The area has also benefited from the nearly 30 top-tier Hyundai suppliers that have invested over $550 million in new plant facilities, creating almost 8,000 additional jobs.
Dothan. We believe that the Dothan MSA, which is located in the southeastern corner of Alabama near the Florida panhandle and Georgia state line, continues to hold great potential due to its position as a central agricultural trade hub, its accessibility to large distribution centers, it being home to several large corporations, and what we believe to be a low level of personalized banking services provided by other financial institutions in the area. The Dothan area is home to facilities of several large corporations, including Michelin, Pemco World Aviation, International Paper, Globe Motors and AAA Cooper Transportation. Additionally, the agriculture and agribusiness industries are thriving in the Dothan MSA, and the area is home to many successful farmers and related businesses. In addition, the nearby agricultural communities in northwest Florida and southwest Georgia often use Dothan as their agricultural trade hub. We believe the existence of these industries and the continuing growth in the area allows an opportunity for the bank to increase its presence and penetration in this market.
Pensacola. In April 2011, we opened our first office outside of Alabama in Pensacola, Florida, which is located in the Florida panhandle approximately 50 miles east of Mobile, Alabama, and 40 miles west of Fort Walton, Florida. The Pensacola and northwest Florida economies are driven by the tourism, military, health services, and medical technology industries. Five major military bases are located in northwest Florida: Eglin Air Force Base, Hurlburt Field, Pensacola Whiting Field, Pensacola Naval Air Station and Corry Station. Other major employers in the area include Sacred Heart Health System, Baptist Healthcare, West Florida Regional Hospital, Gulf Power Company (Southern Company), the University of West Florida, International Paper, Ascend Performance Materials (Solutia), GE Wind Energy, Armstrong World Industries and Wayne Dalton Corporation. The Pensacola Bay area is also home to the Andrews Institute for Orthopaedics and Sports Medicine, a world-leading surgical and research center for human performance enhancement. Although this market was negatively impacted by the recent economic downturn, we believe this area has significant long-term growth potential.
Mobile. In July 2012, we opened a loan production office in Mobile, Alabama and, in May 2013, converted the location to a full-service banking office. The Mobile MSA is located in southwest Alabama approximately 31 miles from the Gulf of Mexico and is the largest metropolitan area along the Gulf between New Orleans, Louisiana and Tampa, Florida. The Mobile Bay region has over 23,000 businesses and is a center for finance, healthcare, education, manufacturing, transportation, construction, distribution, retail, trade and technology. With its strategic location, the Port of Mobile serves as a gateway between the southeastern United States and global destinations, and is served by 12 shipping lines offering service throughout the world. Virtually every service for the maritime industry can be found in this 310-plus-year old port city. The aviation/aerospace industry is another of the area’s strong, growing industry sectors. A former U.S. Air Force base located on Mobile Bay near downtown Mobile, Brookley Aeroplex has been transformed into a leading 1,700-acre industrial and trade aeroplex with deepwater port access and the capability of landing the Space Shuttle on one of its runways. The Mobile area is also served by five national Class I railroads.
Nashville. In April 2013, we opened a loan production office in Nashville, Tennessee, the state’s capital. The Nashville MSA is located in central Tennessee and is home to over 1.8 million people and 40,000 businesses. Nashville, known as the “Music City” for its country music heritage, is also home to a diverse healthcare industry and is a center for manufacturing, transportation and technology in the area. Nashville has more than 250 healthcare companies headquartered in the region, including 16 publicly traded healthcare companies with combined employment of nearly 400,000 and $70 billion in global revenue. The Nashville area is also considered a transportation hub, as it is one of only 12 U.S. cities with three major intersecting interstate highways. Notable companies with corporate headquarters in Nashville include HCA Holdings, Nissan North America, Dollar General Corporation, Asurion and Community Health Systems. Although we only recently opened our loan production facility in Nashville, we believe the market has great potential.
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We compete with other retail and commercial banks and financial institutions in our markets. Although some of these institutions may attract customers and business by offering products at prices that do not achieve the returns we desire, we believe we can continue to compete effectively with these institutions by providing a wide array of financial products, depending on our reputation for greater personal service and flexibility, and making credit and other decisions promptly by utilizing our decentralized decision-making process.
Our Management Team
Led by Tom Broughton, our senior management team, board of directors and non-voting advisory boards have substantial business interests in the markets that we serve. We believe that our management and board’s incentives are closely aligned with our stockholders through the ownership of a substantial amount of our stock. Our executive officers and board of directors own an aggregate of 1,141,296 shares, including options to purchase shares of our common stock, or approximately 13.9% of the fully-diluted amount of common stock outstanding, which amount is not expected to materially change as a result of the offering. The combination of experienced leadership and stock ownership contribute to our culture of success, which we believe builds on itself and allows us to continue to attract and hire top-quality talent in each of our markets. The five members of our senior management team, each of whom is described in more detail below, have an average of 36 years of banking experience.
Thomas “Tom” A. Broughton, III: President and Chief Executive Officer. Mr. Broughton has served as our President and Chief Executive Officer since 2007 and as President and Chief Executive Officer of the bank since 2005. Mr. Broughton has over 30 years of extensive banking experience in Alabama, particularly in Birmingham. In 1985, Mr. Broughton was an organizer and President of First Commercial Bank in Birmingham. First Commercial Bank was acquired by Synovus Financial in 1992. Mr. Broughton continued as President and was named Chief Executive Officer of First Commercial Bank following its acquisition by Synovus Financial. Starting in 1992, Mr. Broughton served in a number of positions at Synovus Financial, including as regional Chief Executive Officer for Alabama, Tennessee and parts of Georgia, until his retirement from Synovus Financial in 2004. Prior to founding First Commercial Bank, Mr. Broughton was a supervisor of several commercial lending departments of large banks in Birmingham. In 2009, Mr. Broughton was named American Banker’s 2009 Community Banker of the Year.
Clarence C. Pouncey, III: Executive Vice President and Chief Operating Officer. Mr. Pouncey has served as our Executive Vice President and Chief Operating Officer since 2007 and Executive Vice President and Chief Operating Officer of the bank since November 2006. Prior to joining the bank, Mr. Pouncey was employed by SouthTrust Bank (subsequently, Wachovia Bank and now Wells Fargo Bank) at its corporate headquarters in Birmingham, in various capacities from 1978 to 2006, most recently as the Senior Vice President and Regional Manager of Real Estate Financial Services. During his employment with SouthTrust, Mr. Pouncey oversaw various operational and production functions in its nine-state footprint of Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Texas and Virginia, and while employed by Wachovia, Mr. Pouncey oversaw various operational and production functions in Alabama, Arizona, Tennessee and Texas.
William “Bud” M. Foshee: Executive Vice President and Chief Financial Officer. Mr. Foshee has served as our Executive Vice President, Chief Financial Officer, Treasurer and Secretary since 2007 and as Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the bank since 2005. Mr. Foshee served as the Chief Financial Officer of Heritage Financial Holding Corporation, a publicly traded bank holding company headquartered in the Huntsville MSA, from 2002 until it was acquired in 2005. Mr. Foshee is a Certified Public Accountant.
Rodney E. Rushing: Executive Vice President and Executive for Correspondent Banking. Mr. Rushing has served as the Executive Vice President and Executive for Correspondent Banking for us and the bank since 2011. Prior to joining us, Mr. Rushing was employed at BBVA Compass from 1982 to 2011, most recently serving as Executive Vice President of Correspondent Banking. At the time of his departure in March 2011, the correspondent banking division of BBVA Compass provided correspondent banking services to over 600 financial institutions with total fundings in excess of $2 billion.
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Don Owens: Senior Vice President and Chief Credit Officer. Mr. Owens has served as the Senior Vice President and Chief Credit Officer for us and the bank since 2012. Prior to joining us, Mr. Owens served as a retail branch manager of First Alabama Bank from 1973 to 1978, worked for C&I Bank (now Bank of America) from 1978 to 1982, including as a branch manager and commercial lender, worked for Republic Bank (now Bank of America) from 1982 to 1988, including as a commercial lender and credit administrator, and served as a Senior Vice President and Senior Loan Administrator for BBVA Compass from 1988 to 2012.
In addition to our senior management team, our co-founder, Stanley “Skip” M. Brock, has served as our Chairman of the Board and a director since 2007 and has served as Chairman of the Board and a director of the bank since its inception in May 2005. He has served as President of Brock Investment Company, Ltd., a private venture capital firm, since its formation in 1995. Prior to 1995, Mr. Brock practiced corporate law for 20 years with one of the largest law firms based in Birmingham, Alabama. Mr. Brock also served as a director of Compass Bancshares, Inc., a publicly traded bank holding company, from 1992 to 1995. Mr. Brock’s experience as a director of a public company, a corporate lawyer and private investor provides him with a background that we believe is valuable to our success.
We also have hired key management employees for all of the bank’s offices, whom we believe have substantial banking experience and strong relationships in their respective markets. As part of our operating strategy, we believe that it is vital to our growth and prospects that we hire the highest-quality bankers in each of our markets. Our regional chief executive officers are empowered to implement our business strategy and make many key business decisions without the need for approval from our senior management team. Our regional chief executive officers and other officers and employees are also incentivized with stock ownership in the Company.
Our board is comprised of a number of business leaders in Alabama, including Messrs. Broughton and Brock. In addition to our and the bank’s boards of directors, which are identical in composition, the bank also has a non-voting advisory board of directors in each of the Huntsville, Montgomery, Dothan and Mobile, Alabama and Pensacola, Florida markets. These directors and advisory directors represent a wide array of business experience and community involvement in the market areas where they live. As residents of our primary service areas, they are sensitive and responsive to the needs of our customers and potential customers. In addition, our directors and advisory directors bring substantial business and banking contacts to us.
For additional information on our management team, see the section titled “Management” beginning on page 73.
Our Financial Performance
As a direct result of our simple community, commercial bank strategy, the quality and depth of our employee base, and the economic health and strength of our markets, we have consistently delivered some of the strongest performance metrics in community banking. We measure our success in three primary categories: growth attributes, balance sheet quality and return metrics. All three of these categories are interdependent and equally important in our view of building value for our stockholders. Within each focal category, we identify key drivers of performance and measure our results, which guide our views of success with respect to the implementation of our business plan.
While we hold ourselves to high standards of performance with respect to stockholder returns, we also measure our performance against all community banks with total assets between $1 billion and $50 billion, a subset of high performing commercial banks determined by returns on average assets and average equity and asset quality, and a peer group comprised of commercial banks with similar lending focuses. More specifically, our comparative financial performance analysis described in this prospectus measures our results in relation to:
· | The nationwide community commercial banking industry (defined as all publicly traded and privately held commercial bank holding companies with total assets between $1 billion and $50 billion)(1), |
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· | A group of 10 high performing publicly traded community commercial bank holding companies in the U.S.(2) as measured by returns on average assets and average common equity, coupled with low ratios of non-performing assets to total assets, and |
· | A group of 10 publicly traded community commercial bank holding companies in the U.S. with high levels of commercial and industrial loans as a percentage of their total loan portfolios. (3) |
(1) | Our selected nationwide community bank holding company group (Nationwide Community BHC) consists of the 437 commercial bank holding companies throughout the U.S. with total assets between $1 billion and $50 billion. |
(2) | Our selected peer group of 10 high performing community commercial bank holding companies (High Performing Peer Group) consists of: Bank of the Ozarks, Inc. (OZRK), Wilshire Bancorp, Inc. (WIBC), City Holding Co. (CHCO), Westamerica Bancorp. (WABC), Eagle Bancorp, Inc. (EGBN), Lakeland Financial Corp. (LKFN), German American Bancorp. Inc. (GABC), Southside Bancshares, Inc. (SBSI), Bryn Mawr Bank Corp. (BMTC), S.Y. Bancorp, Inc. (SYBT). |
(3) | Our selected group of 10 community commercial bank holding companies with high levels of commercial and industrial loans (High C&I Concentration Peer Group) consists of: City National Corp. (CYN), SVB Financial Group (SIVB), East West Bancorp, Inc. (EWBC), Cullen/Frost Bankers, Inc. (CFR), UMB Financial Corp. (UMBF), PrivateBancorp, Inc. (PVTB), Texas Capital Bancshares, Inc. (TCBI), Pinnacle Financial Partners (PNFP), First NBC Bank Holding Co. (NBCB), Lakeland Financial Corp. (LKFN). |
Growth Attributes: Since our inception, our business strategy has resulted in growth rates that outpace most of our competitors and peers. As shown in Table 1, our growth results have exceeded most of the broad banking industry as well as the results produced by our two selected peer groups. Some of the key growth attributes we follow closely in measuring our success include:
· | Growth of deposits, especially growth of core deposits and, more specifically, growth of noninterest-bearing deposits, |
· | Growth of loans, especially growth of our focus areas of lending such as commercial and industrial credit, |
· | Growth of net income, with an eye toward recurring earnings streams, rather than one-time or non-recurring income sources, and |
· | Growth of earnings per share, understanding the connection between our earnings per share results, our net income results and our capital needs. |
TABLE 1: Growth Attributes | Nationwide | High Performing | High C&I | |||||||||||||
ServisFirst | Community | Nationwide Peer | Concentration | |||||||||||||
Bancshares, Inc. | BHC Rank(1) | Group Median | Peer Group Median | |||||||||||||
Five Year Compounded Annual Growth Rate(2): | ||||||||||||||||
Total Deposits | 23.8% | 10 | 9.7% | 12.3% | ||||||||||||
Noninterest-bearing Deposits | 59.1% | 4 | 17.7% | 28.9% | ||||||||||||
Gross Loans | 24.2% | 5 | 7.1% | 7.5% | ||||||||||||
Commercial & Industrial Loans | 30.6% | 9 | 2.5% | 11.0% | ||||||||||||
Net Income Available to Common Stockholders | 42.5% | 27 | 13.1% | 13.6% | ||||||||||||
Diluted Earnings Per Common Share | 34.1% | — | 9.4% | 7.1% |
Source: SNL Financial, Inc.
(1) | Rankings based on highest to lowest growth rates. |
(2) | Five year period ended December 31, 2013. |
Balance Sheet Quality: Also since our inception, we have focused on building a high quality balance sheet capable of delivering strong earnings streams, while protecting and growing our stockholders’ equity. We have assembled a fulsome risk management function that allows us to monitor our balance sheet liquidity, loan quality and exposure to interest rates, while providing our regional chief executive officers and their lending teams latitude to grow customer relationships and deliver a competitive array of commercial banking services. As evidenced by our growth rates, we have succeeded in building both sides of our balance sheet, with loans and deposits garnering equal focus from our management team, resulting in a strong loan to deposit ratio.
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Since 2007 and throughout the economic downturn, even while operating as a smaller bank with a more limited geographic reach and greater pressure on operating expense levels due to size, our focus on credit quality and risk management allowed us to maintain profitability in every quarter. Our emphasis on gathering core deposits to fund our balance sheet growth drives, in large part, our success in delivering earnings alongside the expansion of our assets and liabilities.
We closely measure and monitor our asset quality metrics and proactively manage our lending risk while providing appropriate loan loss reserves. Our historical loss experience in our lending businesses has been low and our ratios of allowance for loan losses as a percentage of our problem assets are in line with peers of similarly high quality lending institutions.
Our expertise in commercial and industrial, or C&I, lending also has driven strong returns throughout the downturn in the national and regional economies. While many community banks have increased lending efforts in commercial and industrial areas, our company has always held this focus and expertise in C&I lending based on our bankers’ extensive experience. We believe this institutional knowledge and experience will continue to drive our ability to grow a high quality loan portfolio, and compete effectively against both larger and smaller banks.
As shown in Table 2, our balance sheet strength is highlighted by our mix of stable and low cost funding sources, the composition of our loan portfolio and our low levels of troubled assets. Some of the key balance sheet quality metrics we follow closely in measuring our success include:
· | Deposit composition, especially our success in building noninterest-bearing deposits and our non-reliance on certificates of deposit as funding sources, |
· | Loan portfolio composition, especially our mix of commercial and industrial loans as a percentage of our total loans, and |
· | Asset quality metrics and coverage ratios, especially our non-performing asset levels as a percentage of our total assets and our allowance for loan losses as a percentage of our troubled loans. |
TABLE 2: Balance Sheet Quality | Nationwide | High Performing | High C&I | |||||||||||||
ServisFirst | Community | Nationwide Peer | Concentration | |||||||||||||
Bancshares, Inc. | BHC Rank | Group Median | Peer Group Median | |||||||||||||
As of December 31, 2013: | ||||||||||||||||
Noninterest Bearing Deposits / Total Deposits (1) | 21.5% | 206 | 20.5% | 27.5% | ||||||||||||
Certificates of Deposit / Total Deposits (2) | 13.7% | 73 | 21.7% | 11.0% | ||||||||||||
Gross Loans / Total Deposits (1) | 94.7% | 61 | 90.6% | 87.1% | ||||||||||||
Commercial & Industrial Loans / Gross Loans (1) | 44.7% | 22 | 13.3% | 37.6% | ||||||||||||
Non-performing Assets / Total Assets (3) | 0.64% | 121 | 0.83% | 0.50% | ||||||||||||
Allowance for Loan Losses / Total Non-accrual Loans (1) | 319% | 94 | 170% | 240% |
Source: SNL Financial, Inc.
(1) | Ranking for comparison to Nationwide Community BHC group based on highest to lowest percentages. |
(2) | Ranking for comparison to Nationwide Community BHC group is based on lowest to highest percentages. |
(3) | Ranking for comparison to Nationwide Community BHC group is based on lowest to highest percentages; non-performing assets are defined as non-accrual loans, plus loans 90-days past due, plus other real estate owned. |
Return Metrics: Since the founding of our bank, our Board of Directors and senior management team have strived to produce the highest return levels in our industry, while maintaining risk controls and superior balance sheet metrics. Many institutions have sacrificed returns on their capital for more aggressive growth metrics, either organically or through acquisitions. Conversely, many institutions have foregone growth opportunities to focus on what they believe to be attractive return metrics. We view our company as somewhat rare in our industry, having married the two concepts through the execution of our simple business model carried out by teams of the best bankers in our attractive markets.
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We have resisted the pressures to grow our loan portfolio at the expense of greater credit risk, or to support our asset growth with a less attractive funding mix. Our disciplined strategy is to compete aggressively for the top borrowers in our markets based on superior customer service and a full suite of commercial banking products, rather than to lend uneconomically from the standpoint of credit, loan structure or loan pricing. Our strategy has also fundamentally focused our bankers on gathering core deposit accounts and serving our deposit customers with tailored deposit products and state-of-the-art technology.
While we routinely review opportunities to increase our non-interest and fee income, we continue to believe our capital is more effectively utilized in focusing our efforts on our core community, commercial bank products and services.
We believe the efficiency of our business model has been, and will continue to be, one of our greatest strengths. With an average branch size of $251 million in deposits ($341 million for those that have been open at least three years) as of December 31, 2013, we are able to generate significant revenue relative to our employee base, while investing significantly in our support and operational systems, including our technology capabilities, our compliance and oversight capabilities and our lending and deposit services. As the community, commercial banking industry continues to evolve and embraces ongoing changes in technology and communications, we believe we are well positioned to continue to grow our high quality balance sheet and gather new customers while addressing the rapidly changing environment of regulatory and operational oversight. We believe our efficient model is scalable and will allow us to achieve strong financial performance metrics while increasing our stockholder value.
As shown in Table 3, the efficiency of our business model has resulted in attractive financial performance results. Some of the key return metrics we follow closely in measuring our success include:
· | Returns on average common equity and assets, which, alongside growth of earnings, we believe represent global measures of success in community banking, |
· | Efficiency measures, including our expense ratios and our revenue per full-time employee, and |
· | Net interest margin, with a focus on our cost of deposits. |
TABLE 3: Return Metrics | Nationwide | High Performing | High C&I | |||||||||||||
ServisFirst | Community | Nationwide Peer | Concentration | |||||||||||||
Bancshares, Inc. | BHC Rank | Group Median | Peer Group Median | |||||||||||||
For the Year Ended December 31, 2013: | ||||||||||||||||
Return on Average Common Equtiy (1) | 18.30% | 9 | 12.88% | 9.96% | ||||||||||||
3-Year Average | 18.24% | 7 | 13.03% | 9.83% | ||||||||||||
Return on Average Assets (1) | 1.31% | 41 | 1.33% | 0.99% | ||||||||||||
3-Year Average | 1.25% | 48 | 1.20% | 1.00% | ||||||||||||
Efficiency Ratio (2) | 38.8% | 9 | 54.0% | 55.4% | ||||||||||||
3-Year Average | 41.2% | 11 | 54.2% | 58.4% | ||||||||||||
Non-interest Expense / Average Assets (3) | 1.51% | 12 | 2.68% | 2.45% | ||||||||||||
3-Year Average | 1.62% | 13 | 2.66% | 2.51% | ||||||||||||
Revenue per FTE (4) | $415.1 | 17 | $217.7 | $307.9 | ||||||||||||
Cost of Total Deposits (5) | 0.43% | 269 | 0.30% | 0.22% | ||||||||||||
Net Interest Margin (6) | 3.80% | 146 | 3.80% | 3.20% |
Source: SNL Financial, Inc.
(1) | Ranking for comparison to Nationwide Community BHC group is based on highest to lowest percentages. |
(2) | Defined as total non-interest expense divided by the sum of non-interest income and net interest income; ranking for comparison to Nationwide Community BHC group is based on lowest to highest percentages. |
(3) | Ranking for comparison to Nationwide Community BHC group is based on lowest to highest percentages. |
(4) | Defined as the sum of interest income and non-interest income divided by the number of full time equivalent employees at period end; ranking for comparison to Nationwide Community BHC group is based on highest to lowest percentages; dollars in thousands. |
(5) | Defined as total interest expense on deposits divided by average deposits for the period; ranking for comparison to Nationwide Community BHC group is based on lowest to highest percentages. |
(6) | Defined as net interest income divided by average earning assets for the period; ranking for comparison to Nationwide Community BHC group is based on highest to lowest percentages. |
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We believe the development of our efficient delivery system and our business model over the last nine years significantly benefits our ability to continue to produce high return growth metrics in the future. We believe our scalable business model and lack of legacy challenges faced by many of our older competitors and peers, including less efficient branch systems highlighted by smaller average deposit sizes per branch, will provide us opportunities to focus our efforts on continuing to outperform the broad community banking markets, positioning us as one of the best performing companies in our industry.
Our Franchise Strengths and Competitive Position
· | Experienced Board and Senior Management Team. Our senior management team, led by Mr. Broughton, is comprised of seasoned professionals, with an average of 36 years of banking experience. Many of our management team members have extensive experience working together at other financial institutions and have successfully executed operating business models similar to ours in the past. We believe that our management and board’s incentives are closely aligned with our stockholders through the ownership of a substantial amount of our stock. The combination of experienced leadership and stock ownership contribute to our culture of success, which we believe builds on itself and allows us to continue to attract and hire top-quality talent in each of our markets. |
· | Significant Historical Growth Coupled with Strong Profitability. We have grown from total assets of approximately $1.6 billion as of December 31, 2009, to total assets of approximately $3.5 billion as of December 31, 2013. From our original location in Birmingham, we have grown to 13 locations in seven markets. At the same time, our focus on credit quality, customer service and operating efficiency has allowed us to increase our earnings per share from $1.02 as of December 31, 2009, to $5.69 as of December 31, 2013. |
· | Simple, Customer-Focused Business Model. Our principal business is to accept deposits from the public and make loans and other investments. We emphasize competitive products, state of the art technology and a focus on quality service. Our management and employees focus on recognizing customers’ needs and delivering products and services to meet those needs. 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 business model of focusing on traditional commercial banking products driven by a high margin delivery system is a superior method to drive returns to our stockholders. |
· | Efficient Operations and High-Capacity, Scalable Operating Platform. We have a corporate culture of expense control. At the same time, we have made significant investments in our infrastructure and technology that, when combined with our operating efficiency, create a scalable platform for future growth. Our core systems have significant capacity to deliver comprehensive commercial products and services. We have made other significant investments in financial reporting and servicing systems. We believe we have created a technology platform that will allow us to compete effectively with our competitors. |
· | Corporate Structure Designed With The Customer in Mind. We empower our local bankers to make local decisions, supported by centralized risk and credit technology and resources so that our bankers can focus on customer service. Our goal in each market is to employ the highest quality bankers to implement our operating strategy, grow our customer base and provide the highest level of customer service possible. We focus on an in-market geographic model of organizational structure as opposed to a line of business model employed by most regional banks. This structure gives significant responsibility and accountability to our regional chief executive officers, which we believe results in superior customer service. |
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Additional Information
Our principal executive office is located at 850 Shades Creek Parkway, Suite 200, Birmingham, Alabama 35209, and our telephone number is (205) 949-0302. Our website is www.servisfirstbank.com. The information contained on our website is not a part of, or incorporated by reference into, this prospectus.
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THE OFFERING
Securities offered by us | [ ] shares of common stock. |
Underwriter purchase option | [ ] shares of common stock. |
Securities offered as a percentage of outstanding shares of common stock | [ ], assuming the underwriters do not exercise their purchase option. |
Common shares outstanding after completion of the offering | [ ] shares of common stock, assuming the underwriters do not exercise their purchase option.(1) |
Securities owned by directors and executive officers | Our directors and executive officers own 1,141,296 shares, including options to purchase our common stock, or 13.9% of the fully-diluted amount of our common stock outstanding, which amount is not expected to materially change as a result of the offering. |
Use of proceeds | Assuming an initial public offering price of $[ ] per share, which is the midpoint of the offering price set forth on the cover page of this prospectus, we estimate that the net proceeds to us from the sale of our common stock in this offering will be $[ ] million (or $[ ] million if the underwriters exercise in full their purchase option), after deducting estimated underwriting discounts and offering expenses. We intend to use the net proceeds to us generated by this offering for general corporate purposes. Although we may, from time to time in the ordinary course of business, evaluate potential acquisition opportunities that we believe are complementary to our business and provide attractive risk-adjusted returns, we do not have any immediate plans, arrangements or understandings relating to any material acquisition. For additional information, see “Use of Proceeds.” |
Dividends | We are a legal entity separate and distinct from our bank. Our principal source of revenue consists of dividends from our bank. The payment of dividends by our bank is subject to various regulatory requirements. On September 19, 2013, we announced the approval of the initiation of quarterly cash dividends beginning in 2014. The first quarterly cash dividend of $0.15 per share will be payable on April 14, 2014 to stockholders of record as of April 7, 2014. Any future determination to pay dividends on our common stock will be made by our board of directors and will depend upon our results of operations, financial condition, capital requirements, regulatory and contractual restrictions, our business strategy and other factors that our board deems relevant. For additional information, see “Dividend Policy.” |
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Proposed Nasdaq Global Market symbol | We have applied to list our common stock on the Nasdaq Global Market under the symbol “SFBS.” |
Risk factors | Investing in our common stock involves risks. See “Risk Factors,” beginning on page 19, for a discussion of certain factors that you should carefully consider before making an investment decision. |
(1) | References in this section to the number of shares of our common stock outstanding after this offering are based on 7,420,812 shares of our common stock issued and outstanding as of March 10, 2014. Unless otherwise noted, these references exclude: |
· | 776,300 shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $23.08 per share (of which options to purchase 423,744 shares have vested); |
· | 217,670 shares of common stock reserved for issuance in connection with stock awards that remain available for issuance under our 2005 Amended and Restated Stock Incentive Plan and our 2009 Stock Incentive Plan; |
· | 15,000 shares of common stock issuable upon the exercise of warrants issued to certain accredited investors at a price of $25.00 per share in connection with issuance of our 8.25% subordinated note due June 1, 2016, which note has been paid off in full. |
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
You should read the selected historical consolidated financial and operating data set forth below in conjunction with the sections titled “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Capitalization,” as well as the consolidated financial statements and the related notes included elsewhere in this prospectus. Except for the data under “Selected Performance Ratios,” “Asset Quality Ratios,” “Selected Balance Sheet Ratios,” “Capital Adequacy Ratios” and “Growth Ratios,” the selected historical consolidated financial data, other than “Selected Balance Sheet Date,” as of and for the years ended December 31, 2013, 2012 and 2011 is derived from our audited financial statements included elsewhere in this prospectus, and the historical consolidated financial data as of and for the years ended December 31, 2010 and 2009 and the “Selected Balance Sheet Data” for the year ended December 31, 2011 is derived from our audited financial statements not included in this prospectus.
As of and for the years ended December 31, | ||||||||||||||||||||
2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
(Dollars in thousands except for share and per share data) | ||||||||||||||||||||
Selected Balance Sheet Data: | ||||||||||||||||||||
Total assets | $ | 1,573,497 | $ | 1,935,166 | $ | 2,460,785 | $ | 2,906,314 | $ | 3,520,699 | ||||||||||
Loans, net | 1,192,173 | 1,376,741 | 1,808,712 | 2,336,924 | 2,828,205 | |||||||||||||||
Total securities | 256,098 | 282,193 | 309,018 | 259,844 | 298,494 | |||||||||||||||
Deposits | 1,432,355 | 1,758,716 | 2,143,887 | 2,511,572 | 3,019,642 | |||||||||||||||
Other borrowings | 24,922 | 24,937 | 84,219 | 136,982 | 194,320 | |||||||||||||||
Subordinated debentures | 15,228 | 30,420 | 30,514 | 15,050 | - | |||||||||||||||
Stockholders’ equity | 97,622 | 117,100 | 196,292 | 233,257 | 297,192 | |||||||||||||||
Selected Income Statement Data: | ||||||||||||||||||||
Net interest income | $ | 43,860 | $ | 62,886 | $ | 75,331 | $ | 94,122 | $ | 112,462 | ||||||||||
Provision for loan losses | 10,685 | 10,350 | 8,972 | 9,100 | 13,008 | |||||||||||||||
Net interest income after provision for loan losses | 33,175 | 52,536 | 66,359 | 85,022 | 99,454 | |||||||||||||||
Noninterest income | 4,413 | 5,169 | 6,926 | 9,643 | 10,010 | |||||||||||||||
Noninterest expense | 28,930 | 30,969 | 37,458 | 43,100 | 47,489 | |||||||||||||||
Income before income taxes | 8,658 | 26,736 | 35,827 | 51,565 | 61,975 | |||||||||||||||
Net income available to common stockholders | 5,878 | 17,378 | 23,238 | 34,045 | 41,201 | |||||||||||||||
Per Common Share Data: | ||||||||||||||||||||
Net income, basic | $ | 1.07 | $ | 3.15 | $ | 4.03 | $ | 5.68 | $ | 6.00 | ||||||||||
Net income, diluted | 1.02 | 2.84 | 3.53 | 4.99 | 5.69 | |||||||||||||||
Tangible book value per share | 17.71 | 21.19 | 26.35 | 30.84 | 35.00 | |||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||
Basic | 5,485,972 | 5,519,151 | 5,759,524 | 5,996,437 | 6,869,071 | |||||||||||||||
Diluted | 5,787,643 | 6,294,604 | 6,749,163 | 6,941,752 | 7,268,675 | |||||||||||||||
Actual common shares outstanding | 5,513,482 | 5,527,482 | 5,932,182 | 6,268,812 | 7,350,012 | |||||||||||||||
Selected Performance Ratios: | ||||||||||||||||||||
Return on average assets | 0.43 | % | 1.04 | % | 1.11 | % | 1.30 | % | 1.31 | % | ||||||||||
Return on average stockholders' equity | 6.33 | % | 15.86 | % | 14.73 | % | 15.81 | % | 15.54 | % | ||||||||||
Return on average common stockholders' equity | 6.33 | % | 15.86 | % | 17.01 | % | 19.41 | % | 18.30 | % |
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Net interest margin (1) | 3.31 | % | 3.94 | % | 3.79 | % | 3.80 | % | 3.80 | % | ||||||||||
Non-interest income to average assets | 0.32 | % | 0.31 | % | 0.33 | % | 0.37 | % | 0.32 | % | ||||||||||
Non-interest expense to average assets | 2.10 | % | 1.85 | % | 1.79 | % | 1.64 | % | 1.51 | % | ||||||||||
Efficiency ratio (2) | 59.93 | % | 45.51 | % | 45.54 | % | 41.54 | % | 38.78 | % | ||||||||||
Asset Quality Ratios: | ||||||||||||||||||||
Non-performing loans to totals loans | 1.01 | % | 1.03 | % | 0.75 | % | 0.44 | % | 0.34 | % | ||||||||||
Non-performing assets to total assets (3) | 1.57 | % | 1.10 | % | 1.06 | % | 0.69 | % | 0.64 | % | ||||||||||
Allowance for loan losses to total gross loans | 1.22 | % | 1.30 | % | 1.20 | % | 1.11 | % | 1.07 | % | ||||||||||
Allowance for loan losses to total non-performing loans | 120.91 | % | 126.00 | % | 159.96 | % | 253.50 | % | 314.94 | % | ||||||||||
Net charge-offs to average loans outstanding | 0.60 | % | 0.55 | % | 0.32 | % | 0.24 | % | 0.33 | % | ||||||||||
Selected Balance Sheet Ratios: | ||||||||||||||||||||
Gross loans to total deposits | 84.27 | % | 79.31 | % | 85.39 | % | 94.09 | % | 94.68 | % | ||||||||||
Noninterest-bearing deposits to total deposits | 14.75 | % | 14.24 | % | 19.54 | % | 21.71 | % | 21.54 | % | ||||||||||
Certificates of deposit to total deposits | 17.73 | % | 15.83 | % | 17.91 | % | 15.75 | % | 13.73 | % | ||||||||||
Capital Adequacy Ratios: | ||||||||||||||||||||
Tangible common equity to tangible assets | 6.20 | % | 6.05 | % | 6.35 | % | 6.65 | % | 7.31 | % | ||||||||||
Tangible equity to tangible assets | 6.20 | % | 6.05 | % | 7.98 | % | 8.03 | % | 8.44 | % | ||||||||||
Tier 1 leverage ratio (4) | 6.97 | % | 7.77 | % | 9.17 | % | 8.43 | % | 8.48 | % | ||||||||||
Tier 1 common capital ratio | 7.69 | % | 8.06 | % | 7.76 | % | 7.63 | % | 8.64 | % | ||||||||||
Tier 1 capital ratio (5) | 8.89 | % | 10.22 | % | 11.39 | % | 9.89 | % | 10.00 | % | ||||||||||
Total risk-based capital ratio (6) | 10.48 | % | 11.82 | % | 12.79 | % | 11.78 | % | 11.73 | % | ||||||||||
Growth Ratios: | ||||||||||||||||||||
Percentage change in assets | 35.38 | % | 22.99 | % | 27.16 | % | 18.11 | % | 21.14 | % | ||||||||||
Percentage change in net loans | 24.49 | % | 15.48 | % | 31.38 | % | 29.20 | % | 21.02 | % | ||||||||||
Percentage change in deposits | 38.08 | % | 22.78 | % | 21.90 | % | 17.15 | % | 20.23 | % | ||||||||||
Percentage change in common equity | 12.49 | % | 19.95 | % | 33.50 | % | 23.64 | % | 33.08 | % | ||||||||||
Percentage change in net income | (16.09 | )% | 195.64 | % | 34.87 | % | 46.96 | % | 20.82 | % | ||||||||||
Percentage change in diluted net income per share | (22.14 | )% | 178.43 | % | 24.30 | % | 41.36 | % | 14.03 | % |
(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) | Nonperforming assets are defined as nonaccrual loans plus loans 90-days past due plus other real estate owned. |
(4) | Total stockholders' equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible assets plus allowance for loan losses (limited to 1.25% of risk-weighted assets) divided by total risk-weighted assets. |
(5) | Total stockholders' equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible assets divided by total risk-weighted assets. |
(6) | Total stockholders' equity excluding unrealized losses on securities available for sale, net of taxes, and intangible assets divided by average assets less intangible assets. |
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GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Some of the financial data included in our selected consolidated financial information are not measures of financial performance recognized by generally accepted accounting principles in the United States, or GAAP. These non-GAAP financial measures are “tangible book value per share,” “tangible common equity to tangible assets” and “tangible equity to tangible assets.” Our management uses these non-GAAP financial measures in its analysis of our performance.
· | “Tangible book value per share” is defined as total stockholders’ equity, excluding preferred stock, less intangible assets divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets. |
· | “Tangible common equity to tangible assets” – Tangible common equity is defined as total stockholders’ equity, excluding preferred stock, less intangible assets, and tangible assets are calculated as total assets less intangible assets. |
· | “Tangible equity to tangible assets” is defined as the ratio of stockholders’ equity reduced by goodwill divided by total assets reduced by goodwill. This measure is important to many investors who are interested in relative changes from period to period in equity and total assets, each exclusive of changes in intangible assets. |
We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use. The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:
December 31, | ||||||||||||||||||||
2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
Total stockholders' equity-GAAP | $ | 97,622 | $ | 117,100 | $ | 196,292 | $ | 233,257 | $ | 297,192 | ||||||||||
Adjustments: | ||||||||||||||||||||
Preferred equity | - | - | 39,958 | 39,958 | 39,958 | |||||||||||||||
Goodwill and other intangibles | - | - | - | - | - | |||||||||||||||
Tangible common equity | 97,622 | 117,100 | 156,334 | 193,299 | 257,234 | |||||||||||||||
Shares outstanding | 5,513 | 5,527 | 5,932 | 6,269 | 7,350 | |||||||||||||||
Tangible book value per share | $ | 17.71 | $ | 21.19 | $ | 26.35 | $ | 30.84 | $ | 35.00 | ||||||||||
Total assets - GAAP | $ | 1,573,497 | $ | 1,935,166 | $ | 2,460,785 | $ | 2,906,314 | $ | 3,520,699 | ||||||||||
Adjustments: | ||||||||||||||||||||
Goodwill and other intangibles | - | - | - | - | - | |||||||||||||||
Tangible assets | 1,573,497 | 1,935,166 | 2,460,785 | 2,906,314 | 3,520,699 | |||||||||||||||
Tangible common equity to tangible assets | 6.20 | % | 6.05 | % | 6.35 | % | 6.65 | % | 7.31 | % | ||||||||||
Total stockholders' equity-GAAP | $ | 97,622 | $ | 117,100 | $ | 196,292 | $ | 233,257 | $ | 297,192 | ||||||||||
Adjustments: | ||||||||||||||||||||
Goodwill and other intangibles | - | - | - | - | - | |||||||||||||||
Tangible equity | 97,622 | 117,100 | 196,292 | 233,257 | 297,192 | |||||||||||||||
Tangible equity to tangible assets | 6.20 | % | 6.05 | % | 7.98 | % | 8.03 | % | 8.44 | % |
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RISK FACTORS
Investing in our common stock involves a significant degree of risk. You should carefully consider the following risk factors, in addition to the other information contained in this prospectus, before deciding to invest in our common stock. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could materially and adversely affect our business, prospects, financial condition, results of operations and cash flow. As a result, the trading price of our common stock could decline, and you could lose all or part of your investment. Further, to the extent that any of the information in this prospectus constitutes forward-looking statements, the risk factors below also are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See “Cautionary Note Regarding Forward-Looking Statements” on page 1.
Risks Related To Our Business
As a business operating in the financial services industry, our business and operations may be adversely affected in numerous and complex ways by weak economic conditions.
Our businesses and operations, which primarily consist of lending money to customers in the form of loans, borrowing money from customers in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States. If the U.S. economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the medium and long-term fiscal outlook of the federal government, and future tax rates is a concern for businesses, consumers and investors in the United States. In addition, economic conditions in foreign countries, including uncertainty over the stability of the euro and other currencies, could affect the stability of global financial markets, which could hinder U.S. economic growth. Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. The current economic environment is also characterized by interest rates at historically low levels, which impacts our ability to attract deposits and to generate attractive earnings through our investment portfolio. All of these factors can individually or in the aggregate be detrimental to our business, and the interplay between these factors can be complex and unpredictable. Our business is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial condition, results of operations and prospects.
We are dependent on the services of our management team and board of directors, and the unexpected loss of key officers or directors may adversely affect our business and operations.
We are led by an experienced core management team with substantial experience in the markets that we serve, and our operating strategy focuses on providing products and services through long-term relationship managers. Accordingly, our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management. Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute our business plan may be lengthy. If any of our or the bank’s executive officers, other key personnel, or directors leaves us or the bank, our operations may be adversely affected. In particular, we believe that Thomas A. Broughton, III, Clarence C. Pouncey, III, and William M. Foshee are extremely important to our success and the success of our bank. Mr. Broughton has extensive executive-level banking experience and is the President and Chief Executive Officer of us and the bank. Mr. Pouncey has extensive operating banking experience and is an Executive Vice President and the Chief Operating Officer of us and the bank. Mr. Foshee has extensive financial and accounting banking experience and is an Executive Vice President and the Chief Financial Officer of us and the bank. If any of Mr. Broughton, Mr. Pouncey or Mr. Foshee leaves his position for any reason, our financial condition and results of operations may suffer. The bank is the beneficiary of a key man life insurance policy on the life of Mr. Broughton in the amount of $5 million. Also, we have hired key officers to run our banking offices in each of the Huntsville, Montgomery, Mobile and Dothan, Alabama markets and the Pensacola, Florida market, who are extremely important to our success in such markets. If any of them leaves for any reason, our results of operations could suffer in such markets. With the exception of the key officers in charge of our Huntsville, Montgomery and Dothan banking offices, we do not have employment agreements or non-competition agreements with any of our executive officers, including Messrs. Broughton, Pouncey and Foshee. In the absence of these types of agreements, our executive officers are free to resign their employment at any time and accept an offer of employment from another company, including a competitor. Additionally, our directors’ and advisory board members’ community involvement and diverse and extensive local business relationships are important to our success. Any material change in the composition of our board of directors or the respective advisory boards of the bank could have a material adverse effect on our business, financial condition, results of operations and prospects.
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We may not be able to successfully expand into new markets.
We have opened new offices and operations in three primary markets (Pensacola, Florida, Mobile, Alabama and Nashville, Tennessee) in the past four years. We may not be able to successfully manage this growth with sufficient human resources, training and operational, financial and technological resources. Any such failure could 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.
A prolonged downturn in the real estate market could result in losses and adversely affect our profitability.
As of December 31, 2013, approximately 48.3% of our loan portfolio was composed of commercial and consumer real estate loans. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. The recent recession has adversely affected real estate market values across the country and values may continue to decline. A further decline in real estate values could further impair the value of our collateral and our ability to sell the collateral upon any foreclosure, which would likely require us to increase our provision for loan losses. In the event of a default with respect to any of these loans, the amounts we receive upon sale of the collateral may be insufficient to recover the outstanding principal and interest on the loan. If we are required to re-value the collateral securing a loan to satisfy the debt during a period of reduced real estate values or to increase our allowance for loan losses, our profitability could be adversely affected, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.
As a result of our growth over the past several years, approximately 56% of the loans in our loan portfolio were originated during the past two years. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because a large portion of our portfolio is relatively new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our high concentration of large loans to certain borrowers may increase our credit risk.
Our growth over the last several years has been partially attributable to our ability to originate and retain large loans. Many of these loans have been made to a small number of borrowers, resulting in a high concentration of large loans to certain borrowers. As of December 31, 2013, our 10 largest borrowing relationships ranged from approximately $17.2 million to $21.9 million (including unfunded commitments) and averaged approximately $19.0 million in total commitments. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or property securing these loans, this high concentration of borrowers presents a risk to our lending operations. If any one of these borrowers becomes unable to repay its loan obligations as a result of economic or market conditions, or personal circumstances, such as divorce or death, our nonperforming loans and our provision for loan losses could increase significantly, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
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Our decisions regarding credit risk could be inaccurate and our allowance for loan losses may be inadequate, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our earnings are affected by our ability to make loans, and thus we could sustain significant loan losses and consequently significant net losses if we incorrectly assess either the creditworthiness of our borrowers resulting in loans to borrowers who fail to repay their loans in accordance with the loan terms or the value of the collateral securing the repayment of their loans, or we fail to detect or respond to a deterioration in our loan quality in a timely manner. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses that we consider adequate to absorb losses inherent in the loan portfolio based on our assessment of the information available. In determining the size of our allowance for loan losses, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information. We target small and medium-sized businesses as loan customers. Because of their size, these borrowers may be less able to withstand competitive or economic pressures than larger borrowers in periods of economic weakness. Also, as we expand into new markets, our determination of the size of the allowance could be understated due to our lack of familiarity with market-specific factors. Despite the effects of sustained economic weakness, we believe our allowance for loan losses is adequate. Our allowance for loan losses as of December 31, 2013 was $30.7 million, or 1.07% of total gross loans.
If our assumptions are inaccurate, we may incur loan losses in excess of our current allowance for loan losses and be required to make material additions to our allowance for loan losses, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
However, even if our assumptions are accurate, federal and state regulators periodically review our allowance for loan losses and could require us to materially increase our allowance for loan losses or recognize further loan charge-offs based on judgments different than those of our management. Any material increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a material adverse effect on our business, financial condition, results of operations and prospects.
If we fail to design, implement and maintain effective internal control over financial reporting or remediate any future material weakness in our internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Effective internal control over financial reporting is necessary for us to provide reliable reports and prevent fraud.
We believe that a control system, no matter how well designed and managed, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. We cannot guarantee that we will identify all significant deficiencies and/or material weaknesses in our internal control in the future, and our failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) could have a material adverse effect on our business, financial condition, results of operations and prospects.
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Our corporate structure provides for decision-making authority by our regional chief executive officers and banking teams. Our business, financial condition, results of operations and prospects could be negatively affected if our employees do not follow our internal policies or are negligent in their decision-making.
We attract and retain our management talent by empowering them to make certain business decisions on a local level. Lending authorities are assigned to regional chief executive officers and their banking teams based on their experience. Additionally, all loans in excess of $1.0 million are reviewed by our centralized credit administration department in Birmingham. Moreover, for decisions that fall outside of the assigned authorities, our regional chief executive officers are required to obtain approval from our senior management team. We cannot guarantee that our local bankers will 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.
We intend to continue pursuing our growth strategy for our business through organic growth of our loan portfolio. Our prospects must be considered in light of the risks, expenses and difficulties that can be encountered by financial service companies in rapid growth stages, which include the risks associated with the following:
· | maintaining loan quality; |
· | maintaining adequate management personnel and information systems to oversee such growth; |
· | maintaining adequate control and compliance functions; and |
· | securing capital and liquidity needed to support anticipated growth. |
We may not be able to expand our presence in our existing markets or successfully enter new markets, and any expansion could adversely affect our results of operations. Our ability to grow successfully will depend on a variety of factors, including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth. Failure to manage our growth effectively could adversely affect our ability to successfully implement our business strategy, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our continued pace of growth may require us to raise additional capital in the future to fund such growth, and the unavailability of additional capital on terms acceptable to us could adversely affect our growth and/or our financial condition and results of operations.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. To support our recent and ongoing growth, we have completed a series of capital transactions during the past three years, including:
· | the sale of 40,000 shares of our senior non-cumulative perpetual preferred stock, Series A, par value $.001 per share (or “Series A Preferred Stock”) to the United States Department of the Treasury (“Treasury”) in connection with the Treasury’s Small Business Lending Fund program, for gross proceeds of $40,000,000 on June 21, 2011; |
· | the sale of an aggregate of 340,000 shares of our common stock at $30 per share, or $10,200,000, in a private placement completed on June 30, 2011; |
· | the sale of $20,000,000 in 5.5% subordinated notes due November 9, 2022 to accredited investor purchasers in November 2012, the proceeds of which were used to pay off $15,000,000 in our 8.5% subordinated debentures; and |
· | the sale of an aggregate of 250,000 shares of our common stock at $41.50 per share, or $10,375,000, in a private placement completed on December 2, 2013. |
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After giving effect to these transactions and this offering, we believe that we will have sufficient capital to meet our capital needs for our immediate growth plans. However, we will continue to need capital to support our longer-term growth plans. If capital is not available on favorable terms when we need it, we will have to either issue common stock or other securities on less than desirable terms or reduce our rate of growth until market conditions become more favorable. Either of such events could have a material adverse effect on our business, financial condition, results of operations and prospects.
Competition from financial institutions and other financial service providers may adversely affect our profitability.
The banking business is highly competitive, and we experience competition in our markets from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other community banks and super-regional and national financial institutions that operate offices in our service areas.
We compete with these other financial institutions both in attracting deposits and in making loans. In addition, we must attract our customer base from other existing financial institutions and from new residents. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to successfully compete with an array of financial institutions in our service areas.
Our ability to compete successfully will depend on a number of factors, including, among other things:
· | our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound banking practices; |
· | the scope, relevance and pricing of products and services that we offer; |
· | customer satisfaction with our products and services; |
· | industry and general economic trends; and |
· | our ability to keep pace with technological advances and to invest in new technology. |
Increased competition could require us to increase the rates that we pay on deposits or lower the rates that we offer on loans, which could reduce our profitability. Our failure to compete effectively in our market could restrain our growth or cause us to lose market share, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Unpredictable economic conditions or a natural disaster in the state of Alabama, the panhandle of the state of Florida or the Nashville, Tennessee MSA may have a material adverse effect on our financial performance.
Substantially all of our borrowers and depositors are individuals and businesses located and doing business in our markets within the state of Alabama, the panhandle of the state of Florida and the Nashville, Tennessee MSA. Therefore, our success will depend on the general economic conditions in these areas, and more particularly in Birmingham, Huntsville, Dothan, Montgomery and Mobile, Alabama, Pensacola, Florida and Nashville, Tennessee, which we cannot predict with certainty. Unlike with many of our larger competitors, the majority of our borrowers are commercial firms, professionals and affluent consumers located and doing business in such local markets. As a result, our operations and profitability may be more adversely affected by a local economic downturn or natural disaster in Alabama, Florida or Tennessee, particularly in such markets, than those of larger, more geographically diverse competitors. For example, a downturn in the economy of any of our MSAs could make it more difficult for our borrowers in those markets to repay their loans and may lead to loan losses that we cannot offset through operations in other markets until we can expand our markets further. Our entry into the Pensacola, Florida and Mobile, Alabama markets increased our exposure to potential losses associated with hurricanes and similar natural disasters that are more common on the Gulf Coast than in our other markets. Accordingly, any regional or local economic downturn, or natural or man-made disaster, that affects Alabama, the panhandle of Florida or the Nashville, Tennessee MSA, or existing or prospective property or borrowers in Alabama, the panhandle of Florida or the Nashville, Tennessee MSA 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.
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We encounter technological change continually and have fewer resources than many of our competitors to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to serving customers better, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our success will depend in part on our ability to address our customers’ needs by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we have. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers. As these technologies are improved in the future, we may, in order to remain competitive, be required to make significant capital expenditures, which may increase our overall expenses and have a material adverse effect on our net income.
We depend on our information technology and telecommunications systems and third-party servicers, and any systems failures or interruptions could adversely affect our operations and financial condition.
Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. We outsource many of our major systems, such as data processing, loan servicing and deposit processing systems. For example, Jack Henry & Associates, Inc. provides our entire core banking system through a service bureau arrangement. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
We may bear costs associated with the proliferation of computer theft and cybercrime.
We necessarily collect, use and hold data concerning individuals and businesses with whom we have a banking relationship. Threats to data security, including unauthorized access and cyber attacks, rapidly emerge and change, exposing us to additional costs for protection or remediation and competing time constraints to secure our data in accordance with customer expectations and statutory and regulatory requirements. It is difficult and near impossible to defend against every risk being posed by changing technologies as well as criminals intent on committing cyber-crime. Increasing sophistication of cyber-criminals and terrorists make keeping up with new threats difficult and could result in a breach of our data security. Patching and other measures to protect existing systems and servers could be inadequate, especially on systems that are being retired. Controls employed by our information technology department and third-party vendors could prove inadequate. We could also experience a breach by intentional or negligent conduct on the part of our employees or other internal sources. Our systems and those of our third-party vendors may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware.
A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs, and reputational damage, any of which could individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition and prospects.
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Our recent results may not be indicative of our future results, and may not provide guidance to assess the risk of an investment in our common stock.
We may not be able to sustain our historical rate of growth and may not even be able to expand our business at all. In addition, our recent growth may distort some of our historical financial ratios and statistics. In the future, we may not have the benefit of several factors that were favorable until late 2008, such as a rising interest rate environment, a strong residential housing market or the ability to find suitable expansion opportunities. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. As a small commercial bank, we have different lending risks than larger banks. We provide services to our local communities; thus, our ability to diversify our economic risks is limited by our own local markets and economies. We lend primarily to small to medium-sized businesses, which may expose us to greater lending risks than those faced by banks lending to larger, better-capitalized businesses with longer operating histories. We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through our loan approval and review procedures. Our use of historical and objective information in determining and managing credit exposure may not be accurate in assessing our risk. Our failure to sustain our historical rate of growth or adequately manage the factors that have contributed to our growth could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our directors and executive officers own a significant portion of our common stock and can exert influence over our business and corporate affairs.
Our directors and executive officers, as a group, beneficially owned approximately 14.26% of our outstanding common stock as of March 10, 2014. As a result of their ownership, our directors and executive officers will have the ability, by voting their shares in concert, to influence the outcome of all matters submitted to our stockholders for approval, including the election of directors.
We engage in lending secured by real estate and may be forced to foreclose on the collateral and own the underlying real estate, subjecting us to the costs associated with the ownership of the real property.
Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real estate. As of December 31, 2013, we held $12.7 million in other real estate owned. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to:
· | general or local economic conditions; |
· | environmental cleanup liability; |
· | neighborhood assessments; |
· | interest rates; |
· | real estate tax rates; |
· | operating expenses of the mortgaged properties; |
· | supply of and demand for rental units or properties; |
· | ability to obtain and maintain adequate occupancy of the properties; |
· | zoning laws; |
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· | 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.
The dividend rate on our Series A Preferred Stock fluctuates based on the changes in our “qualified small business lending” and other factors and may increase, which could adversely affect income to common stockholders.
We issued $40.0 million in Series A Preferred Stock to the Treasury on June 21, 2011 in connection with the Treasury’s Small Business Lending Fund program. Dividends on each share of our Series A Preferred Stock are payable on the liquidation amount at an annual rate calculated based upon the “percentage change in qualified lending” of the bank between each dividend period and the “baseline” level of “qualified small business lending” of the bank. Such dividend rate may vary from 1% per annum to 7% per annum for the eleventh through the eighteenth dividend periods and that portion of the nineteenth dividend period ending on the four and one-half year anniversary of the date of issuance of the Series A Preferred Stock (or, the dividend periods from October 1, 2013 through and including December 20, 2015). The dividend rate increases to a fixed rate of 9% after 4.5 years from the issuance of our Series A Preferred Stock (or, on December 21, 2015), regardless of the previous rate, until all of the preferred shares are redeemed. If we are unable to maintain our “qualified small business lending” at certain levels, if we fail to comply with certain other terms of our Series A Preferred Stock, or if we are unable to redeem our Series A Preferred Stock within 4.5 years following issuance, the dividend rate on our Series A Preferred Stock could result in materially greater dividend payments, which in turn could have a material adverse effect on our business, financial condition, results of operations and prospects.
We are subject to interest rate risk, which could adversely affect our profitability.
Our profitability, like that of most financial institutions, depends to a large extent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowings. We have positioned our asset portfolio to benefit in a higher or lower interest rate environment, but this may not remain true in the future. Our interest sensitivity profile was somewhat asset sensitive as of December 31, 2013, meaning that our net interest income and economic value of equity would increase more from rising interest rates than from falling interest rates. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System (or, the “Federal Reserve”). Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average duration of our assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our business, financial condition, results of operations and prospects.
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In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also necessitate further increases to the allowance for loan losses which could have a material adverse effect on our business, results of operations, financial condition and prospects.
Liquidity risk could impair our ability to fund operations and meet our obligations as they become due.
Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of an inability to liquidate assets or obtain adequate funding. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. In particular, approximately 74.0% of the bank’s liabilities as of December 31, 2013 were checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, 81.2% of the assets of the bank were loans, which cannot be called or sold in the same time frame. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Market conditions or other events could also negatively affect the level or cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations and fund asset growth and new business transactions at a reasonable cost, in a timely manner and without adverse consequences. Any substantial, unexpected or prolonged change in the level or cost of liquidity could have a material adverse effect on our ability to meet deposit withdrawals and other customer needs, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
The fair value of our investment securities can fluctuate due to factors outside of our control.
As of December 31, 2013, the fair value of our investment securities portfolio was approximately $297.5 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect our business, results of operations, financial condition and prospects. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Our failure to assess any currency impairments or losses with respect to our securities could have a material adverse effect on our business, financial condition, results of operations and prospects.
Deterioration in the fiscal position of the U.S. federal government and downgrades in Treasury and federal agency securities could adversely affect us and our banking operations.
The long-term outlook for the fiscal position of the U.S. federal government is uncertain, as illustrated by the 2011 downgrade by certain rating agencies of the credit rating of the U.S. government and federal agencies. However, in addition to causing economic and financial market disruptions, any future downgrade, failure to raise the U.S. statutory debt limit, or deterioration in the fiscal outlook of the U.S. federal government, could, among other things, materially adversely affect the market value of the U.S. and other government and governmental agency securities that we hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms. In particular, it could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost and availability of funding, which could negatively affect our profitability. Also, the adverse consequences of any downgrade could extend to those to whom we extend credit and could adversely affect their ability to repay their loans. Any of these developments could have a material adverse effect on our business, financial condition, results of operations and prospects.
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We may be adversely affected by the soundness of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. These losses or defaults could have a material adverse effect on our business, financial condition, results of operations and prospects.
We are subject to environmental liability risk associated with our lending activities.
In the course of our business, we may purchase real estate, or we may foreclose on and take title to real estate. As a result, we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Any significant environmental liabilities could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risks Related to Our Industry
We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business, which limitations or restrictions could have a material adverse effect on our profitability.
We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies including the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”) and the Alabama State Banking Department (the “Alabama Banking Department”). Regulatory compliance is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, and interest rates paid on deposits. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth. Violations of various laws, even if unintentional, may result in significant fines or other penalties, including restrictions on branching or bank acquisitions. Recently, banks generally have faced increased regulatory sanctions and scrutiny particularly with respect to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“USA Patriot Act”) and other statutes relating to anti-money laundering compliance and customer privacy. The recent recession had major adverse effects on the banking and financial industry, during which time many institutions saw a significant amount of their market capitalization erode as they charged off loans and wrote down the value of other assets. As described above, recent legislation has substantially changed, and increased, federal regulation of financial institutions, and there may be significant future legislation (and regulations under existing legislation) that could have a further material effect on banks and bank holding companies like us.
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In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”). The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies, other than "small bank holding companies" (generally bank holding companies with consolidated assets of less than $500 million). The Basel III Rules not only increase most of the required minimum regulatory capital ratios, they introduce a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer. The Basel III Rules also expand the current definition of capital by establishing additional criteria that capital instruments must meet to be considered additional Tier 1 capital (that is, Tier 1 capital in addition to common equity) and Tier 2 capital. A number of instruments that now generally qualify as Tier 1 capital will not qualify or their qualifications will change when the Basel III Rules are fully implemented. However, the Basel III Rules permit banking organizations with less than $15 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Basel III Rules have maintained the general structure of the current prompt corrective action thresholds while incorporating the increased requirements, including the common equity Tier 1 capital ratio. In order to be a "well-capitalized" depository institution under the new regime, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of common equity Tier 1 capital. Generally, financial institutions will become subject to the Basel III Rules on January 1, 2015 with a phase-in period through 2019 for many of the changes.
The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably. We are subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), the Sarbanes-Oxley Act, and the related rules and regulations promulgated by the Securities and Exchange Commission (or, the “SEC”). These laws and regulations increase the scope, complexity and cost of corporate governance, reporting and disclosure practices over those of non-public or non-reporting companies. Despite our conducting business in a highly regulated environment, these laws and regulations have different requirements for compliance than we experienced prior to becoming a reporting company. Our expenses related to services rendered by our accountants, legal counsel and consultants have increased in order to ensure compliance with these laws and regulations that we became subject to as a reporting company and may increase further as we become a public company and grow in size. These provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to us may impact the profitability of our business activities and may change certain of our business practices, including our ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Federal and state regulators periodically examine our business and we may be required to remediate adverse examination findings.
The Federal Reserve, the FDIC and the Alabama Banking Department periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a federal or state banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on our business, results of operations, financial condition and prospects.
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Our FDIC deposit insurance premiums and assessments may increase.
The deposits of the bank are insured by the FDIC up to legal limits and, accordingly, subject it to the payment of FDIC deposit insurance assessments. The bank’s regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses. High levels of bank failures since the beginning of the financial crisis and increases in the statutory deposit insurance limits have increased resolution costs to the FDIC and put significant pressure on the Deposit Insurance Fund. In order to maintain a strong funding position and restore the reserve ratios of the Deposit Insurance Fund, the FDIC increased deposit insurance assessment rates and charged a special assessment to all FDIC-insured financial institutions. Further increases in assessment rates or special assessments may occur in the future, especially if there are significant additional financial institution failures. Any future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and prospects.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act, the USA Patriot, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (“OFAC”). If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and prospects.
Financial reform legislation will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new regulations that are likely to increase our costs of operations.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. As final rules and regulations implementing the Dodd-Frank Act are adopted, this law is significantly changing the current bank regulatory structure and affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many years.
The Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits effective one year after the date of its enactment, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.
The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. Noninterest-bearing transaction accounts and certain attorney’s trust accounts had unlimited deposit insurance through December 31, 2012.
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The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and golden parachute payments. In addition, the Dodd-Frank Act authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials and directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Bureau now has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Institutions with less than $10 billion in assets will continue to be examined for compliance with consumer laws by their primary bank regulator.
As noted above, many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. However, compliance with this new law and its implementing regulations will result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operations and prospects.
Additional regulatory requirements especially those imposed under ARRA, EESA or other legislation intended to strengthen the U.S. financial system, could adversely affect us.
Recent government efforts to strengthen the U.S. financial system, including the implementation of the American Recovery and Reinvestment Act (“ARRA”), the Emergency Economic Stabilization Act (“EESA”), the Dodd-Frank Act, and special assessments imposed by the FDIC, subject us, to the extent applicable, to additional regulatory fees, corporate governance requirements, restrictions on executive compensation, restrictions on declaring or paying dividends, restrictions on stock repurchases, limits on tax deductions for executive compensation and prohibitions against golden parachute payments. These fees, requirements and restrictions, as well as any others that may be imposed in the future, may have a material adverse effect on our business, financial condition, results of operations and prospects.
Recent market conditions have adversely affected, and may continue to adversely affect, us, our customers and our industry.
Because our business is focused exclusively in the southeastern United States, we are particularly exposed to downturns in the U.S. economy in general and in the southeastern economy in particular. Beginning with the economic recession in 2008 and continuing through 2010, falling home prices, increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities, in turn, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit has led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and businesses and lack of confidence in the financial markets may adversely affect our customers and thus our business, financial condition, and results of operations. A return of these conditions in the near future would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry and have a material adverse effect on our business, financial condition, results of operations and prospects.
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Current market volatility and industry developments may adversely affect our business and financial results.
The volatility in the capital and credit markets, along with the housing declines over the past years, has resulted in significant pressure on the financial services industry. We have experienced a higher level of foreclosures and higher losses upon foreclosure than we have historically. If current volatility and market conditions continue or worsen, there can be no assurance that our industry, results of operations or our business will not be significantly adversely impacted. We may have further increases in loan losses, deterioration of capital or limitations on our access to funding or capital, if needed.
Further, if other, particularly larger, financial institutions continue to fail to be adequately capitalized or funded, it may negatively impact our business and financial results. We routinely interact with numerous financial institutions in the ordinary course of business and are therefore exposed to operational and credit risk to those institutions. Failures of such institutions may significantly adversely impact our operations and have a material adverse effect on our business, financial condition, results of operations and prospects.
Our profitability is vulnerable to interest rate fluctuations.
As a financial institution, our earnings can be significantly affected by changes in interest rates, particularly our net interest income, the rate of loan prepayments, the volume and type of loans originated or produced, the sales of loans on the secondary market and the value of our mortgage servicing rights. Our profitability is dependent to a large extent on our net interest income, which is the difference between our income on interest-earning assets and our expense on interest-bearing liabilities. We are affected by changes in general interest rate levels and by other economic factors beyond our control.
Changes in interest rates also affect the average life of loans and mortgage-backed securities. The relatively lower interest rates in recent periods have resulted in increased prepayments of loans and mortgage-backed securities as borrowers have refinanced their mortgages to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are not able to reinvest such prepayments at rates which are comparable to the rates on the prepaid loans or securities. Our inability to manage interest rate risk and fluctuations could have a material adverse effect on our business, financial condition, results of operations and prospects.
Changes in monetary policies may have a material adverse effect on our business.
Like all regulated financial institutions, we are affected by monetary policies implemented by the Federal Reserve and other federal instrumentalities. A primary instrument of monetary policy employed by the Federal Reserve is the restriction or expansion of the money supply through open market operations. This instrument of monetary policy frequently causes volatile fluctuations in interest rates, and it can have a direct, material adverse effect on the operating results of financial institutions including our business. Borrowings by the United States government to finance government debt may also cause fluctuations in interest rates and have similar effects on the operating results of such institutions. We do not have any control over monetary policies implemented by the Federal Reserve or otherwise and any changes in these policies could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risks Related to Our Common Stock and the Offering
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:
· | actual or anticipated fluctuations in our operating results, financial condition or asset quality; |
· | changes in economic or business conditions; |
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· | the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve; |
· | publication of research reports about us, our competitors, or the financial services industry generally, or changes in, or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage; |
· | operating and stock price performance of companies that investors deemed comparable to us; |
· | future issuances of our common stock or other securities; |
· | additions to or departures of key personnel; |
· | proposed or adopted changes in laws, regulations or policies affecting us; |
· | perceptions in the marketplace regarding our competitors and/or us; |
· | significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us; |
· | other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and |
· | other news, announcements or disclosures (whether by us or others) related to us, our competitors, our core market or the financial services industry. |
The stock market and, in particular, the market for financial institution stocks, have experienced substantial fluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects of particular companies. In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations to occur. Increased market volatility may materially and adversely affect the market price of our common stock, which could make it difficult to sell your shares at the volume, prices and times desired.
An active, liquid market for our common stock may not develop or be sustained following the offering, which may impair your ability to sell your shares.
Before this offering, there has been no established public market for our common stock. Although we have applied to list our common stock on the Nasdaq Global Market, our application may not be approved. Even if approved, an active, liquid trading market for our common stock may not develop or be sustained following the offering. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace and independent decisions of willing buyers and sellers of our common stock, over which we have no control. Without an active, liquid trading market for our common stock, stockholders may not be able to sell their shares at the volume, prices and times desired. Moreover, the lack of an established market could materially and adversely affect the value of our common stock. The market price of our common stock could decline significantly due to actual or anticipated issuances or sales of our common stock in the future.
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Actual or anticipated issuances or sales of additional amounts of our common stock following this offering could cause the market price of our common stock to decline significantly and make it more difficult for us to sell equity or equity-related securities in the future at a time and on terms that we deem appropriate. In addition, 27,000 shares that are owned by Mr. Broughton, our President and Chief Executive Officer, are pledged as collateral to secure a line of credit, 36,662 shares that are owned by Mr. Foshee, our Chief Financial Officer, are pledged to First National Bankers Bank, 145,000 shares that are owned by Mr. Fuller, one of our directors, are pledged to us as security for a loan, and 87,922 shares that are owned by Mr. Cashio, one of our directors, have been placed in a margin account, and may be sold by the pledgees under certain circumstances. The issuance of any shares of our common stock in the future also would, and equity-related securities could, dilute the percentage ownership interest held by stockholders prior to such issuance. All of the shares of common stock sold in this offering (including shares if the underwriters exercise in full their purchase option) will be freely tradable, except that any shares purchased by “affiliates” (as that term is defined in Rule 144 under the Securities Act of 1933 (the “Securities Act”)) may be sold publicly only in compliance with the limitations described under “Shares Eligible For Future Sale.” The remaining [ ] outstanding shares of our common stock, or [ ]% of our outstanding shares, will be deemed to be “restricted securities” as that term is defined in Rule 144, and may be sold in the market over time in private transactions or future public offerings. We have also filed a registration statement on Form S-8 under the Securities Act to register an aggregate of 1,450,000 shares of common stock for issuance under our 2009 Stock Incentive Plan and our Second Amended and Restated 2005 Stock Incentive Plan (or, “stock incentive plans”), of which 776,300 shares are subject to outstanding options to purchase such shares and 217,670 are reserved for future issuance. We may issue all of these shares without any action or approval by our stockholders, and these shares, once issued (including upon exercise of outstanding options), will be available for sale into the public market, subject to the restrictions described above, if applicable, for affiliate holders.
Securities analysts may not initiate or continue coverage on our common stock, which could adversely affect the market for our common stock.
The trading market for our common stock will depend in part on the research and reports that securities analysts publish about us and our business. We do not have any control over these securities analysts, and they may not cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our common stock is the subject of an unfavorable report, the price of our common stock may decline. If one or more of these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our common stock to decline.
Investors in this offering will experience immediate and substantial dilution.
The initial public offering price is expected to be substantially higher than the net tangible book value per share of our common stock immediately following this offering. Therefore, if you purchase shares in this offering, you will experience immediate and substantial dilution in net tangible book value per share in relation to the price that you paid for your shares. We expect the dilution as a result of the offering to be $[ ] per share, based on an assumed initial public offering price of $[ ] per share (the midpoint of the range set forth on the cover page of this prospectus), and our pro forma net tangible book value of $[ ] per share as of December 31, 2013. Accordingly, if we were liquidated at our pro forma net tangible book value, you would not receive the full amount of your investment.
We have broad discretion in the use of the net proceeds from this offering, and our use of those proceeds may not yield a favorable return on your investment.
We expect to use the net proceeds of this offering for general corporate purposes, which may include, among other things, acquisitions, capital expenditures, investments, and the repayment, redemption or refinancing of all or a portion of any indebtedness or other securities outstanding at a particular time. Although we may, from time to time, in the ordinary course of our business, evaluate potential acquisition opportunities that we believe are complementary to our business and provide attractive risk-adjusted returns, we do not have any immediate plans, arrangements or understandings relating to any material acquisition. Our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. In addition, we may not use the proceeds of this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the proceeds, and we cannot predict how long it will take to deploy the proceeds. Investing the offering proceeds in securities until we are able to deploy the proceeds will provide lower margins that we generally earn on loans, potentially adversely affecting stockholder returns, including earnings per share, return on assets and return on equity.
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The rights of our common stockholders are subordinate to the rights of the holders of our Series A Preferred Stock and any debt securities that we may issue and may be subordinate to the holders of any other class of preferred stock that we may issue in the future.
We have issued 40,000 shares of our Series A Preferred Stock to the Treasury in connection with our participation in the Small Business Lending Fund program. These shares have certain rights that are senior to our common stock. As a result, we must make payments on the preferred stock before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the Series A Preferred Stock must be satisfied in full before any distributions can be made to the holders of our common stock. Our board of directors has the authority to issue in the aggregate up to one million shares of preferred stock, and to determine the terms of each issue of preferred stock, without stockholder approval. Accordingly, you should assume that any shares of preferred stock that we may issue in the future will also be senior to our common stock. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, the amount, timing, nature or success of our future capital raising efforts is uncertain. Thus, common stockholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the market price of our common stock.
We and our banking subsidiary are subject to capital and other requirements which restrict our ability to pay dividends.
On September 19, 2013, we announced the approval of the initiation of quarterly cash dividends beginning in 2014. Future declarations of quarterly dividends will be subject to the approval of our board of directors, subject to limits imposed on us by our regulators. In order to pay any dividends, we will need to receive dividends from our bank or have other sources of funds. Under Alabama law, a state-chartered bank may not pay a dividend in excess of 90% of its net earnings until the bank’s surplus is equal to at least 20% of its capital (our bank’s surplus currently exceeds 20% of its capital). Moreover, our bank is also required by Alabama law to obtain the prior approval of the Superintendent of Banks (the “Superintendent”) for its payment of dividends if the total of all dividends declared by our bank in any calendar year will exceed the total of (1) our bank’s net earnings (as defined by statute) for that year, plus (2) its retained net earnings for the preceding two years, less any required transfers to surplus. In addition, the bank must maintain certain capital levels, which may restrict the ability of the bank to pay dividends to us and our ability to pay dividends to our stockholders. As of December 31, 2013, our bank could pay approximately $110.9 million of dividends to us without prior approval of the Superintendent. However, the payment of dividends is also subject to declaration by our board of directors, which takes into account our financial condition, earnings, general economic conditions and other factors, including statutory and regulatory restrictions. There can be no assurance that dividends will in fact be paid on our common stock in future periods or that, if paid, such dividends will not be reduced or eliminated.
Alabama and Delaware law limit the ability of others to acquire the bank, which may restrict your ability to fully realize the value of your common stock.
In many cases, stockholders receive a premium for their shares when one company purchases another. Alabama and Delaware law make it difficult for anyone to purchase the bank or us without approval of our board of directors. Thus, your ability to realize the potential benefits of any sale by us may be limited, even if such sale would represent a greater value for stockholders than our continued independent operation.
Our Certificate of Incorporation, as amended, authorizes the issuance of preferred stock which could adversely affect holders of our common stock and discourage a takeover of us by a third party.
Our certificate of incorporation, as amended (or, our “charter”) authorizes our board of directors to issue up to 1,000,000 shares of preferred stock without any further action on the part of our stockholders. In 2011, we issued 40,000 shares of our Series A Preferred Stock with certain rights and preferences set forth in the certificate of designation for such preferred stock. Our board of directors also has the power, without stockholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of the stockholders may impede a takeover of us and prevent a transaction favorable to our stockholders.
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An investment in our common stock is not an insured deposit and is subject to risk of loss.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and is subject to the same market forces that affect the price of common stock in any company. As a result, an investor may lose some or all of such investor’s investment in our common stock.
Our corporate governance documents, and certain corporate and banking laws applicable to us, could make a takeover more difficult.
Certain provisions of our charter and bylaws, as amended, and corporate and federal banking laws, could make it more difficult for a third party to acquire control of our organization, even if those events were perceived by many of our stockholders as beneficial to their interests. These provisions, and the corporate and banking laws and regulations applicable to us:
· | provide that special meetings of stockholders may be called at any time by the Chairman of our board of directors, by the President or by order of the board of directors; |
· | enable our board of directors to issue preferred stock up to the authorized amount, with such preferences, limitations and relative rights, including voting rights, as may be determined from time to time by the board; |
· | enable our board of directors to increase the number of persons serving as directors and to fill the vacancies created as a result of the increase by a majority vote of the directors present at the meeting; |
· | enable our board of directors to amend our bylaws without stockholder approval; and |
· | do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose). |
These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including under circumstances in which our stockholders might otherwise receive a premium over the market price of our shares.
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USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of our common stock in this offering will be approximately $[ ] million, or approximately $[ ] million if the underwriters elect to exercise in full their purchase option, assuming an initial public offering price of $[ ] per share, the midpoint of the price range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and offering expenses. Each $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us of this offering by $[ ] million, or $[ ] million if the underwriters elect to exercise in full their purchase option, after deducting estimated underwriting discounts and offering expenses.
We intend to use the net proceeds to us generated by this offering for general corporate purposes, which may include acquisitions, capital expenditures, investments, and the repayment, redemption or refinancing of all or a portion of any indebtedness or other securities outstanding at a particular time. Although we may, from time to time in the ordinary course of our business, evaluate potential acquisition opportunities that we believe are complementary to our business and provide attractive risk-adjusted returns, we do not have any immediate plans, arrangements or understandings relating to any material acquisition. Pending the application of the net proceeds, we expect to invest the proceeds in short-term, interest-bearing instruments or other investment-grade securities.
The information above is for illustrative purposes only and is subject to the actual offering price and the actual number of shares issued at pricing.
DIVIDEND POLICY
Holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors out of funds legally available for dividends. We paid a special cash dividend of $0.50 per common share on each of December 31, 2012 and December 16, 2013. On September 19, 2013, we announced the approval of the initiation of quarterly cash dividends beginning in 2014. The first quarterly cash dividend of $0.15 per share will be payable on April 14, 2014 to stockholders of record as of April 7, 2014, and future declarations of quarterly dividends will be subject to the approval of our board of directors, subject to limits imposed on us by our regulators.
In order to pay any dividends, we will need to receive dividends from our bank or have other sources of funds. Under Alabama law, our bank is subject to restrictions on the payment of dividends to us, which are similar to those applicable to national banks. Pursuant to Alabama law, our bank may not, without the prior consent of the Superintendent of the Alabama Banking Department, pay any dividends to us in a year in excess of the total of (i) the bank’s net earnings (as defined by statute) for that year, plus (ii) the retained net earnings for the preceding two years, less any required transfers to surplus. As of December 31, 2013, our bank could pay approximately $110.9 million of dividends to us without prior approval of the Superintendent.
Our ability to pay dividends to our stockholders in the future will depend on our earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common stock and other factors deemed relevant by our board of directors. For additional information, see “Supervision and Regulation — Bank Regulation and Supervision — Payment of Dividends.”
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CAPITALIZATION
The following table shows our capitalization, including regulatory capital ratios, on a consolidated basis, as of December 31, 2013, on an actual basis and on an as adjusted basis after giving effect to the net proceeds from the sale by us of [ ] shares of common stock in this offering (assuming the underwriters do not exercise their purchase option) at an assumed initial public offering price of $[ ] per share, the midpoint of the price range on the cover of this prospectus, after deducting estimated underwriting discounts and offering expenses. You should read the following table in conjunction with the sections titled “Selected Historical Consolidated Financial Information,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.
As of December 31, 2013 | ||||||||
Actual | As adjusted | |||||||
(dollars in thousands, except per share amounts) | ||||||||
Stockholders’ equity: | ||||||||
Common stock, par value $0.001 per share, 50,000,000 shares authorized, 7,350,012 shares issued and outstanding; and [ ] shares issued and outstanding, as adjusted | $ | 7 | ||||||
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $.001 per share (liquidation preference $1,000), net of discount; 40,000 shares authorized, 40,000 shares issued and outstanding at December 31, 2013, actual and as adjusted | 39,958 | |||||||
Preferred stock, undesignated, par value $.001 per share; 1,000,000 shares authorized; no shares outstanding | - | |||||||
Additional paid-in capital | 123,325 | |||||||
Retained earnings | 130,011 | |||||||
Accumulated other comprehensive income | 3,891 | |||||||
Total stockholders’ equity | 297,192 | |||||||
Total capitalization | 297,192 | |||||||
Capital ratios: | ||||||||
Tangible common equity to tangible assets | 7.31 | % | ||||||
Tangible equity to tangible assets | 8.44 | % | ||||||
Tier 1 leverage ratio | 8.48 | % | ||||||
Tier 1 common capital ratio | 8.64 | % | ||||||
Tier 1 capital ratio | 10.00 | % | ||||||
Total risk-based capital ratio | 11.73 | % | ||||||
Tangible book value per share | $ | 35.00 |
DILUTION
If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the as adjusted net tangible book value per share of our common stock after this offering. Our net tangible book value as of December 31, 2013 was approximately $297.2 million, or $40.43 per share of common stock based on the 7,350,012 shares issued and outstanding as of that date. Net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. After giving effect to our sale of [ ] shares of common stock in this offering (assuming the underwriters do not exercise their purchase option) at an assumed initial public offering price of [ ] per share, the midpoint of the price range on the cover of this prospectus, and after deducting estimated underwriting discounts and offering expenses, our as adjusted net tangible book value as of December 31, 2013 would have been approximately $[ ] million, or $[ ] per share. This represents an immediate increase in net tangible book value of $[ ] per share to our existing stockholders and an immediate dilution of $[ ] per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share | $ | [ ] | ||||||
Net tangible book value per share as of December 31, 2013 | $ | 40.43 | ||||||
Increase in net tangible book value per share attributable to this offering | [ ] | |||||||
Pro forma net tangible book value per share after this offering | [ ] | |||||||
Dilution per share to new investors in this offering | $ | [ ] |
The following table illustrates the differences between the number of shares of common stock purchased from us, the total consideration paid, and the average price per share paid by existing stockholders and new investors purchasing shares of our common stock in this offering based on an assumed initial public offering price of $[ ] per share, the mid-point of the price range on the cover of this prospectus, and before deducting estimated underwriting discounts and commissions and estimated offering expenses as of December 31, 2013 on a pro forma basis.
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Shares Purchased | Total Consideration (in thousands) | Average Price Per Share | ||||||||||||||||||
Number | Percent | Amount | Percent | |||||||||||||||||
Existing Stockholders | % | % | $ | |||||||||||||||||
New Investors | $ | |||||||||||||||||||
Total | % | % |
If the underwriters exercise their over-allotment option in full, the percentage of shares of common stock held by existing stockholders will decrease to approximately [ ]% of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors will be increased to [ ], or approximately [ ]% of the total number of shares of our common stock outstanding after this offering.
PRICE RANGE OF OUR COMMON STOCK
Prior to this offering, our common stock has not been traded on an established public trading market, and quotations for our common stock were not reported on any market. As a result, there has been no regular public trading market for our common stock. Although our shares may have been sporadically traded in private transactions, the prices at which such transactions occurred may not necessarily reflect the price that would be paid for our common stock in an actively traded public market. The most recent private transaction involving a sale of our common stock of which we are aware occurred on February 4, 2014 at a price of $41.50 per share. As of March 10, 2014, there were 7,420,812 shares of our common stock outstanding, held by approximately 1,562 holders of record.
We anticipate that this offering and the anticipated listing of our common stock on the Nasdaq Global Market will result in a more active trading market for our common stock. However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. See the section of this prospectus titled “Underwriting” for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.
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, ServisFirst Bank, we operate 12 full-service banking offices located in Jefferson, Shelby, Madison, Montgomery, Houston and Mobile Counties of Alabama and in Escambia County Florida in the metropolitan statistical areas (“MSAs”) of Birmingham-Hoover, Huntsville, Montgomery, Mobile and Dothan, Alabama, and Pensacola-Ferry Pass-Brent, Florida. Additionally, we operate a loan production office in Davidson County of Tennessee, in the Nashville MSA. 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, 2013, we had total assets of approximately $3.5 billion, total loans of approximately $2.9 billion, total deposits of approximately $3.0 billion and total stockholders’ equity of approximately $297 million.
We operate 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. Rather than relying on a more typical traditional, retail bank strategy of operating a broad base of multiple brick and mortar branch locations in each market, our strategy focuses on operating a limited and efficient branch network with sizable aggregate balances of total loans and deposits housed in each branch office. We believe that this approach more appropriately addresses our customers’ banking needs and reflects a best-of-class delivery strategy for commercial banking services. Our strategy allows us to deliver targeted, high quality customer service, while achieving significantly lower efficiency ratios relative to the banking industry, as evidenced by our efficiency ratios of 45.54%, 41.54% and 38.78% as of December 31, 2011, 2012 and 2013, respectively.
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Our principal business is to accept deposits from the public and to make loans and other investments. Our principal sources of funds for loans and investments are demand, time, savings and other deposits (including negotiable orders of withdrawal, or NOW accounts) and the amortization and prepayment of loans and borrowings. Our principal sources of income are interest and fees collected on loans, interest and dividends collected on other investments, and service charges. Our principal expenses are interest paid on savings and other deposits (including NOW accounts), interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses.
In January 2012, we formed SF Holding 1, Inc., an Alabama corporation (“SF Holding”), and its subsidiary, SF Realty 1, Inc., an Alabama corporation (“SF Realty 1”). In September 2013, we formed SF FLA Realty, Inc., an Alabama corporation (“SF FLA Realty”), as a subsidiary of SF Holding. Each of SF Realty 1 and SF FLA Realty elected to be treated as a real estate investment trust (“REIT”) for U.S. income tax purposes. SF Realty 1 and SF FLA Realty hold and manage participations in residential mortgages and commercial real estate loans originated by our bank in Alabama and Florida, respectively. SF Holding, SF Realty 1 and SF FLA Realty are all 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.
History
Our bank was founded by our President and Chief Executive Officer, Thomas A. Broughton, III, and commenced banking operations in May 2005 following an initial capital raise of $35 million, the largest capital raise by a de novo bank in the history of Alabama. We were incorporated as a Delaware corporation in August 2007 for the purpose of acquiring all of the common stock of our bank, and in November 2007 our holding company became the sole shareholder of the bank by virtue of a plan of reorganization and agreement of merger. In May 2008, following our filing of a registration statement on Form 10 with the SEC, we became a reporting company within the meaning of the Exchange Act and have been filing annual, quarterly, and current reports, proxy statements and other information with the SEC since 2008.
Since inception, our bank has achieved significant growth, all of which has been generated organically. We achieved total asset milestones of $1 billion in 2008, $2 billion in 2011 and $3 billion in 2013. In addition to total asset milestones, we have opened offices in six new markets, and raised an aggregate of approximately $55.1 million to support our growth in these new locations through five separate private placements of our common stock to predominately local, individual investors.
Business Strategy
We are a full service commercial bank focused on providing competitive products, state of the art technology and quality service. Our business philosophy is to operate as a metropolitan community bank emphasizing prompt, personalized customer service to the individuals and businesses located in our primary markets. We aggressively market to our target customers, which include privately held businesses with $2 million to $250 million in annual sales, professionals and affluent consumers whom we believe are underserved by the larger regional banks operating in our markets. We also seek to capitalize on the extensive relationships that our management, directors, advisory directors and stockholders have with the businesses and professionals in our markets. We believe this philosophy has attracted, and will continue to attract, valuable customers and capture market share historically controlled by other financial institutions operating in our markets.
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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 in turn leads to greater operational efficiency. Additionally, our centralized technology and process infrastructure contribute to our low operating costs. We believe this combination of products, operating efficiency and technology make us attractive to customers in our markets. In addition, in 2011 we began providing correspondent banking services to various smaller community banks in our markets, and currently act as a correspondent bank to approximately 150 community banks located throughout the southeastern United States. We provide a source of clearing and liquidity to our correspondent bank customers, as well as a wide array of account, credit, settlement and international services. We believe this service is of a scale and quality that is unique for a bank our size and provides us with a solid revenue stream and supplemental low cost source of funds.
Commercial Bank Emphasis. We have historically focused on people as opposed to places. This strategy translates into a smaller number of brick and mortar branch locations relative to our size, but larger overall branch sizes in terms of total deposits. As a result, our branches average approximately $251 million in total deposits, and our branches that have been open at least three years average approximately $341 million in total deposits. Whereas, in the more typical retail banking model, branch banks continue to lose traffic to other banking channels which may prove to be an impediment to earnings growth for those banks that have invested in large branch networks. In addition, unlike many traditional community banks, we place a strong emphasis on originating commercial and industrial loans, which comprised approximately 44.7% of our total loan portfolio as of December 31, 2013. Our focus has been to expand opportunistically when we identify a strong banking team in a market with 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.
Scalable, Decentralized Business Model. We emphasize local decision-making by experienced bankers supported by centralized risk and credit oversight. We believe that the delivery by our bankers of in-market customer decisions, coupled with risk and credit support from our corporate headquarters, allows us to serve our borrowers and depositors directly and in person, while managing risk centrally and on a uniform basis. We intend to continue our growth by repeating this scalable model in each market in which we are able to identify a strong banking team. Our goal in each market is to employ the highest quality bankers in that market. We then empower those bankers to implement our operating strategy, grow our customer base and provide the highest level of customer service possible. We focus on a geographic model of organizational structure as opposed to a line of business model employed by most regional banks. This structure assigns significant responsibility and accountability to our regional chief executive officers, who we believe will drive our growth and success. We have developed a business culture whereby our management team, from the top down, is actively involved in sales, which we believe is a key differentiator from our competition.
Identify Opportunities in Vibrant Markets. Since opening our original banking facility in Birmingham in 2005, we have expanded into six additional markets. There are two primary factors we consider when determining whether to enter a new market:
· | the availability of successful, experienced bankers with strong reputations in the market; and |
· | the economic attributes of the market necessary to drive quality lending opportunities coupled with deposit-related characteristics of the potential market. |
Prior to entering a new market, we identify and build a team of experienced, successful bankers with market-specific knowledge to lead the bank’s operations in that market, including a regional chief executive officer. Generally, we or members of our senior management 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 assemble a non-voting advisory board of directors in each market, comprised of directors representing a broad spectrum of business experience and community involvement in the market. We currently have advisory boards in each of the Huntsville, Montgomery, Dothan, Mobile and Pensacola markets. While we currently have a loan production office in Nashville, Tennessee with three experienced bankers (one of whom was hired in January 2014), we anticipate expanding this office into a full-service branch in the future, assuming that we are able to identify and retain a full team of experienced bankers whom we believe can successfully effect our strategy.
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In connection with opening a full-service banking office in a new market, historically we have raised capital through private placements to investors in the local market, many of whom are also customers of our bank in such market. We believe that having many of our customers who are also stockholders provides us with a strong source of core deposits, aligns our and our customers’ interests, and fosters a platform for developing and maintaining the long-term banking relationships we seek.
To date, we have not supplemented our organic deposit and loan growth with traditional mergers or acquisitions. However, we view our organic growth strategy as a form of acquisition strategy, insofar as we have successfully hired qualified teams of experienced bankers in each new market we have entered, and have built significantly sized franchises in those markets within a short time following our entry into a new market. We believe that our success in attracting these teams of bankers has allowed us to achieve growth attributes similar to competitors that have chosen to execute traditional mergers or acquisitions, but without the addition of goodwill and resulting capital pressures attendant to traditional merger and acquisition strategies. In addition to organic expansion, we may seek to expand through targeted acquisitions. Although we have not yet identified any specific acquisition opportunity that meets our strict requirements, including a limited number of branches serving a vibrant market with a strong deposit base, a premier banking team with individuals whom we believe can execute our business model, and available at a price that we believe provides attractive risk-adjusted returns, we routinely evaluate potential acquisition opportunities that we believe would be complementary to our business. We do not, however, have any immediate plans, arrangements or understandings relating to any acquisition, and we do not believe an acquisition is necessary to successfully execute our business model.
Markets and Competition
Our primary markets are broadly defined as the metropolitan statistical areas (“MSAs”) of Birmingham-Hoover, Huntsville, Montgomery, Dothan and Mobile, Alabama, Pensacola-Ferry Pass-Brent, Florida, and Nashville, Tennessee. We draw most of our deposits from, and conduct most of our lending transactions in, these markets.
According to FDIC reports, total deposits in each of our primary market areas have expanded from 2003 to 2013 (deposit data reflects totals as reported by financial institutions as of June 30th of each year and does not include the Nashville MSA, where we opened a loan production office in April 2013) as follows:
2013 | 2003 | Compound Annual Growth Rate | ||||||||||
(Dollars in Billions) | ||||||||||||
Jefferson/Shelby County, Alabama | $ | 24.8 | $ | 16.3 | 4.29 | % | ||||||
Madison County, Alabama | 6.1 | 3.7 | 5.13 | % | ||||||||
Montgomery County, Alabama | 6.5 | 3.6 | 6.09 | % | ||||||||
Houston County, Alabama | 2.2 | 1.3 | 5.40 | % | ||||||||
Mobile County, Alabama | 6.0 | 4.7 | 2.47 | % | ||||||||
Escambia County, Florida | 3.5 | 3.1 | 1.22 | % |
Our bank is subject to intense competition from various financial institutions and other financial service providers. Our bank competes for deposits with other local and regional commercial banks, savings and loan associations, credit unions and issuers of commercial paper and other securities, such as money-market and mutual funds. In making loans, our bank competes with other commercial banks, savings and loan associations, consumer finance companies, credit unions, leasing companies and other lenders.
Although we may in the future identify additional new markets to enter, we believe that the long-term growth potential of each of our current markets is substantial, and that we have the ability to continue to grow organically by increasing our market share in these markets. We further believe that many local affluent professionals and small business owners will prefer to conduct their banking with local, independent institutions that offer a higher level of personalized service.
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The following table illustrates our market share, by insured deposits as of the dates indicated, in our primary markets:
Our Market Deposits | ||||||||||||||||||||||||||
Market(1) | Date Opened | Total Branches | June 30, 2013(2) | December 31, 2013 | Total Market Deposits(2) | Rank(2) | Market Share %(2) | |||||||||||||||||||
Alabama: | ||||||||||||||||||||||||||
Birmingham-Hoover | May 2005 | 3 | $ | 1,217.3 | $ | 1,380.0 | (3) | $ | 30,175.1 | 5 | 4.03% | |||||||||||||||
Huntsville | August 2006 | 2 | 540.8 | 579.5 | 6,805.7 | 5 | 7.95% | |||||||||||||||||||
Montgomery | June 2007 | 2 | 374.2 | 432.3 | 7,810.1 | 7 | 4.79% | |||||||||||||||||||
Dothan | September 2008 | 2 | 327.1 | 358.6 | 2,883.9 | 3 | 11.34% | |||||||||||||||||||
Mobile | July 2012(4) | 1 | 15.2 | 43.1 | 6,041.6 | 18 | 0.25% | |||||||||||||||||||
Florida: | ||||||||||||||||||||||||||
Pensacola-Ferry Pass-Brent | April 2011 | 2 | 202.9 | 227.2 | 4,638.0 | 8 | 4.38% | |||||||||||||||||||
Tennessee: | ||||||||||||||||||||||||||
Nashville | April 2013 | — | (5) | — | (5) | — | (5) | 40,800.5 | — | (5) | — | (5) |
(1) Represents metropolitan statistical areas (MSAs).
(2) As reported by the FDIC as of June 30, 2013.
(3) Includes approximately $19.7 million in deposits attributable to our loan production office in Nashville, Tennessee.
(4) Opened in July 2012 as a loan production office and in May 2013 converted to a full service branch.
(5) Opened as a loan production office.
Together, deposits for all institutions in Jefferson, Shelby, Madison, Montgomery, Houston and Mobile Counties represented approximately 56.04% of all the deposits in the state of Alabama at June 30, 2013. Deposits for all institutions in Escambia County represent approximately 0.79% of all the deposits in the state of Florida at June 30, 2013.
Birmingham. Birmingham, the largest city in Alabama, is located in central Alabama 146 miles west of Atlanta, Georgia and 148 miles southwest of Chattanooga, Tennessee. The Birmingham-Hoover MSA’s economy consists of a diverse mixture of traditional and emerging employment sectors. While metals manufacturing is an important historical sector, finance, insurance and healthcare services and distribution are the region’s core economic sectors, and biological and medical technology, entertainment and diverse manufacturing have been identified as the region’s emerging economic sectors. Large corporations headquartered or with a major presence in the region include Protective Life, HealthSouth Corporation, Vulcan Materials Company and AT&T. Additionally, The University of Alabama at Birmingham (UAB) is Alabama’s largest employer, and Birmingham is home to the largest nonprofit independent research laboratory in the southeastern United States, the Southern Research Institute.
Huntsville. We believe that Huntsville, located in northern Alabama mid-way between Birmingham and Nashville, Tennessee, offers substantial growth as one of the strongest technology economies in the nation, with over 300 companies performing sophisticated government, commercial and university research. Huntsville has one of the highest concentrations of engineers and Ph.D.’s in the United States and has a number of major government programs, including NASA and the U.S. Army. Huntsville also has one of the highest concentrations of Inc. 5000 companies in the United States and a number of offices of Fortune 500 companies. Major employers in Huntsville include the U.S. Army/Redstone Arsenal, the Boeing Company, NASA/Marshall Space Flight Center, Intergraph Corporation, ADTRAN, Inc., Northrop Grumman, Cinram, SAIC, DirecTV, Lockheed Martin and Toyota Motor Manufacturing of Alabama.
Montgomery. Montgomery, which is Alabama’s capital, is located in south central Alabama between Birmingham and Mobile, Alabama. In addition to housing many Alabama government agencies, Montgomery is also home to Maxwell Gunter Air Force Base, which employs more than 12,500 people and includes Air University, the worldwide center for U.S. Air Force leadership and education. In 2005, Hyundai Motor Manufacturing Alabama opened its Montgomery manufacturing plant, which was built with an initial capital investment of over $1.4 billion, and has experienced subsequent expansions. The area has also benefited from the nearly 30 top-tier Hyundai suppliers that have invested over $550 million in new plant facilities, creating almost 8,000 additional jobs.
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Dothan. We believe that the Dothan MSA, which is located in the southeastern corner of Alabama near the Florida panhandle and Georgia state line, continues to hold great potential due to its position as a central agricultural trade hub, its accessibility to large distribution centers, it being home to several large corporations, and what we believe to be a low level of personalized banking services provided by other financial institutions in the area. The Dothan area is home to facilities of several large corporations, including Michelin, Pemco World Aviation, International Paper, Globe Motors and AAA Cooper Transportation. Additionally, the agriculture and agribusiness industries are thriving in the Dothan MSA, and the area is home to many successful farmers and related businesses. In addition, the nearby agricultural communities in northwest Florida and southwest Georgia often use Dothan as their agricultural trade hub. We believe the existence of these industries and the continuing growth in the area allows an opportunity for the bank to increase its presence and penetration in this market.
Pensacola. In April 2011, we opened our first office outside of Alabama in Pensacola, Florida, which is located in the Florida panhandle approximately 50 miles east of Mobile, Alabama, and 40 miles west of Fort Walton, Florida. The Pensacola and northwest Florida economies are driven by the tourism, military, health services, and medical technology industries. Five major military bases are located in northwest Florida: Eglin Air Force Base, Hurlburt Field, Pensacola Whiting Field, Pensacola Naval Air Station and Corry Station. Other major employers in the area include Sacred Heart Health System, Baptist Healthcare, West Florida Regional Hospital, Gulf Power Company (Southern Company), the University of West Florida, International Paper, Ascend Performance Materials (Solutia), GE Wind Energy, Armstrong World Industries and Wayne Dalton Corporation. The Pensacola Bay area is also home to the Andrews Institute for Orthopaedics and Sports Medicine, a world-leading surgical and research center for human performance enhancement. Although this market was negatively impacted by the recent economic downturn, we believe this area has significant long-term growth potential.
Mobile. In July 2012, we opened a loan production office in Mobile, Alabama and, in May 2013, converted the location to a full-service banking office. The Mobile MSA is located in southwest Alabama approximately 31 miles from the Gulf of Mexico and is the largest metropolitan area along the Gulf between New Orleans, Louisiana and Tampa, Florida. The Mobile Bay region has over 23,000 businesses and is a center for finance, healthcare, education, manufacturing, transportation, construction, distribution, retail, trade and technology. With its strategic location, the Port of Mobile serves as a gateway between the southeastern United States and global destinations, and is served by 12 shipping lines offering service throughout the world. Virtually every service for the maritime industry can be found in this 310-plus-year old port city. The aviation/aerospace industry is another of the area’s strong, growing industry sectors. A former U.S. Air Force base located on Mobile Bay near downtown Mobile, Brookley Aeroplex has been transformed into a leading 1,700-acre industrial and trade aeroplex with deepwater port access and the capability of landing the Space Shuttle on one of its runways. The Mobile area is also served by five national Class I railroads.
Nashville. In April 2013, we opened a loan production office in Nashville, Tennessee, the state’s capital. The Nashville MSA is located in central Tennessee and is home to over 1.8 million people and 40,000 businesses. Nashville, known as the “Music City” for its country music heritage, is also home to a diverse healthcare industry and is a center for manufacturing, transportation and technology in the area. Nashville has more than 250 healthcare companies headquartered in the region, including 16 publicly traded healthcare companies with combined employment of nearly 400,000 and $70 billion in global revenue. The Nashville area is also considered a transportation hub, as it is one of only 12 U.S. cities with three major intersecting interstate highways. Notable companies with corporate headquarters in Nashville include HCA Holdings, Nissan North America, Dollar General Corporation, Asurion and Community Health Systems. Although we only recently opened our loan production facility in Nashville, we believe the market has great potential.
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.
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In our primary service areas, our five largest competitors are Regions Bank, Wells Fargo Bank, BBVA Compass Bank, BB&T and Synovus Bank. These institutions, as well as other competitors of ours, have greater resources, serve broader geographic markets, have higher lending limits, offer various services that we do not offer and can better afford, and make broader use of, media advertising, support services, and electronic technology than we can. To offset these competitive disadvantages, we depend on our reputation for greater personal service, consistency, and flexibility and the ability to make credit and other business decisions quickly.
Lending Services
Lending Policy
Our lending policies are established to support the credit needs of our primary market areas. Consequently, we aggressively seek high-quality borrowers within a limited geographic area. While we believe that we are successful in attracting high quality borrowers, we face competition with other well-established financial institutions in our primary service areas that have greater resources and lending limits than we have.
Loan Approval and Review
Our loan approval policies set various levels of officer lending authority, which are based on the experience of the individual officer. When the total amount of loans to a single borrower exceeds an individual officer’s lending authority, further approval, up to $2.5 million secured, must be obtained from the regional chief executive officer and/or our senior management team.
Commercial Loans
Our commercial lending activity is directed principally toward businesses and professional service firms whose demand for funds falls within our legal lending limits. We make loans to small- and medium-sized businesses in our primary service areas for the purpose of upgrading plant and equipment, buying inventory and for general working capital. Typically, targeted business borrowers have annual sales between $2 million and $250 million. This category of loans includes loans made to individual, partnership or corporate borrowers, and such loans are obtained for a variety of business purposes. We offer a variety of commercial lending products to meet the needs of business and professional service firms in our service areas. These commercial lending products include seasonal loans, bridge loans and term loans for working capital, expansion of the business, or acquisition of property, plants and equipment. We also offer commercial lines of credit. The repayment terms of our commercial loans will vary according to the needs of each customer.
Our commercial loans usually will be collateralized. Generally, collateral consists of business assets, including accounts receivable, inventory, equipment, or real estate. Collateral is subject to the risk that we may have difficulty converting it to a liquid asset if necessary, as well as risks associated with degree of specialization, mobility and general collectability in a default situation. To mitigate this risk, we underwrite collateral to strict standards, including valuations and general acceptability based on our ability to monitor its ongoing condition and value.
We underwrite our commercial loans primarily on the basis of the borrower’s cash flow, ability to service debt, and degree of management expertise. As a general practice, we take as collateral a security interest in any available real estate, equipment or personal property. Under limited circumstances, we may make commercial loans on an unsecured basis. This type of loan may be subject to many different types of risks, including fraud, bankruptcy, economic downturn, deteriorated or non-existent collateral, and changes in interest rates such as have occurred in the recent economic recession and credit market crisis. Perceived risks may differ depending on the particular industry in which a borrower operates. General risks to an industry, such as the recent economic recession and credit market crisis, or to a particular segment of an industry are monitored by senior management on an ongoing basis. When warranted, loans to individual borrowers who may be at risk due to an industry condition may be more closely analyzed and reviewed by our credit review committee or board of directors. Commercial and industrial borrowers are required to submit financial statements to us on a regular basis. We analyze these statements, looking for weaknesses and trends, and will assign the loan a risk grade accordingly. Based on this risk grade, the loan may receive an increased degree of scrutiny by management, up to and including additional loss reserves being required.
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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, credit review committee and board of directors.
Construction and Development Loans. We make construction and development loans both on a pre-sold and speculative basis. If the borrower has entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a pre-sold basis. If the borrower has not entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a speculative basis. Construction and development loans are generally made with a term of 12 to 24 months, and interest is paid monthly. The ratio of the loan principal to the value of the collateral as established by independent appraisal typically will not exceed 80% of residential construction loans. Speculative construction loans will be based on the borrower’s financial strength and cash flow position. Development loans are generally limited to 75% of appraised value. Loan proceeds will be disbursed based on the percentage of completion and only after the project has been inspected by an experienced construction lender or third-party inspector. During times of economic stress, this loan type has typically had a greater degree of risk than other loan types, as has been evident in the recent credit crisis.
Beginning in 2008, there have been numerous construction loan defaults among many commercial bank loan portfolios, including a number of Alabama-based banks. To mitigate the risk of such defaults in our portfolio, our board of directors and management tracks and monitors these loans closely. Our total construction loans decreased $6.5 million in 2013. Our allocation of loan loss reserve for these loans decreased $0.7 million to $5.8 million at December 31, 2013 compared to $6.5 million at the end 2012. Charge-offs for construction loans increased from $3.1 million for 2012 to $4.8 million for 2013, but the overall quality of our construction loan portfolio has improved with $9.2 million rated as substandard at December 31, 2013 compared to $14.4 million at December 31, 2012.
Residential Real Estate Loans. Our residential real estate loans consist primarily of residential second mortgage loans, residential construction loans and traditional mortgage lending for one-to-four family residences. We will originate fixed-rate mortgages with long-term maturities and balloon payments generally not exceeding five years. The majority of our fixed-rate loans are sold in the secondary mortgage market. All loans are made in accordance with our appraisal policy, with the ratio of the loan principal to the value of collateral as established by independent appraisal generally not exceeding 80%. Risks associated with these loans are generally less significant than those of other loans and involve fluctuations in the value of real estate, bankruptcies, economic downturn and customer financial problems. Real estate has recently experienced a period of declining prices which negatively affects real estate collateralized loans, but this negative effect has to date been more prevalent in regions of the United States other than our primary service areas; however, homes in our primary service areas may experience significant price declines in the future. We have not made and do not expect to make any “Alt-A” or subprime loans.
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Consumer Loans
We offer a variety of loans to retail customers in the communities we serve. Consumer loans in general carry a moderate degree of risk compared to other loans. They are generally more risky than traditional residential real estate loans but less risky than commercial loans. Risk of default is usually determined by the well-being of the local economies. During times of economic stress, there is usually some level of job loss both nationally and locally, which directly affects the ability of the consumer to repay debt. Risk on consumer-type loans is generally managed though policy limitations on debt levels consumer borrowers may carry and limitations on loan terms and amounts depending upon collateral type. Our consumer loans include home equity loans (open- and closed-end), vehicle financing, loans secured by deposits, and secured and unsecured personal loans. These various types of consumer loans all carry varying degrees of risk.
Commitments and Contingencies
As of December 31, 2013, we had commitments to extend credit beyond current fundings of approximately $1.1 billion, had issued standby letters of credit in the amount of approximately $40.4 million, and had commitments for credit card arrangements of approximately $38.1 million.
Policy for Determining the Loan Loss Allowance
The allowance for loan losses represents our management’s assessment of the risk associated with extending credit and its evaluation of the quality of the loan portfolio. In calculating the adequacy of the loan loss allowance, our management evaluates the following factors:
· | the asset quality of individual loans; |
· | changes in the national and local economy and business conditions/development, including underwriting standards, collections, and charge-off and recovery practices; |
· | changes in the nature and volume of the loan portfolio; |
· | changes in the experience, ability and depth of our lending staff and management; |
· | changes in the trend of the volume and severity of past-due loans and classified loans, and trends in the volume of non-accrual loans, troubled debt restructurings and other modifications, as has occurred in the residential mortgage markets and particularly for residential construction and development loans; |
· | possible deterioration in collateral segments or other portfolio concentrations; |
· | historical loss experience (when available) used for pools of loans (that is, collateral types, borrowers, purposes, etc.); |
· | changes in the quality of our loan review system and the degree of oversight by our board of directors; and |
· | the effect of external factors such as competition and the legal and regulatory requirement on the level of estimated credit losses in our current loan portfolio. |
These factors are evaluated monthly, and changes in the asset quality of individual loans are evaluated as needed.
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We assign all of our loans individual risk grades when they are underwritten. We have established minimum general reserves based on the asset quality grade of the loan. We also apply general reserve factors based on historical losses, management’s experience and common industry and regulatory guidelines.
After a loan is underwritten and booked, it is monitored by the account officer, management, internal loan review, and representatives of our independent external loan review firm during the life of the loan. Payment performance is monitored monthly for the entire loan portfolio; account officers contact customers during the regular course of business and may be able to ascertain whether weaknesses are developing with the borrower; independent loan consultants perform a review annually; and federal and state banking regulators perform annual reviews of the loan portfolio. If we detect weaknesses that have developed in an individual loan relationship, we downgrade the loan and assign higher reserves based upon management’s assessment of the weaknesses in the loan that may affect full collection of the debt. We have established a policy to discontinue accrual of interest (non-accrual status) after any loan has become 90 days delinquent as to payment of principal or interest unless the loan is considered to be well collateralized and is actively in process of collection. In addition, a loan will be placed on non-accrual status before it becomes 90 days delinquent if management believes that the borrower’s financial condition is such that the collection of interest or principal is doubtful. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. Interest income on non-accrual loans is recognized only as received. If a loan will not be collected in full, we increase the allowance for loan losses to reflect our management’s estimate of any potential exposure or loss.
Our net loan losses to average total loans increased to 0.33% for the year ended December 31, 2013 from 0.24% for the year ended December 31, 2012, which was down from 0.32% for the year ended December 31, 2011. Historical performance, however, is not an indicator of future performance, and our future results could differ materially. As of December 31, 2013, we had $9.6 million of non-accrual loans, of which 76% are secured real estate loans. We have allocated approximately $5.8 million of our allowance for loan losses to real estate construction, acquisition and development, and lot loans and $11.2 million to commercial and industrial loans, and have a total loan loss reserve as of December 31, 2013 allocable to specific loan types of $25.4 million. We also currently maintain a portion of the allowance for loan losses which is management’s evaluation of potential future losses that would arise in the loan portfolio should management’s assumption about qualitative and environmental conditions materialize. The qualitative factor portion of the allowance for loan losses is based on management’s judgment regarding various external and internal factors including macroeconomic trends, management’s assessment of the Company’s loan growth prospects and evaluations of internal risk controls. This qualitative factor portion of the allowance for loan losses totaled $5.3 million, resulting in a total allowance for loan losses of $30.7 million at December 31, 2013. Our management believes, based upon historical performance, known factors, overall judgment, and regulatory methodologies, that the current methodology used to determine the adequacy of the allowance for loan losses is reasonable, including after considering the effect of the current residential housing market defaults and business failures (particularly of real estate developers) plaguing financial institutions in general.
Our allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer banks identified by the regulators. During their routine examinations of banks, regulatory agencies may require a bank to make additional provisions to its allowance for loan losses when, in the opinion of the regulators, credit evaluations and allowance for loan loss methodology differ materially from those of management.
While it is our policy to charge off in the current period loans for which a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, our management’s judgment as to the adequacy of the allowance is necessarily approximate and imprecise.
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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 our board of directors. Our investment policy provides that no more than 60% of our total investment portfolio may be composed of municipal securities. All securities held are traded in liquid markets, and we have no auction-rate securities. We had no investments in any one security, restricted or liquid, in excess of 10% of our stockholders’ equity at December 31, 2013.
Deposit Services
We seek to establish solid core deposits, including checking accounts, money market accounts, savings accounts and a variety of certificates of deposit and IRA accounts. We currently have no brokered deposits. To attract deposits, we employ an aggressive marketing plan throughout our service areas that features a broad product line and competitive services. The primary sources of core deposits are residents of, and businesses, and their employees located in, our market areas. We have obtained deposits primarily through personal solicitation by our officers and directors, through reinvestment in the community, and through our stockholders, who have been a substantial source of deposits and referrals. We make deposit services accessible to customers by offering direct deposit, wire transfer, night depository, banking-by-mail and remote capture for non-cash items. The bank is a member of the FDIC, and thus our deposits are FDIC-insured.
Other Banking Services
Given client demand for increased convenience and account access, we offer a range of products and services, including 24-hour telephone banking, direct deposit, Internet banking, mobile banking, traveler’s checks, safe deposit boxes, attorney trust accounts and automatic account transfers. We also participate in a shared network of automated teller machines and a debit card system that our customers are able to use throughout Alabama and in other states and, in certain accounts subject to certain conditions, we rebate to the customer the ATM fees automatically after each business day. Additionally, we offer Visa® credit cards.
Asset, Liability and Risk Management
We manage our assets and liabilities with the aim of providing an optimum and stable net interest margin, a profitable after-tax return on assets and return on equity, and adequate liquidity. These management functions are conducted within the framework of written loan and investment policies. To monitor and manage the interest rate margin and related interest rate risk, we have established policies and procedures to monitor and report on interest rate risk, devise strategies to manage interest rate risk, monitor loan originations and deposit activity and approve all pricing strategies. We attempt to maintain a balanced position between rate-sensitive assets and rate-sensitive liabilities. Specifically, we chart assets and liabilities on a matrix by maturity, effective duration, and interest adjustment period, and endeavor to manage any gaps in maturity ranges.
Seasonality and Cycles
We do not consider our commercial banking business to be seasonal.
Employees
We had 262 full-time equivalent employees as of March 10, 2014. We consider our employee relations to be good, and we have no collective bargaining agreements with any employees.
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Properties
We operate through 13 banking offices, including our loan production office in Nashville, Tennessee. Our Shades Creek Parkway office also includes our corporate headquarters. We believe that our banking offices are in good condition, are suitable to our needs and, for the most part, are relatively new. The following table gives pertinent details about our banking offices:
State | |||||||||
MSA | |||||||||
Office Address | City | Zip Code | Owned or Leased |
Date Opened | |||||
Alabama: | |||||||||
Birmingham-Hoover: | |||||||||
850 Shades Creek Parkway, Suite 200 (1) | Birmingham | 35209 | Leased | 3/2/2005 | |||||
324 Richard Arrington Jr. Boulevard North | Birmingham | 35203 | Leased | 12/19/2005 | |||||
5403 Highway 280, Suite 401 | Birmingham | 35242 | Leased | 8/15/2006 | |||||
Total | 3 Offices | ||||||||
Huntsville: | |||||||||
401 Meridian Street, Suite 100 | Huntsville | 35801 | Leased | 11/21/2006 | |||||
1267 Enterprise Way, Suite A (1) | Huntsville | 35806 | Leased | 8/21/2006 | |||||
Total | 2 Offices | ||||||||
Montgomery: | |||||||||
1 Commerce Street, Suite 200 | Montgomery | 36104 | Leased | 6/4/2007 | |||||
8117 Vaughn Road, Unit 20 | Montgomery | 36116 | Leased | 9/26/2007 | |||||
Total | 2 Offices | ||||||||
Dothan: | |||||||||
4801 West Main Street (1) | Dothan | 36305 | Leased | 10/17/2008 | |||||
1640 Ross Clark Circle | Dothan | 36301 | Leased | 2/1/2011 | |||||
Total | 2 Offices | ||||||||
Mobile: | |||||||||
64 North Royal Street | Mobile | 36602 | Leased | 7/9/2012 | |||||
1 Office | |||||||||
Total Offices in Alabama | 10 Offices | ||||||||
Florida: | |||||||||
Pensacola-Ferry Pass-Brent: | |||||||||
316 South Balen Street | Pensacola | 32502 | Leased | 4/1/2011 | |||||
4980 North 12th Avenue | Pensacola | 32504 | Owned | 8/27/2012 | |||||
Total | 2 Offices | ||||||||
Tennessee: | |||||||||
Nashville: | |||||||||
611 Commerce Street (2) | Nashville | 37203 | Leased | 6/4/2013 | |||||
1 Office | |||||||||
Total offices | 13 Offices |
(1) Offices relocated to this address. Original offices opened on date indicated.
(2) Office is a loan production office only.
Legal Proceedings
Neither we nor the bank is currently subject to any material legal proceedings. In the ordinary course of business, the bank is involved in routine litigation, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the bank’s business. Management does not believe that there are any threatened proceedings against us or the bank which, if determined adversely, would have a material effect on our or the bank’s business, financial position or results of operations.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this prospectus, including the consolidated financial statements and related notes, and should be read in conjunction with the accompanying tables and our annual audited financial statements. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” We assume no obligation to update any of these forward-looking statements.
Overview
The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations through our bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level.
We are a bank holding company within the meaning of the Bank Holding Company Act of 1956 headquartered in Birmingham, Alabama. Through our wholly-owned subsidiary bank, we operate 12 full-service banking offices located in Jefferson, Shelby, Madison, Montgomery, Mobile and Houston Counties in Alabama, and in Escambia County in Florida. These offices operate in the Birmingham-Hoover, Huntsville, Montgomery, Mobile and Dothan, Alabama MSAs, and in the Pensacola-Ferry Pass-Brent, Florida MSA. Additionally, we opened a loan production office in Nashville, Tennessee in June 2013. Our principal business is to accept deposits from the public and to make loans and other investments. Our principal source of funds for loans and investments are demand, time, savings, and other deposits and the amortization and prepayment of loans and borrowings. Our principal sources of income are interest and fees collected on loans, interest and dividends collected on other investments and service charges. Our principal expenses are interest paid on savings and other deposits, interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses.
Critical Accounting Policies
Our consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in the notes to the consolidated financial statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results and financial position for the current period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on our future financial condition and results of operations.
Allowance for Loan Losses
The allowance for loan losses, sometimes referred to as the “ALLL,” is established through periodic charges to income. Loan losses are charged against the ALLL when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. If the ALLL is considered inadequate to absorb future loan losses on existing loans for any reason, including but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan losses is increased.
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Loans are considered impaired when, based on current information and events, it is probable that the bank will be unable to collect all amounts due according to the original terms of the loan agreement. The collection of all amounts due according to contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or, as a practical expedient, at the loan’s observable market price, or the fair value of the underlying collateral. The fair value of collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral-dependent.
Investment Securities Impairment
Periodically, we may need to assess whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. In any such instance, we would consider many factors, including the severity and duration of the impairment, our intent and ability to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value, with the write-down recorded as a realized loss in securities gains (losses).
Other Real Estate Owned
Other real estate owned (“OREO”), consisting of assets that have been acquired through foreclosure, is recorded at the lower of cost or estimated fair value less the estimated cost of disposition. Fair value is based on independent appraisals and other relevant factors. Other real estate owned is revalued on an annual basis or more often if market conditions necessitate. Valuation adjustments required at foreclosure are charged to the allowance for loan losses. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged to net income as OREO expense. Significant judgments and complex estimates are required in estimating the fair value of other real estate, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility, as experienced in recent years. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate.
Results of Operations
Net Income
Net income available to common stockholders was $41.2 million for the year ended December 31, 2013, compared to $34.0 million for the year ended December 31, 2012. This increase in net income is primarily attributable to an increase in net interest income, which increased $18.4 million, or 19.6%, to $112.5 million in 2013 from $94.1 million in 2012. Noninterest income increased $0.4 million, or 4.2%, to $10.0 million in 2013 from $9.6 million in 2012. Noninterest expense increased by $4.4 million, or 10.2%, to $47.5 million in 2013 from $43.1 million in 2012. Basic and diluted net income per common share were $6.00 and $5.69, respectively, for the year ended December 31, 2013, compared to $5.68 and $4.99, respectively, for the year ended December 31, 2012. Return on average assets was 1.31% in 2013, compared to 1.30% in 2012, and return on average stockholders’ equity was 15.54% in 2013, compared to 15.81% in 2012.
Net income for the year ended December 31, 2012 was $34.0 million, compared to net income of $23.2 million for the year ended December 31, 2011. This increase in net income is primarily attributable to an increase in net interest income, which increased $18.8 million, or 25.0%, to $94.1 million in 2012 from $75.3 million in 2011. Noninterest income increased $2.7 million, or 39.1%, to $9.6 million in 2012 from $6.9 million in 2011. Noninterest expense increased by $5.6 million, or 14.9%, to $43.1 million in 2012 from $37.5 million in 2011. Basic and diluted net income per common share were $5.68 and $4.99, respectively, for the year ended December 31, 2012, compared to $4.03 and $3.53, respectively, for the year ended December 31, 2011. Return on average assets was 1.30% in 2012, compared to 1.11% in 2011, and return on average stockholders’ equity was 15.81% in 2012, compared to 14.73% in 2011. The following table presents some ratios of our results of operations for the years ended December 31, 2013, 2012 and 2011.
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For the years ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Return on average assets | 1.31 | % | 1.30 | % | 1.11 | % | ||||||
Return on average stockholders' equity | 15.54 | % | 15.81 | % | 14.73 | % | ||||||
Dividend payout ratio | 8.79 | % | 10.02 | % | - | % | ||||||
Average stockholders' equity to average total assets | 8.43 | % | 8.19 | % | 7.56 | % |
The following tables present a summary of our statements of income, including the percentage change in each category, for the year ended December 31, 2013 compared to 2012, and for the year ended December 31, 2012 compared to 2011, respectively.
Year Ended December 31, | ||||||||||||
2013 | 2012 | Change from the Prior Year | ||||||||||
(Dollars in Thousands) | ||||||||||||
Interest income | $ | 126,081 | $ | 109,023 | 15.65 | % | ||||||
Interest expense | 13,619 | 14,901 | -8.60 | % | ||||||||
Net interest income | 112,462 | 94,122 | 19.49 | % | ||||||||
Provision for loan losses | 13,008 | 9,100 | 42.95 | % | ||||||||
Net interest income after provision for loan losses | 99,454 | 85,022 | 16.97 | % | ||||||||
Noninterest income | 10,010 | 9,643 | 3.81 | % | ||||||||
Noninterest expense | 47,489 | 43,100 | 10.18 | % | ||||||||
Net income before taxes | 61,975 | 51,565 | 20.19 | % | ||||||||
Taxes | 20,358 | 17,120 | 18.91 | % | ||||||||
Net income | 41,617 | 34,445 | 20.82 | % | ||||||||
Dividends on preferred stock | 416 | 400 | 4.00 | % | ||||||||
Net income available to common stockholders | $ | 41,201 | $ | 34,045 | 21.02 | % |
Year Ended December 31, | ||||||||||||
2012 | 2011 | Change from the Prior Year | ||||||||||
(Dollars in Thousands) | ||||||||||||
Interest income | $ | 109,023 | $ | 91,411 | 19.27 | % | ||||||
Interest expense | 14,901 | 16,080 | -7.33 | % | ||||||||
Net interest income | 94,122 | 75,331 | 24.94 | % | ||||||||
Provision for loan losses | 9,100 | 8,972 | 1.43 | % | ||||||||
Net interest income after provision for loan losses | 85,022 | 66,359 | 28.12 | % | ||||||||
Noninterest income | 9,643 | 6,926 | 39.23 | % | ||||||||
Noninterest expense | 43,100 | 37,458 | 15.06 | % | ||||||||
Net income before taxes | 51,565 | 35,827 | 43.93 | % | ||||||||
Taxes | 17,120 | 12,389 | 38.19 | % | ||||||||
Net income | 34,445 | 23,438 | 46.96 | % | ||||||||
Dividends on preferred stock | 400 | 200 | 100.00 | % | ||||||||
Net income available to common stockholders | $ | 34,045 | $ | 23,238 | 46.51 | % |
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Net Interest Income
Net interest income is the difference between the income earned on interest-earning assets and interest paid on interest-bearing liabilities used to support such assets. The major factors which affect net interest income are changes in volumes, the yield on interest-earning assets and the cost of interest-bearing liabilities. Our management’s ability to respond to changes in interest rates by effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of our primary source of earnings.
Net interest income increased $18.4 million, or 19.5%, to $112.5 million for the year ended December 31, 2013 from $94.1 million for the year ended December 31, 2012. This was due to an increase in total interest income of $17.1 million, or 15.6%, and a decrease in total interest expense of $1.3 million, or a 8.6% reduction. The increase in total interest income was primarily attributable to a 26.50% increase in average loans outstanding from 2012 to 2013, which was the result of growth in all of our markets, including in Mobile, Alabama and Nashville, Tennessee, our two newest markets.
Net interest income increased $18.8 million, or 24.9%, to $94.1 million for the year ended December 31, 2012 from $75.3 million for the year ended December 31, 2011. This was due to an increase in total interest income of $17.6 million, or 19.3%, and a decrease in total interest expense of $1.2 million, or -7.3%. The increase in total interest income was primarily attributable to a 29.30% increase in average loans outstanding from 2011 to 2012, which was the result of growth in all of our markets, including in Pensacola, Florida, our newest market entrance in 2011.
Net Interest Margin Analysis
The net interest margin is impacted by the average volumes of interest-sensitive assets and interest-sensitive liabilities and by the difference between the yield on interest-sensitive assets and the cost of interest-sensitive liabilities (spread). Loan fees collected at origination represent an additional adjustment to the yield on loans. Our spread can be affected by economic conditions, the competitive environment, loan demand, and deposit flows. The net yield on earning assets is an indicator of effectiveness of our ability to manage the net interest margin by managing the overall yield on assets and cost of funding those assets.
The following table shows, for the years ended December 31, 2013, 2012 and 2011, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue, and the change in interest income and interest expense segregated into amounts attributable to changes in volume and changes in rates. This table is presented on a taxable equivalent basis, if applicable.
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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)
2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
Average Balance | Interest Earned / Paid | Average Yield / Rate | Average Balance | Interest Earned / Paid | Average Yield / Rate | Average Balance | Interest Earned / Paid | Average Yield / Rate | ||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
Loans, net of unearned income | ||||||||||||||||||||||||||||||||||||
Taxable (1) | $ | 2,573,621 | $ | 118,032 | 4.59 | % | $ | 2,034,478 | $ | 100,143 | 4.92 | % | $ | 1,573,500 | $ | 82,083 | 5.22 | % | ||||||||||||||||||
Tax-exempt(2) | 3,274 | 170 | 5.19 | 1,631 | 95 | 5.82 | - | - | - | |||||||||||||||||||||||||||
Mortgage loans held for sale Securities: | 12,953 | 306 | 2.36 | 17,905 | 349 | 1.95 | 7,556 | 211 | 2.79 | |||||||||||||||||||||||||||
Taxable | 149,996 | 3,906 | 2.60 | 184,174 | 4,815 | 2.61 | 188,315 | 5,721 | 3.04 | |||||||||||||||||||||||||||
Tax-exempt(2) | 115,829 | 4,884 | 4.22 | 100,926 | 4,683 | 4.64 | 82,239 | 4,275 | 5.20 | |||||||||||||||||||||||||||
Total securities (3) | 265,825 | 8,790 | 3.31 | 285,100 | 9,498 | 3.33 | 270,554 | 9,996 | 3.69 | |||||||||||||||||||||||||||
Federal funds sold | 44,106 | 110 | 0.25 | 94,425 | 196 | 0.21 | 85,825 | 176 | 0.21 | |||||||||||||||||||||||||||
Restricted equity securities | 4,299 | 93 | 2.16 | 4,434 | 104 | 2.35 | 4,259 | 74 | 1.74 | |||||||||||||||||||||||||||
Interest-bearing balances with banks | 100,417 | 280 | 0.28 | 80,170 | 200 | 0.25 | 83,152 | 203 | 0.24 | |||||||||||||||||||||||||||
Total interest-earning assets | $ | 3,004,495 | $ | 127,781 | 4.25 | % | $ | 2,518,143 | $ | 110,585 | 4.39 | % | $ | 2,024,846 | $ | 92,743 | 4.58 | % | ||||||||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||||||||||||||
Cash and due from banks | 45,528 | 38,467 | 28,304 | |||||||||||||||||||||||||||||||||
Net premises and equipment | 9,148 | 6,074 | 4,813 | |||||||||||||||||||||||||||||||||
Allowance for loan losses,accrued interest and other assets | 84,297 | 65,504 | 29,094 | |||||||||||||||||||||||||||||||||
Total assets | $ | 3,143,468 | $ | 2,628,188 | $ | 2,087,057 | ||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||||||||||||||
Checking | $ | 433,931 | $ | 1,201 | 0.28 | % | $ | 351,975 | $ | 1,074 | 0.31 | % | $ | 303,165 | $ | 1,133 | 0.37 | % | ||||||||||||||||||
Savings | 21,793 | 61 | 0.28 | 17,081 | 48 | 0.28 | 10,088 | 47 | 0.47 | |||||||||||||||||||||||||||
Money market | 1,244,957 | 5,810 | 0.47 | 1,042,870 | 5,820 | 0.56 | 902,290 | 6,675 | 0.74 | |||||||||||||||||||||||||||
Time deposits | 404,927 | 4,758 | 1.18 | 398,552 | 5,307 | 1.33 | 330,221 | 5,192 | 1.57 | |||||||||||||||||||||||||||
Federal funds purchased | 167,063 | 462 | 0.28 | 88,732 | 222 | 0.25 | 19,335 | 49 | 0.25 | |||||||||||||||||||||||||||
Other borrowings | 21,780 | 1,327 | 6.09 | 33,126 | 2,430 | 7.34 | 41,866 | 2,984 | 7.13 | |||||||||||||||||||||||||||
Total interest-bearing liabilities | $ | 2,294,451 | $ | 13,619 | 0.59 | % | $ | 1,932,336 | $ | 14,901 | 0.77 | % | $ | 1,606,965 | $ | 16,080 | 1.00 | % | ||||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
Non-interest-bearing checking | 576,072 | 474,284 | 315,781 | |||||||||||||||||||||||||||||||||
Other liabilities | 7,835 | 6,200 | 6,580 | |||||||||||||||||||||||||||||||||
Stockholders' equity | 259,631 | 207,656 | 145,050 | |||||||||||||||||||||||||||||||||
Unrealized gains on securities and derivatives | 5,479 | 7,712 | 12,681 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 3,143,468 | $ | 2,628,188 | $ | 2,087,057 | ||||||||||||||||||||||||||||||
Net interest spread | 3.66 | % | 3.62 | % | 3.58 | % | ||||||||||||||||||||||||||||||
Net interest margin | 3.80 | % | 3.80 | % | 3.79 | % |
(1) | Non-accrual loans are included in average loan balances in all periods. Loan fees of $551,000, $372,000 and $538,000 are included in interest income in 2013, 2012 and 2011, respectively. |
(2) | Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%. |
(3) | Unrealized gains of $8,408,000, $11,998,000 and $7,624,000 are excluded from the yield calculation in 2013, 2012 and 2011, respectively. |
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The following table reflects changes in our net interest margin as a result of changes in the volume and rate of our interest-bearing assets and liabilities.
For the Year Ended December 31, | ||||||||||||||||||||||||
2013 Compared to 2012 Increase (Decrease) in Interest Income and Expense Due to Changes in: | 2012 Compared to 2011 Increase (Decrease) in Interest Income and Expense Due to Changes in: | |||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans, net of unearned income | ||||||||||||||||||||||||
Taxable | $ | 25,097 | $ | (7,208 | ) | $ | 17,889 | $ | 22,910 | $ | (4,850 | ) | $ | 18,060 | ||||||||||
Tax-exempt | 86 | (11 | ) | 75 | 95 | - | 95 | |||||||||||||||||
Mortgages held for sale | (108 | ) | 65 | (43 | ) | 218 | (80 | ) | 138 | |||||||||||||||
Taxable | (890 | ) | (19 | ) | (909 | ) | (124 | ) | (782 | ) | (906 | ) | ||||||||||||
Tax-exempt | 652 | (451 | ) | 201 | 900 | (492 | ) | 408 | ||||||||||||||||
Federal funds sold | (119 | ) | 33 | (86 | ) | 18 | 2 | 20 | ||||||||||||||||
Restricted equity securities | (3 | ) | (8 | ) | (11 | ) | 3 | 27 | 30 | |||||||||||||||
Interest-bearing balances with banks | 54 | 26 | 80 | (7 | ) | 4 | (3 | ) | ||||||||||||||||
Total interest-earning assets | 24,769 | (7,573 | ) | 17,196 | 24,013 | (6,171 | ) | 17,842 | ||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand deposits | 234 | (107 | ) | 127 | 167 | (226 | ) | (59 | ) | |||||||||||||||
Savings | 13 | - | 13 | 25 | (24 | ) | 1 | |||||||||||||||||
Money market | 1,028 | (1,038 | ) | (10 | ) | 941 | (1,796 | ) | (855 | ) | ||||||||||||||
Time deposits | 84 | (633 | ) | (549 | ) | 980 | (865 | ) | 115 | |||||||||||||||
Federal funds purchased | 215 | 25 | 240 | 174 | (1 | ) | 173 | |||||||||||||||||
Other borrowed funds | (738 | ) | (365 | ) | (1,103 | ) | (641 | ) | 87 | (554 | ) | |||||||||||||
Total interest-bearing liabilities | 836 | (2,118 | ) | (1,282 | ) | 1,646 | (2,825 | ) | (1,179 | ) | ||||||||||||||
Increase in net interest income | $ | 23,933 | $ | (5,455 | ) | $ | 18,478 | $ | 22,367 | $ | (3,346 | ) | $ | 19,021 |
In the table above, changes in net interest income are attributable to (i) changes in average balances (volume variance), (ii) changes in rates (rate variance), or (iii) changes in rate and average balances (rate/volume variance). The volume variance is calculated as the change in average balances times the old rate. The rate variance is calculated as the change in rates times the old average balance. The rate/volume variance is calculated as the change in rates times the change in average balances. The rate/volume variance is allocated on a pro rata basis between the volume variance and the rate variance in the table above.
The two primary factors that make up the spread are the interest rates received on loans and the interest rates paid on deposits. We have been disciplined in raising interest rates on deposits only as the market demanded and thereby managing our cost of funds. Also, we have not competed for new loans on interest rate alone, but rather we have relied significantly on effective marketing to business customers.
Our net interest spread and net interest margin were 3.66% and 3.80%, respectively, for the year ended December 31, 2013, compared to 3.62% and 3.80%, respectively, for the year ended December 31, 2012. Our average interest-earning assets for the year ended December 31, 2013 increased $486.4 million, or 19.3%, to $3.0 billion from $2.5 billion for the year ended December 31, 2012. This increase in our average interest-earning assets was due to continued core growth in all of our markets and increased loan production. Our average interest-bearing liabilities increased $362.1 million, or 18.7%, to $2.3 billion for the year ended December 31, 2013 from $1.9 billion for the year ended December 31, 2012. This increase in our average interest-bearing liabilities was primarily due to an increase in interest-bearing deposits in all our markets. The ratio of our average interest-earning assets to average interest-bearing liabilities was 130.9% and 130.3% for the years ended December 31, 2013 and 2012, respectively.
Our average interest-earning assets produced a taxable equivalent yield of 4.25% for the year ended December 31, 2013, compared to 4.39% for the year ended December 31, 2012. The average rate paid on interest-bearing liabilities was 0.59% for the year ended December 31, 2013, compared to 0.77% for the year ended December 31, 2012.
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Our net interest spread and net interest margin were 3.62% and 3.80%, respectively, for the year ended December 31, 2012, compared to 3.58% and 3.79%, respectively, for the year ended December 31, 2011. Our average interest-earning assets for the year ended December 31, 2012 increased $493.3 million, or 24.4%, to $2.5 billion from $2.0 billion for the year ended December 31, 2011. This increase in our average interest-earning assets was due to continued core growth in all of our markets, increased loan production and increases in investment securities, federal funds sold and interest-bearing balances with other banks. Our average interest-bearing liabilities increased $325.4 million, or 20.2%, to $1.9 billion for the year ended December 31, 2012 from $1.6 billion for the year ended December 31, 2011. This increase in our average interest-bearing liabilities was primarily due to an increase in interest-bearing deposits in all our markets. We prepaid our $5 million 8.25% subordinated note on June 2, 2012 and our $15 million 8.5% subordinated debenture on November 8, 2012. We issued $20 million in 5.5% subordinated notes due in November 9, 2022 in a private placement with accredited investors. The ratio of our average interest-earning assets to average interest-bearing liabilities was 130.3% and 126.0% for the years ended December 31, 2012 and 2011, respectively.
Our average interest-earning assets produced a taxable equivalent yield of 4.39% for the year ended December 31, 2012, compared to 4.58% for the year ended December 31, 2011. The average rate paid on interest-bearing liabilities was 0.77% for the year ended December 31, 2012, compared to 1.00% for the year ended December 31, 2011.
Provision for Loan Losses
The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. Our management reviews the adequacy of the allowance for loan losses on a quarterly basis. The allowance for loan losses calculation is segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale with loan officers having the primary responsibility for assigning risk grades and for the timely reporting of changes in the risk grades. Based on these processes, and the assigned risk grades, the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss, with some general allocation of reserve based on these grades. At December 31, 2013, total loans rated Special Mention, Substandard, and Doubtful were $93.2 million, or 3.3% of total loans, compared to $100.7 million, or 4.3% of total loans, at December 31, 2012. Impaired loans are reviewed specifically and separately under FASB ASC 310-30-35, Subsequent Measurement of Impaired Loans, to determine the appropriate reserve allocation. Our management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in our loan portfolio, our management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level.
The provision expense for loan losses was $13.0 million for the year ended December 31, 2013, an increase of $3.9 million from $9.1 million in 2012. This increase in provision expense for loan losses is primarily attributable to growth in the loan portfolio and elevated net charge-offs for 2013 compared to 2012. Our management maintains a proactive approach in managing nonperforming loans, which decreased to $9.7 million, or 0.34%, of total loans at December 31, 2013 from $10.4 million, or 0.44%, of total loans at December 31, 2012. During 2013, we had net charged-off loans totaling $8.6 million, compared to net charged-off loans of $4.9 million for 2012. The ratio of net charged-off loans to average loans was 0.33% for 2013 compared to 0.24% for 2012. The allowance for loan losses totaled $30.7 million, or 1.07% of loans, net of unearned income, at December 31, 2013, compared to $26.3 million, or 1.11% of loans, net of unearned income, at December 31, 2012.
The provision expense for loan losses was $9.1 million for the year ended December 31, 2012, an increase of $0.1 million from $9.0 million in 2011. Also, nonperforming loans decreased to $10.4 million, or 0.44% of total loans, at December 31, 2012 from $13.8 million, or 0.75%, of total loans at December 31, 2011. During 2012, we had net charged-off loans totaling $4.9 million, compared to net charged-off loans of $5.0 million for 2011. The ratio of net charged-off loans to average loans was 0.24% for 2012 compared to 0.32% for 2011. The allowance for loan losses totaled $26.3 million, or 1.11% of loans, net of unearned income, at December 31, 2012, compared to $22.0 million, or 1.20% of loans, net of unearned income, at December 31, 2011.
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Noninterest Income
Noninterest income increased $0.4 million, or 4.2%, to $10.0 million in 2013 from $9.6 million in 2012. Service charges on deposit accounts increased $0.4 million, or 14.3%, to $3.2 million in 2013 compared to 2012 due to increases in the number of accounts. Increases in the cash surrender value of bank-owned life insurance contracts were up $0.4 million, or 25.0%, to $2.0 million in 2013 compared to 2012 which is the result of additional investment of $10.0 million in such contracts in September 2013. Other operating income increased $0.4 million, or 23.5%, to $2.1 million in 2013 compared to 2012. Mortgage banking income decreased $1.1 million, or 30.6%, to $2.5 million in 2013 compared to 2012. Higher mortgage rates and a general slow-down in refinance activity during 2013 compared to 2012 lead to lower mortgage banking revenue.
Noninterest income increased $2.7 million, or 39.1%, to $9.6 million in 2012 from $6.9 million in 2011. Increases in the cash surrender value of bank-owned life insurance contracts of $1.6 million in 2012, compared to $0.4 million in 2011, was a major component of the increase in noninterest income from 2011 to 2012. Service charges on deposit accounts increased $0.5 million, or 21.7%, to $2.8 million in 2012 compared to 2011. The average balances on transaction deposit accounts, from which service fees are derived, were up $354.9 million, or 23.2%, from 2012 to 2013. We also dropped our earnings credit rate paid on deposits in April 2012 from 0.50% to 0.35%, which contributed to somewhat higher service fee income. Interchange income from credit card activity increased from $0.5 million in 2011 to $1.0 million in 2012, resulting from increases in the number of cards sold, and from increased spending on existing cards. There were no gains on the sale of available-for-sale securities during 2012, compared to $0.7 million during 2011.
Noninterest Expense
Noninterest expenses increased $4.4 million, or 10.2%, to $47.5 million for the year ended December 31, 2013 from $43.1 million for the year ended December 31, 2012. This increase is largely attributable to increased salary and employee benefits expense, which is a result of staff additions related to our expansion, increased incentive pay, and general merit increases. We had 262 full-time equivalent employees at December 31, 2013 compared to 234 at December 31, 2012. Equipment and occupancy expense increased $1.2 million, or 30.0%, to $5.2 million in 2013 compared to $4.0 million in 2012. Much of this increase is the result of operating an airplane we purchased in the fourth quarter of 2012. Additionally, we opened a new loan production office in Nashville, Tennessee and expanded our space in our Mobile, Alabama office. FDIC assessments were up $0.2 million, or 12.5%, to $1.8 million in 2013 from $1.6 million in 2012, mostly a result of increases in total assets, which is the major component of our assessment base. OREO expense decreased $1.3 million, or 48.1%, to $1.4 million in 2013 from $2.7 million in 2012. This large decrease was the result of fewer write-downs in residential development properties during 2013 compared to 2012. Other noninterest expenses increased $0.2 million, or 1.9%, to $10.9 million compared to $10.7 million in 2012.
Noninterest expenses increased $5.6 million, or 14.9%, to $43.1 million for the year ended December 31, 2012 from $37.5 million for the year ended December 31, 2011. This increase is largely attributable to increased salary and employee benefits expense, which is a result of staff additions related to our expansion. We had 234 full-time equivalent employees at December 31, 2012 compared to 210 at December 31, 2011. Equipment and occupancy expense increased $0.3 million, or 8.1%, as a result of the opening of a new office in our Pensacola, Florida market. This office is housed in an owned facility. FDIC assessments expensed during 2012 were down $0.2 million, or 11.1%, from $1.8 million in 2011 to $1.6 million in 2012. This was the result of changes by the FDIC, under the Dodd-Frank Act, in how the assessment base is determined, and at what rates assessments are charged. These changes took effect during the second quarter of 2011. OREO expense increased $1.9 million, or 237.5%, from $0.8 million in 2011 to $2.7 million in 2012. This increase was the result of increased write-downs in the value of residential development properties in various stages of completion. Other noninterest expenses increased $0.3 million, or 2.9%, to $10.7 million for the year ended December 31, 2012 from $10.4 million for the year ended December 31, 2011. Other expenses in 2011 included $738,000 in prepayment penalties incurred as a result of our prepayment of FHLB debt. Offsetting this during 2012 were increases in credit card processing expenses and other loan expenses.
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Income Tax Expense
Income tax expense was $20.4 million for the year ended December 31, 2013 compared to $17.1 million in 2012 and $12.4 million in 2011. Our effective tax rates for 2013, 2012 and 2011 were 32.85%, 33.20% and 34.58%, respectively. Our primary permanent differences are related to tax exempt income on securities, and Alabama income tax benefits on real estate investment trust dividends and incentive stock option expenses.
We invested $65.0 million in bank-owned life insurance for certain named officers of the bank. The periodic increases in cash surrender value of those policies are tax exempt and therefore contribute to a larger permanent difference between book income and taxable income.
We created real estate investment trusts for the purposes of isolating certain real estate loans in Alabama and Florida for tracking purposes. The trusts are wholly-owned subsidiaries of a trust holding company, which in turn is a wholly-owned subsidiary of the bank. The trusts pay a dividend of their net earnings, primarily interest income derived from the loans they hold, to the bank, which receives a deduction for state income tax.
Financial Condition
Assets
Total assets at December 31, 2013, were $3.5 billion, an increase of $0.6 billion, or 20.7% over total assets of $2.9 billion at December 31, 2012. Average assets for the year ended December 31, 2013 were $3.1 billion, an increase of $0.5 billion, or 23.8%, over average assets of $2.6 billion for the year ended December 31, 2012. Loan growth was the primary reason for the increase. Year-end 2013 loans were $2.9 billion, up $0.5 billion, or 20.8%, over year-end 2012 total loans of $2.4 billion.
Total assets at December 31, 2012, were $2.9 billion, an increase of $0.4 billion, or 16.0% over total assets of $2.5 billion at December 31, 2011. Average assets for the year ended December 31, 2012 were $2.6 billion, an increase of $0.5 billion, or 23.8%, over average assets of $2.1 billion for the year ended December 31, 2011. Loan growth was the primary reason for the increase. Year-end 2012 loans were $2.4 billion, up $0.6 billion, or 33.3%, over year-end 2011 total loans of $1.8 billion.
Earning assets include loans, securities, short-term investments and bank-owned life insurance contracts. We maintain a higher level of earning assets in our business model than do our peers because we allocate fewer of our resources to facilities, ATMs, cash and due-from-bank accounts used for transaction processing. Earning assets at December 31, 2013 were $3.4 billion, or 97.6% of total assets of $3.5 billion. Earning assets at December 31, 2012 were $2.8 billion, or 97.5% of total assets of $2.9 billion. We believe this ratio is expected to generally continue at these levels, although it may be affected by economic factors beyond our control.
Investment Portfolio
We view the investment portfolio as a source of income and liquidity. Our investment strategy is to accept a lower immediate yield in the investment portfolio by targeting shorter term investments. Our investment policy provides that no more than 60% of our total investment portfolio should be composed of municipal securities. At December 31, 2013, mortgage-backed securities represented 39% of the investment portfolio, state and municipal securities represented 45% of the investment portfolio, U.S. Treasury and government agencies represented 11% of the investment portfolio, and corporate debt represented 5% of the investment portfolio.
All of our investments in mortgage-backed securities are pass-through mortgage-backed securities. We do not currently, and did not have at December 31, 2013, any structured investment vehicles or any private-label mortgage-backed securities. The amortized cost of securities in our portfolio totaled $292.5 million at December 31, 2013, compared to $248.6 million at December 31, 2012. All such securities held are traded in liquid markets. The following table presents the amortized cost of securities available for sale and held to maturity by type at December 31, 2013, 2012 and 2011.
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December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Securities Available for Sale | ||||||||||||
U.S. Treasury and government agencies | $ | 31,641 | $ | 27,360 | $ | 98,169 | ||||||
Mortgage-backed securities | 85,764 | 69,298 | 88,118 | |||||||||
State and municipal securities | 127,083 | 112,319 | 95,331 | |||||||||
Corporate debt | 15,738 | 13,677 | 1,030 | |||||||||
Total | $ | 260,226 | $ | 222,654 | $ | 282,648 | ||||||
Securities Held to Maturity | ||||||||||||
Mortgage-backed securities | $ | 26,730 | $ | 20,429 | $ | 9,676 | ||||||
State and municipal securities | 5,544 | 5,538 | 5,533 | |||||||||
Total | $ | 32,274 | $ | 25,967 | $ | 15,209 |
The following table presents the amortized cost of our securities as of December 31, 2013 by their stated maturities (this maturity schedule excludes security prepayment and call features), as well as the taxable equivalent yields for each maturity range.
Maturity of Debt Securities - Amortized Cost
Less Than One Year | One Year through Five Years | Six Years through Ten Years | More Than Ten Years | Total | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
At December 31, 2013: | ||||||||||||||||||||
Securities Available for Sale: | ||||||||||||||||||||
U.S. Treasury and government agencies | $ | 59 | $ | 22,676 | $ | 8,906 | $ | - | $ | 31,641 | ||||||||||
Mortgage-backed securities | 195 | 83,929 | 1,147 | 493 | 85,764 | |||||||||||||||
State and municipal securities | 5,600 | 70,106 | 50,283 | 1,094 | 127,083 | |||||||||||||||
Corporate debt | - | 9,753 | 5,985 | - | 15,738 | |||||||||||||||
Total | $ | 5,854 | $ | 186,464 | $ | 66,321 | $ | 1,587 | $ | 260,226 | ||||||||||
Tax-equivalent Yield | ||||||||||||||||||||
U.S. Treasury and government agencies | 5.02 | % | 2.17 | % | 2.31 | % | - | % | 2.21 | % | ||||||||||
Mortgage-backed securities | 8.47 | 2.99 | 3.51 | 3.46 | 3.01 | |||||||||||||||
State and municipal securities | 4.95 | 3.54 | 4.53 | 6.17 | 4.02 | |||||||||||||||
Corporate debt | - | 1.33 | 1.17 | - | 1.27 | |||||||||||||||
Weighted average yield | 5.07 | % | 3.01 | % | 3.91 | % | 5.33 | % | 3.30 | % | ||||||||||
Securities Held to Maturity: | ||||||||||||||||||||
Mortgage-backed securities | $ | - | $ | 2,382 | $ | 24,348 | $ | - | $ | 26,730 | ||||||||||
State and municipal securities | - | - | - | 5,544 | 5,544 | |||||||||||||||
Total | $ | - | $ | 2,382 | $ | 24,348 | $ | 5,544 | $ | 32,274 | ||||||||||
Tax-equivalent Yield | ||||||||||||||||||||
Mortgage-backed securities | - | % | 3.94 | % | 2.69 | % | - | % | 2.80 | % | ||||||||||
State and municipal securities | - | - | - | 6.27 | 6.27 | |||||||||||||||
Weighted average yield | - | % | 3.94 | % | 2.69 | % | 6.27 | % | 3.40 | % |
(1) Yields are presented on a fully-taxable equivalent basis using a tax rate of 35%.
At December 31, 2013, we had $8.6 million in federal funds sold, compared with $3.3 million at December 31, 2012. At the end of each of the two years, we shifted balances held at correspondent banks to our reserve account at the Federal Reserve Bank of Atlanta to gain favorable capital treatment. At December 31, 2013, there were no holdings of securities of any issuer, other than U.S. government and its agencies, in an amount greater than 10% of our stockholders’ equity.
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The objective of our investment policy is to invest funds not otherwise needed to meet our loan demand to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. In doing so, we balance the market and credit risks against the potential investment return, make investments compatible with the pledge requirements of any deposits of public funds, maintain compliance with regulatory investment requirements, and assist certain public entities with their financial needs. The investment committee has full authority over the investment portfolio and makes decisions on purchases and sales of securities. The entire portfolio, along with all investment transactions occurring since the previous board of directors meeting, is reviewed by the board at each monthly meeting. The investment policy allows portfolio holdings to include short-term securities purchased to provide us with needed liquidity and longer term securities purchased to generate level income for us over periods of interest rate fluctuations.
Loan Portfolio
We had total loans of approximately $2.859 billion at December 31, 2013. The following table shows the percentage of our total loan portfolio by MSA. With our loan portfolio concentrated in a limited number of markets, there is a risk that our borrowers’ ability to repay their loans from us could be affected by changes in local and regional economic conditions.
Percentage of Total Loans in MSA | ||||
Birmingham-Hoover, AL MSA | 50 | % | ||
Huntsville, AL MSA | 15 | % | ||
Montgomery, AL MSA | 10 | % | ||
Dothan, AL MSA | 13 | % | ||
Mobile, AL MSA | 3 | % | ||
Total Alabama MSAs | 91 | % | ||
Pensacola, FL MSA | 8 | % | ||
Nashville, TN MSA | 1 | % |
The following table details our loans at December 31, 2013, 2012, 2011, 2010 and 2009:
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Commercial, financial and agricultural | $ | 1,278,649 | $ | 1,030,990 | $ | 799,464 | $ | 536,620 | $ | 461,088 | ||||||||||
Real estate - construction | 151,868 | 158,361 | 151,218 | 172,055 | 224,178 | |||||||||||||||
Real estate - mortgage: | ||||||||||||||||||||
Owner-occupied commercial | 710,372 | 568,041 | 398,601 | 270,767 | 203,983 | |||||||||||||||
1-4 family mortgage | 278,621 | 235,909 | 205,182 | 199,236 | 165,512 | |||||||||||||||
Other mortgage | 391,396 | 323,599 | 235,251 | 178,793 | 119,749 | |||||||||||||||
Total real estate - mortgage | 1,380,389 | 1,127,549 | 839,034 | 648,796 | 489,244 | |||||||||||||||
Consumer | 47,962 | 46,282 | 41,026 | 37,347 | 32,574 | |||||||||||||||
Total Loans | 2,858,868 | 2,363,182 | 1,830,742 | 1,394,818 | 1,207,084 | |||||||||||||||
Less: Allowance for loan losses | (30,663 | ) | (26,258 | ) | (22,030 | ) | (18,077 | ) | (14,737 | ) | ||||||||||
Net Loans | $ | 2,828,205 | $ | 2,336,924 | $ | 1,808,712 | $ | 1,376,741 | $ | 1,192,347 |
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The following table details the percentage composition of our loan portfolio by type at December 31, 2013, 2012, 2011, 2010 and 2009:
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Commercial, financial and agricultural | 44.73 | % | 43.63 | % | 43.67 | % | 38.47 | % | 38.20 | % | ||||||||||
Real estate - construction | 5.31 | 6.70 | 8.26 | 12.34 | 18.57 | |||||||||||||||
Real estate - mortgage: | ||||||||||||||||||||
Owner-occupied commercial | 24.85 | 24.04 | 21.77 | 19.41 | 16.90 | |||||||||||||||
1-4 family mortgage | 9.74 | 9.98 | 11.21 | 14.28 | 13.71 | |||||||||||||||
Other mortgage | 13.69 | 13.69 | 12.85 | 12.82 | 9.92 | |||||||||||||||
Total real estate - mortgage | 48.28 | 47.71 | 45.83 | 46.51 | 40.53 | |||||||||||||||
Consumer | 1.68 | 1.96 | 2.24 | 2.68 | 2.70 | |||||||||||||||
Total Loans | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % |
The following table details maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2013:
Due in 1 | Due in 1 to 5 | Due after 5 | ||||||||||||||
year or less | years | years | Total | |||||||||||||
(in Thousands) | ||||||||||||||||
Commercial, financial and agricultural | $ | 717,845 | $ | 482,849 | $ | 77,955 | $ | 1,278,649 | ||||||||
Real estate - construction | 81,886 | 56,776 | 13,206 | 151,868 | ||||||||||||
Real estate - mortgage: | ||||||||||||||||
Owner-occupied commercial | 71,785 | 405,715 | 232,872 | 710,372 | ||||||||||||
1-4 family mortgage | 42,147 | 204,955 | 31,519 | 278,621 | ||||||||||||
Other mortgage | 75,648 | 261,341 | 54,407 | 391,396 | ||||||||||||
Total Real estate - mortgage | 189,580 | 872,011 | 318,798 | 1,380,389 | ||||||||||||
Consumer | 33,369 | 13,996 | 597 | 47,962 | ||||||||||||
Total Loans | $ | 1,022,680 | $ | 1,425,632 | $ | 410,556 | $ | 2,858,868 | ||||||||
Less: Allowance for loan losses | (30,663 | ) | ||||||||||||||
Net Loans | $ | 2,828,205 | ||||||||||||||
Interest rate sensitivity: | ||||||||||||||||
Fixed interest rates | $ | 197,627 | $ | 933,986 | $ | 263,538 | $ | 1,395,151 | ||||||||
Floating or adjustable rates | 825,053 | 491,646 | 147,018 | 1,463,717 | ||||||||||||
Total | $ | 1,022,680 | $ | 1,425,632 | $ | 410,556 | $ | 2,858,868 |
Asset Quality
The following table presents a summary of changes in the allowance for loan losses over the past five fiscal years. Our net charge-offs as a percentage of average loans for 2013 was 0.33%, compared to 0.24% for 2012. The largest balance of our charge-offs is on real estate construction loans. Real estate construction loans represented 5.31% of our loan portfolio at December 31, 2013.
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Analysis of the Allowance for Loan Losses
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||
Beginning of year | $ | 26,258 | $ | 22,030 | $ | 18,077 | $ | 14,737 | $ | 10,602 | ||||||||||
Charge-offs: | ||||||||||||||||||||
Commercial, financial and agricultural | (1,932 | ) | (1,106 | ) | (1,096 | ) | (1,667 | ) | (2,616 | ) | ||||||||||
Real estate - construction | (4,829 | ) | (3,088 | ) | (2,594 | ) | (3,488 | ) | (3,322 | ) | ||||||||||
Real estate - mortgage: | ||||||||||||||||||||
Owner occupied commercial | (1,100 | ) | (250 | ) | - | (548 | ) | - | ||||||||||||
1-4 family mortgage | (941 | ) | (311 | ) | (1,096 | ) | (1,227 | ) | (522 | ) | ||||||||||
Other mortgage | - | (99 | ) | - | - | (9 | ) | |||||||||||||
Total real estate mortgage | (2,041 | ) | (660 | ) | (1,096 | ) | (1,775 | ) | (531 | ) | ||||||||||
Consumer | (210 | ) | (901 | ) | (867 | ) | (278 | ) | (207 | ) | ||||||||||
Total charge-offs | (9,012 | ) | (5,755 | ) | (5,653 | ) | (7,208 | ) | (6,676 | ) | ||||||||||
Recoveries: | ||||||||||||||||||||
Commercial, financial and agricultural | 66 | 125 | 361 | 97 | - | |||||||||||||||
Real estate - construction | 296 | 58 | 180 | 53 | 108 | |||||||||||||||
Real estate - mortgage: | ||||||||||||||||||||
Owner occupied commercial | 32 | - | 12 | 12 | - | |||||||||||||||
1-4 family mortgage | 4 | 692 | - | 20 | 3 | |||||||||||||||
Other mortgage | - | - | - | - | - | |||||||||||||||
Total real estate mortgage | 36 | 692 | 12 | 32 | 3 | |||||||||||||||
Consumer | 11 | 8 | 81 | 16 | 15 | |||||||||||||||
Total recoveries | 409 | 883 | 634 | 198 | 126 | |||||||||||||||
Net charge-offs | (8,603 | ) | (4,872 | ) | (5,019 | ) | (7,010 | ) | (6,550 | ) | ||||||||||
Provision for loan losses charged to expense | 13,008 | 9,100 | 8,972 | 10,350 | 10,685 | |||||||||||||||
Allowance for loan losses at end of period | $ | 30,663 | $ | 26,258 | $ | 22,030 | $ | 18,077 | $ | 14,737 | ||||||||||
As a percent of year to date average loans: | ||||||||||||||||||||
Net charge-offs | 0.33 | % | 0.24 | % | 0.32 | % | 0.55 | % | 0.60 | % | ||||||||||
Provision for loan losses | 0.50 | % | 0.45 | % | 0.57 | % | 0.81 | % | 1.00 | % | ||||||||||
Allowance for loan losses as a percentage of: | ||||||||||||||||||||
Year-end loans | 1.07 | % | 1.11 | % | 1.20 | % | 1.30 | % | 1.24 | % | ||||||||||
Nonperforming assets | 135.70 | % | 130.77 | % | 84.48 | % | 84.82 | % | 60.34 | % |
The allowance for loan losses is established and maintained at levels needed to absorb anticipated credit losses from identified and otherwise inherent risks in the loan portfolio as of the balance sheet date. In assessing the adequacy of the allowance for loan losses, management considers its evaluation of the loan portfolio, past due loan experience, collateral values, current economic conditions and other factors considered necessary to maintain the allowance at an adequate level. Our management believes that the allowance was adequate at December 31, 2013.
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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.
For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||||
Percentage | Percentage | Percentage | Percentage | Percentage | ||||||||||||||||||||||||||||||||||||
of loans in | of loans in | of loans in | of loans in | of loans in | ||||||||||||||||||||||||||||||||||||
each | each | each | each | each | ||||||||||||||||||||||||||||||||||||
category to | category to | category to | category to | category to | ||||||||||||||||||||||||||||||||||||
Amount | total loans | Amount | total loans | Amount | total loans | Amount | total loans | Amount | total loans | |||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | $ | 11,170 | 44.73 | % | $ | 8,233 | 43.63 | % | $ | 6,627 | 43.67 | % | $ | 5,348 | 38.47 | % | $ | 3,135 | 38.20 | % | ||||||||||||||||||||
Real estate - construction | 5,809 | 5.31 | 6,511 | 6.70 | 6,542 | 8.26 | 6,373 | 12.34 | 6,295 | 18.57 | ||||||||||||||||||||||||||||||
Real estate -mortgage | 7,495 | 48.28 | 4,912 | 47.71 | 3,295 | 45.83 | 2,443 | 46.51 | 2,102 | 40.53 | ||||||||||||||||||||||||||||||
Consumer | 855 | 1.68 | 199 | 1.96 | 531 | 2.24 | 749 | 2.68 | 115 | 2.70 | ||||||||||||||||||||||||||||||
Qualitative factors | 5,334 | - | 6,403 | - | 5,035 | - | 3,164 | - | 3,090 | - | ||||||||||||||||||||||||||||||
Total | $ | 30,663 | 100.00 | % | $ | 26,258 | 100.00 | % | $ | 22,030 | 100.00 | % | $ | 18,077 | 100.00 | % | $ | 14,737 | 100.00 | % |
We target small and medium-sized businesses as loan customers. Because of their size, these borrowers may be less able to withstand competitive or economic pressures than larger borrowers in periods of economic weakness. If loan losses occur at a level where the loan loss reserve is not sufficient to cover actual loan losses, our earnings will decrease. We use an independent consulting firm to review our loans annually for quality in addition to the reviews that may be conducted by bank regulatory agencies as part of their usual examination process.
As of December 31, 2013, we had impaired loans of $32.0 million inclusive of nonaccrual loans, a decrease of $5.4 million from $37.4 million as of December 31, 2012. We allocated $6.3 million of our allowance for loan losses at December 31, 2013 to these impaired loans. We had previous write-downs against impaired loans of $1.3 million at December 31, 2013, compared to $2.6 million at December 31, 2012. The average balance for 2013 of loans impaired as of December 31, 2013 was $30.7 million. Interest income foregone throughout the year on impaired loans was $972,000 for the year ended December 31, 2013, and we recognized $1.1 million of interest income on these impaired loans for the year ended December 31, 2013. A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original loan agreement. Impairment does not always indicate credit loss, but provides an indication of collateral exposure based on prevailing market conditions and third-party valuations. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. The amount of any initial impairment and subsequent changes in impairment are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status. Our credit administration group performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are allocated to these loans.
Of the $32.0 million of impaired loans reported as of December 31, 2013, $9.2 million were real estate construction loans, $12.3 million were residential real estate loans, $3.9 million were commercial and industrial loans, $2.1 million were commercial real estate loans and $3.8 million were other mortgage loans. Of the $9.2 million of impaired real estate construction loans, $7.3 million (a total of 23 loans with six builders) were residential construction loans, and $135,000 consisted of various residential lot loans to two builders.
The bank has procedures and processes in place intended to ensure that losses do not exceed the potential amounts documented in the bank’s impairment analyses and reduce potential losses in the remaining performing loans within our real estate construction portfolio. These include the following:
· | We closely monitor the past due and overdraft reports on a weekly basis to identify deterioration as early as possible and the placement of identified loans on the watch list; |
· | We perform extensive monthly credit 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; |
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· | We require updated financial information, global inventory aging and interest carry analysis for existing builders to help identify potential future loan payment problems; and |
· | We generally limit loans for new construction to established builders and developers that have an established record of turning their inventories, and we restrict our funding of undeveloped lots and land. |
Nonperforming Assets
The table below summarizes our nonperforming assets at December 31, 2013, 2012, 2011, 2010 and 2009:
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||||
Number | Number | Number | Number | Number | ||||||||||||||||||||||||||||||||||||
Balance | of Loans | Balance | of Loans | Balance | of Loans | Balance | of Loans | Balance | of Loans | |||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||
Nonaccrual loans: | ||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | $ | 1,714 | 9 | $ | 276 | 2 | $ | 1,179 | 7 | $ | 2,164 | 8 | $ | 2,032 | 2 | |||||||||||||||||||||||||
Real estate - construction | 3,749 | 14 | 6,460 | 19 | 10,063 | 21 | 10,722 | 24 | 8,100 | 13 | ||||||||||||||||||||||||||||||
Real estate - mortgage: | ||||||||||||||||||||||||||||||||||||||||
Owner-occupied commercial | 1,435 | 3 | 2,786 | 3 | 792 | 2 | 635 | 1 | 909 | 2 | ||||||||||||||||||||||||||||||
1-4 family mortgage | 1,878 | 3 | 453 | 2 | 670 | 4 | 202 | 1 | 265 | 2 | ||||||||||||||||||||||||||||||
Other mortgage | 243 | 1 | 240 | 1 | 693 | 1 | - | - | 615 | 1 | ||||||||||||||||||||||||||||||
Total real estate -mortgage | 3,556 | 7 | 3,479 | 6 | 2,155 | 7 | 837 | 2 | 1,789 | 5 | ||||||||||||||||||||||||||||||
Consumer | 602 | 4 | 135 | 2 | 375 | 1 | 624 | 1 | - | - | ||||||||||||||||||||||||||||||
Total nonaccrual loans | $ | 9,621 | 34 | $ | 10,350 | 29 | $ | 13,772 | 36 | $ | 14,347 | 35 | $ | 11,921 | 20 | |||||||||||||||||||||||||
90+ days past due and accruing: | ||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | $ | - | - | $ | - | - | $ | - | - | $ | - | - | $ | 14 | 1 | |||||||||||||||||||||||||
Real estate -construction | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Real estate - mortgage: | ||||||||||||||||||||||||||||||||||||||||
Owner-occupied commercial | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
1-4 family mortgage | 19 | 1 | - | - | - | - | - | - | 253 | 1 | ||||||||||||||||||||||||||||||
Other mortgage | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total real estate mortgage | 19 | 1 | - | - | - | - | - | - | 253 | 1 | ||||||||||||||||||||||||||||||
Consumer | 96 | 1 | 8 | 4 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total 90+ days past due and accruing | $ | 115 | 2 | $ | 8 | 4 | $ | - | - | $ | - | - | $ | 267 | 2 | |||||||||||||||||||||||||
Total nonperforming loans | $ | 9,736 | 36 | $ | 10,358 | 33 | $ | 13,772 | 36 | $ | 14,347 | 35 | $ | 12,188 | 22 | |||||||||||||||||||||||||
Plus: Other real estate owned and repossessions | 12,861 | 51 | 9,721 | 38 | 12,305 | 39 | 6,966 | 39 | 12,525 | 51 | ||||||||||||||||||||||||||||||
Total nonperforming assets | $ | 22,597 | 87 | $ | 20,079 | 71 | $ | 26,077 | 75 | $ | 21,313 | 74 | $ | 24,713 | 73 | |||||||||||||||||||||||||
Restructured accruing loans: | ||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | $ | 962 | 2 | $ | 1,168 | 2 | $ | 1,369 | 2 | $ | 2,398 | 9 | $ | - | - | |||||||||||||||||||||||||
Real estate -construction | 217 | 1 | 3,213 | 15 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Real estate - mortgage: | ||||||||||||||||||||||||||||||||||||||||
Owner-occupied commercial | - | - | 3,121 | 3 | 2,785 | 3 | - | - | 845 | 1 | ||||||||||||||||||||||||||||||
1-4 family mortgage | 8,225 | 2 | 1,709 | 5 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Other mortgage | 285 | 1 | 302 | 1 | 331 | 1 | - | - | - | - | ||||||||||||||||||||||||||||||
Total real estate -mortgage | 8,510 | 3 | 5,132 | 9 | 3,116 | 4 | - | - | 845 | 1 | ||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total restructured accruing loans | $ | 9,689 | 6 | $ | 9,513 | 26 | $ | 4,485 | 6 | $ | 2,398 | 9 | $ | 845 | 1 | |||||||||||||||||||||||||
Total nonperforming assets and restructured accruing loans | $ | 32,286 | 93 | $ | 29,592 | 97 | $ | 30,562 | 81 | $ | 23,711 | 83 | $ | 25,558 | 74 | |||||||||||||||||||||||||
Gross interest income foregone on nonaccrual loans throughout year | $ | 972 | $ | 850 | $ | 1,371 | $ | 510 | $ | 647 | ||||||||||||||||||||||||||||||
Interest income recognized on nonaccrual loans throughout year | $ | 433 | $ | 155 | $ | 263 | $ | 418 | $ | 310 | ||||||||||||||||||||||||||||||
Ratios: | ||||||||||||||||||||||||||||||||||||||||
Nonperforming loans to total loans | 0.34 | % | 0.44 | % | 0.75 | % | 1.03 | % | 1.01 | % | ||||||||||||||||||||||||||||||
Nonperforming assets to total loans plus other real estate owned | 0.79 | % | 0.85 | % | 1.41 | % | 1.52 | % | 2.02 | % | ||||||||||||||||||||||||||||||
Nonperforming loans plus restructured accruing loans to total loans plus other real estate owned and repossessions | 0.68 | % | 0.84 | % | 0.99 | % | 1.19 | % | 1.06 | % |
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 (that is, place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. Interest income on nonaccrual loans is recognized only as received. If we believe that a loan will not be collected in full, we will increase the allowance for loan losses to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. There are not any loans, outside of those included in the table above, that cause management to have serious doubts as to the ability of borrowers to comply with present repayment terms.
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Deposits
We rely on increasing our deposit base to fund loan and other asset growth. Each of our markets is highly competitive. We compete for local deposits by offering attractive products with competitive rates. We expect to have a higher average cost of funds for local deposits than competitor banks due to our lack of an extensive branch network. Our management’s strategy is to offset the higher cost of funding with a lower level of operating expense and firm pricing discipline for loan products. We have promoted electronic banking services by providing them without charge and by offering in-bank customer training. The following table presents the average balance and average rate paid on each of the following deposit categories at the bank level for years ended 2013, 2012 and 2011:
Average Deposits | ||||||||||||||||||||||||
Average for Years Ended December 31, | ||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||
Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | |||||||||||||||||||
Types of Deposits: | (Dollars in Thousands) | |||||||||||||||||||||||
Non-interest-bearing demand deposits | $ | 576,072 | - | % | $ | 474,284 | - | % | $ | 315,781 | - | % | ||||||||||||
Interest-bearing demand deposits | 433,931 | 0.28 | % | 351,975 | 0.31 | % | 303,165 | 0.37 | % | |||||||||||||||
Money market accounts | 1,244,957 | 0.47 | % | 1,042,870 | 0.56 | % | 902,290 | 0.74 | % | |||||||||||||||
Savings accounts | 21,793 | 0.28 | % | 17,081 | 0.28 | % | 10,088 | 0.47 | % | |||||||||||||||
Time deposits | 69,247 | 1.01 | % | 69,906 | 1.24 | % | 65,484 | 1.44 | % | |||||||||||||||
Time deposits, $100,000 and over | 335,680 | 1.13 | % | 328,646 | 1.35 | % | 264,737 | 1.60 | % | |||||||||||||||
Total deposits | $ | 2,681,680 | $ | 2,284,762 | $ | 1,861,545 |
The following table presents the maturities of our certificates of deposit as of December 31, 2013 and 2012.
At December 31, 2013 | $100,000 or more | Less than $100,000 | Total | |||||||||
Maturity | (In Thousands) | |||||||||||
Three months or less | $ | 56,566 | $ | 15,105 | $ | 71,671 | ||||||
Over three through six months | 62,916 | 12,863 | 75,779 | |||||||||
Over six months through one year | 90,609 | 22,429 | 113,038 | |||||||||
Over one year | 134,214 | 19,918 | 154,132 | |||||||||
Total | $ | 344,305 | $ | 70,315 | $ | 414,620 |
At December 31, 2012 | $100,000 or more | Less than $100,000 | Total | |||||||||
Maturity | (In Thousands) | |||||||||||
Three months or less | $ | 81,299 | $ | 20,910 | $ | 102,209 | ||||||
Over three through six months | 33,712 | 9,351 | 43,063 | |||||||||
Over six months through one year | 89,215 | 17,236 | 106,451 | |||||||||
Over one year | 122,275 | 21,682 | 143,957 | |||||||||
Total | $ | 326,501 | $ | 69,179 | $ | 395,680 |
Total average deposits for the year ended December 31, 2013 were $2.7 billion, an increase of $0.4 billion, or 21.1%, over total average deposits of $2.3 billion for the year ended December 31, 2012. Average noninterest-bearing deposits increased by $0.1 billion, or 20.0%, from $0.5 billion for the year ended December 31, 2012 to $0.6 billion for the year ended December 31, 2013.
Total average deposits for the year ended December 31, 2012 were $2.3 billion, an increase of $0.4 billion, or 21.1%, over total average deposits of $1.9 billion for the year ended December 31, 2011. Average noninterest-bearing deposits increased by $0.2 billion, or 66.7%, from $0.3 billion for the year ended December 31, 2011 to $0.5 billion for the year ended December 31, 2012.
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We have never had brokered deposits.
Borrowed Funds
We had available approximately $130 million in unused federal funds lines of credit with regional banks as of December 31, 2013 and 2012. These lines are subject to certain restrictions and collateral requirements.
Stockholders’ Equity