10-K 1 stbz-20161231x10k.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016      
 
Commission file number: 001-35139 

STATE BANK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
Georgia
 
27-1744232
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
3399 Peachtree Road, NE, Suite 1900
Atlanta, Georgia
 
30326
(Address of principal executive offices)
 
(Zip Code)
 404-475-6599
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.01 par value per share
The NASDAQ Stock Market LLC
    
                                        
Securities registered under Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o 
(Do not check if a smaller reporting company)
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant's common stock held by nonaffiliates of the registrant was approximately $710.7 million.

The number of shares outstanding of the registrant’s common stock, as of February 23, 2017 was 38,869,395.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Annual Report on Form 10-K is incorporated by reference from the registrant's definitive proxy statement relating to the 2017 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.
 





TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this report that are not statements of historical fact are forward-looking statements. These forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words "may," "would," "could," "will," "expect," "anticipate," "project," "believe," "intend," "plan" and "estimate," as well as similar expressions. These forward-looking statements include statements related to our strategic plans to continue organic growth and pursue other strategic opportunities, such as acquisitions, that our direct banking strategy will assist us in obtaining the deposits from local customers, the use of the mortgage and Small Business Administration ("SBA") platforms from our recent acquisitions, our expectations regarding growth in our markets, our belief that our deposits are attractive sources of funding because of their stability and relative cost, our anticipation that a significant portion of our commercial and residential real estate construction and consumer equity lines of credit will not be funded, our expectation that our total risk-weighted assets will increase, our belief that our recorded deferred tax assets are fully recoverable, our expected dividend capacity in 2017, as well as statements relating to the anticipated effects on results of operations and financial condition from expected developments or events, the possible normalizing of our level of capitalization, anticipated organic growth, our use of derivatives and their anticipated future effect on our financial statements, and our plans to acquire other banks.

These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ materially from those anticipated in such statements. Potential risks and uncertainties include those described under "Risk Factors" and the following:

negative reactions to our recent or future acquisitions of each bank's customers, employees and counterparties or difficulties related to the transition of services;
general economic conditions (both generally and in our markets) may be less favorable than expected, which could result in, among other things, a deterioration in credit quality, a reduction in demand for credit and a decline in real estate values;
a general decline in the real estate and lending markets, particularly in our market areas, could negatively affect our financial results;
risk associated with income taxes including the potential for adverse adjustments and the inability to fully realize deferred tax benefits;
increased cybersecurity risk, including potential network breaches, business disruptions or financial losses;
our ability to raise additional capital may be impaired based on conditions in the capital markets;
costs or difficulties related to the integration of the banks we have acquired or may acquire may be greater than expected;
current or future restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals;
legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect us;
competitive pressures among depository and other financial institutions may increase significantly;
changes in the interest rate environment may reduce the volumes or values of the loans we make or have acquired;
other financial institutions may be able to develop or acquire products that enable them to compete more successfully than we can;
our ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry;
adverse changes may occur in the bond and equity markets;
war or terrorist activities may cause deterioration in the economy or cause instability in credit markets;
economic, geopolitical or other factors may prevent the growth we expect in the markets in which we operate; and
we will or may continue to face the risk factors discussed from time to time in the periodic reports we file with the Securities and Exchange Commission ("SEC").

For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new

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information, future events or otherwise. See Item 1A. Risk Factors, for a description of some of the important factors that may affect actual outcomes.

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PART I

Item 1.    Description of Business.

General Overview

State Bank Financial Corporation (the "Company") is a bank holding company that was incorporated under the laws of the State of Georgia in January 2010 to serve as the holding company for State Bank and Trust Company (the "Bank" or "State Bank"). State Bank is a Georgia state-chartered bank that opened in October 2005 in Pinehurst, Georgia, which initially operated as a small community bank with two branch offices located in Dooly County, Georgia. Between July 24, 2009 and December 31, 2016, we successfully completed 16 bank acquisitions totaling $5.1 billion in assets and $4.5 billion in deposits. State Bank principally operates through 31 full-service branches throughout seven of Georgia's eight largest metropolitan statistical areas, or MSAs.

 In this report, unless the context indicates otherwise, all references to "we," "us," and "our" refer to State Bank Financial Corporation and our wholly-owned subsidiary, State Bank. Additionally, we refer to each of the financial institutions we have acquired collectively as the "Acquired Banks."

As a result of our acquisitions, we have transformed from a small community bank to a much larger commercial bank. We offer a variety of community banking services to individuals and businesses within our markets. Our product lines include loans to small and medium-sized businesses, residential and commercial construction and development loans, commercial real estate loans, farmland and agricultural production loans, residential mortgage loans, home equity loans, consumer loans and a variety of commercial and consumer demand, savings and time deposit products. We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers. In addition to the banking services noted above, we offer payroll and insurance services, through Altera Payroll and Insurance, a division of State Bank, to small and medium-size businesses. These services include fully automated human resources information system, payroll, benefits and labor management.

At December 31, 2016, our total assets were approximately $4.2 billion, our total loans receivable were approximately $2.8 billion, our total deposits were approximately $3.4 billion and our total shareholders' equity was approximately $613.6 million. The Company is headquartered at 3399 Peachtree Road, N.E., Suite 1900, Atlanta, Georgia 30326. State Bank's main office is located at 4219 Forsyth Road, Macon, Georgia 31210.

Our History and Growth

On July 24, 2009, State Bank raised approximately $292.1 million in gross proceeds (before expenses) from investors in a private offering of its common stock. Since that date and through October 2011, State Bank has acquired $3.9 billion in total assets and assumed $3.6 billion in deposits from the Federal Deposit Insurance Corporation (the "FDIC"), as receiver, in 12 different failed bank acquisition transactions.

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Concurrent with each of our failed bank acquisitions, we entered into loss share agreements with the FDIC that covered certain of the acquired loans and other real estate owned. Historically, we have referred to loans subject to loss share agreements with the FDIC as “covered loans” and loans that are not subject to loss share agreements with the FDIC as “noncovered loans.” However, with the early termination of all of our loss share agreements as discussed below, we now segregate our loan portfolio into the following three categories:

(1) organic loans, which refers to loans not purchased in the acquisition of an institution or credit impaired portfolio,

(2) purchased non-credit impaired loans ("PNCI"), which refers to loans acquired in our acquisitions that did not show
signs of credit deterioration at acquisition, and

(3) purchased credit impaired loans ("PCI"), which refers to loans we acquired that, at acquisition, we determined it was
probable that we would be unable to collect all contractual principal and interest payments due.

All of the loans we acquired in our 12 FDIC assisted transactions, which we refer to as our failed bank transactions, and all of the loans acquired in our purchase of a loan portfolio from the FDIC in July 2014, were deemed purchased credit impaired loans at acquisition. The indemnification asset previously associated with the FDIC loss share agreements related to our failed bank transactions is referred to as the "FDIC receivable." The FDIC receivable was eliminated with the early termination of our loss share agreements discussed below.

 On October 1, 2014, we closed on our acquisition of Atlanta Bancorporation, Inc. and its wholly-owned subsidiary bank, Bank of Atlanta. Atlanta Bancorporation, Inc. was immediately merged into the Company followed by the merger of Bank of Atlanta with and into State Bank. We paid approximately $25.2 million in cash for all of the outstanding shares of Atlanta Bancorporation. With the acquisition of Bank of Atlanta, we acquired one branch in midtown Atlanta and one branch in Duluth, Georgia. Simultaneously with the acquisition, State Bank announced that our existing midtown Atlanta branch would be closed and merged into Bank of Atlanta's midtown Atlanta branch.

On January 1, 2015, we completed our merger with Georgia-Carolina Bancshares, Inc., the holding company for First Bank of Georgia ("First Bank"). We paid approximately $88.9 million for all of the outstanding shares of Georgia-Carolina Bancshares, Inc. consisting of $31.8 million in cash and $57.0 million of our common stock. Immediately following the merger, First Bank, a Georgia state-chartered bank, became a wholly-owned subsidiary bank of the Company. With the acquisition of First Bank, we acquired three branches in Augusta, Georgia, two branches in Martinez, Georgia, one branch in Evans, Georgia and one branch in Thomson, Georgia. Additionally with the First Bank acquisition, we acquired four mortgage origination offices in Aiken, South Carolina, Augusta, Georgia, Savannah, Georgia and Pooler, Georgia. On July 24, 2015, First Bank merged with and into State Bank.

On May 21, 2015, we entered into an agreement with the FDIC to terminate our loss share agreements for all 12 of our FDIC-assisted acquisitions, resulting in a one-time after-tax charge of approximately $8.9 million, or $14.5 million pre-tax. All rights and obligations of the parties under the FDIC loss share agreements, including the clawback provisions and the settlement of historical loss share expense reimbursement claims, were eliminated under the early termination agreement. All future charge-offs, recoveries, gains, losses and expenses related to assets previously covered by FDIC loss share agreements will now be recognized entirely by us since the FDIC will no longer be sharing in such charge-offs, recoveries, gains, losses and expenses. Despite the termination of the loss share agreements, the terms of the purchase and assumption agreements for our FDIC-assisted acquisitions continue to provide for the FDIC to indemnify us against certain claims, including claims with respect to assets, liabilities or any affiliate not acquired or otherwise assumed by us and with respect to claims based on any action by directors, officers or employees of the failed banks for the term provided in the agreements.

On October 22, 2015, we closed on the acquisition of the equipment finance origination platform of Patriot Capital Corporation ("Patriot Capital"). Patriot Capital, which now operates as a division of State Bank, is a leading provider of equipment financing to the retail petroleum industry. Patriot Capital originates loans throughout the United States.

On December 31, 2016, we closed on our acquisition of NBG Bancorp, Inc. ("NBG Bancorp") and its wholly-owned subsidiary bank, The National Bank of Georgia ("National Bank of Georgia"). NBG Bancorp was immediately merged into the Company followed by the merger of National Bank of Georgia with and into State Bank. We paid approximately $77.9 million for all of the outstanding shares of NBG Bancorp consisting of $34.2 million in cash and $43.7 million of our common stock. With the acquisition of National Bank of Georgia, we acquired one branch in Athens, Georgia, one branch in Gainesville, Georgia, and a mortgage office in Athens, Georgia.


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On December 31, 2016, we also closed on our acquisition of S Bankshares, Inc. ("S Bankshares") and its wholly-owned subsidiary bank, S Bank. S Bankshares was immediately merged into the Company followed by the merger of S Bank with and into State Bank. We paid approximately $12.6 million for all of the outstanding shares of S Bankshares consisting of $4.3 million in cash and $8.3 million of our common stock. With the acquisition of S Bank, we acquired four branches located in Savannah, Glennville, Reidsville and Hinesville, Georgia.

Strategic Plan

As a result of our 12 FDIC-assisted acquisitions since July 2009, and the fair value discounts associated with each such acquisition, we anticipate that a significant portion of our earnings over the next year or two will continue to be derived from the realization of accretable discounts on the loans that we purchased. (See below "Lending Activities-General" for an explanation of "accretable discounts"). We also plan to continue growing our loan portfolio organically over the coming year and to add additional clients to our cash management and payments business, including our payroll processing services. For the year ended December 31, 2016, we had organic loan growth of $316.2 million, or 17.8%, from 2015.

In addition to organic growth, we plan to seek other strategic opportunities, such as acquisitions of select loan portfolios, whole loans and loan participations from correspondent banks and specialty lenders, open bank acquisitions and acquisitions that leverage our expertise in failed bank transactions and distressed debt resolutions. We will also consider the purchase of select lines of business that we believe will complement our existing operations.

To achieve our goals, we have assembled an experienced senior management team, combining extensive market knowledge with an energetic and entrepreneurial culture. The members of our management team have close ties to, and are actively involved in, the communities in which we operate, which is critical to our relationship banking focus.

Our Market Area

Our primary market areas are Middle Georgia (including Macon), Metropolitan Atlanta, Greater Savannah, Athens, Gainesville and Augusta, Georgia. In addition to our administrative office, located at 3399 Peachtree Road, N.E., Suite 1900, Atlanta, Georgia 30326, at December 31, 2016, we operated 31 full-service banking offices in the following counties in Georgia: Bibb, Chatham, Clarke, Cobb, Columbia, Dooly, Fulton, Gwinnett, Hall, Houston, Jones, Liberty, McDuffie, Richmond and Tattnall. We also operated eight mortgage production offices.


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The following table shows key deposit and demographic information about our market areas and our presence in these markets:
 
State Bank and Trust Company
 
Total Market Area
 
2016 State Bank Deposits in Market ($000) (1)
 
2016 Total Market Share (1)
 
2016 Rank in Market (1)
 
2016 Total Deposits in Market Area ($000) (1)
 
2016 Population (2)
 
2017-2022 Projected Population Growth (2)
 
2016 Median Household Income (2)
 
2017-2022 Projected Growth in Household Income (2)
Middle Georgia
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bibb
$
842,704

 
29.96
%
 
1
 
$
2,813,056

 
153,056
 
.83
 %
 
$
38,134

 
6.93
 %
Dooly
26,676

 
19.38

 
3
 
137,652

 
13,822
 
(2.08
)
 
28,446

 
(3.59
)
Houston
258,302

 
19.50

 
2
 
1,324,691

 
151,976
 
5.35

 
53,565

 
2.20

Jones
154,238

 
52.98

 
1
 
291,112

 
28,302
 
.61

 
55,999

 
8.14

Metro Atlanta
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cobb
166,180

 
1.21

 
16
 
13,785,646

 
757,707
 
6.62

 
69,945

 
8.34

Fulton
980,353

 
1.11

 
9
 
88,592,983

 
1,031,774
 
6.79

 
61,084

 
7.26

Gwinnett
85,746

 
.58

 
24
 
14,798,376

 
923,142
 
8.11

 
63,148

 
5.34

Augusta
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Columbia
132,633

 
7.52

 
5
 
1,764,758

 
150,080
 
9.74

 
69,878

 
1.89

McDuffie
66,873

 
23.48

 
1
 
284,866

 
21,506
 
1.15

 
41,331

 
9.72

Richmond
225,450

 
6.39

 
5
 
3,526,729

 
202,265
 
2.35

 
37,955

 
2.50

Greater Savannah (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chatham
13,725

 
.22

 
19
 
6,314,712

 
292,924
 
6.54

 
51,261

 
7.94

Liberty
19,740

 
5.04

 
4
 
391,610

 
61,070
 
(2.06
)
 
43,191

 
(3.05
)
Tattnall
57,914

 
19.60

 
3
 
295,532

 
25,176
 
1.15

 
35,995

 
3.57

Athens/Gainesville (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Clarke
225,302

 
7.97

 
6
 
2,826,332

 
126,464
 
6.17

 
32,847

 
4.06

Hall
98,359

 
3.04

 
11
 
3,239,570

 
197,797
 
6.61

 
56,020

 
10.06

 
(1) Source: SNL Financial. This data is as of June 30, 2016 and the market information includes only retail branches for banks,
thrifts, and savings banks and does not include credit unions.
(2) Source: Nielsen, as provided by SNL Financial. Demographic data is provided by Nielsen, based primarily on U.S. Census data. For non-census year data, Nielsen uses samples and projections to estimate the demographic data.
(3) Reflects new markets entered into as a result of our acquisitions of S Bankshares, Inc. and NBG Bancorp, Inc. each on December 31, 2016. Deposit data reflects deposits held by S Bank (Greater Savannah) and National Bank of Georgia (Athens/Gainesville) as of June 30, 2016.

Competition

The banking business is highly competitive, and we experience competition in our market areas from many other financial institutions. We offer a competitive suite of products coupled with personalized service. Delivery of customized product sets specifically designed to meet the needs of middle market businesses give us a competitive advantage with our target customers. Competition among financial institutions is based on interest rates offered on deposit accounts, structure, terms and interest rates charged on loans, other credit and service charges relating to loans, the quality and scope of products and services rendered, the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative lending limits. We compete with commercial banks, credit unions, savings institutions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, as well as super-regional, national and international financial institutions that operate in our market areas and elsewhere. In addition, we compete with payroll processing businesses in providing payroll services.


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We compete with financial institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions, such as SunTrust, Bank of America, Wells Fargo, and BB&T. These institutions offer some services, such as extensive and established branch networks and more complex financial products, which we do not provide. In addition, many of our nonbank competitors are not subject to the same extensive governmental regulations applicable to bank holding companies and federally insured banks such as ours.

Lending Activities

General

We offer a range of lending services, including commercial and residential real estate mortgage loans, real estate construction loans, commercial and industrial loans, agriculture and consumer loans. Our customers are generally individuals, owner-managed businesses, farmers, professionals, real estate investors, home builders, counties and municipalities within our market areas. We also offer equipment finance agreements and certain Small Business Administration loan programs to customers nationally. At December 31, 2016, we had net total loans of $2.8 billion, representing 71.2% of our total earning assets.

We recorded the loans we acquired in each of our acquisitions at their estimated fair values on the date of each acquisition. We calculated the fair value of loans by discounting scheduled cash flows through the estimated maturity date of the loan, using estimated market discount rates that reflect the credit risk inherent in the loan. We refer to the excess cash flows expected at acquisition over the estimated fair value as the "accretable discount." The accretable discount for purchased non-credit impaired loans is recognized as interest income over the remaining life of the loan. The accretable discount for purchased credit impaired loans is recognized as accretion income over the remaining life of the loan. The "nonaccretable discount" is the difference, calculated at acquisition, between contractually required payments and the cash flows expected to be collected. We re-estimate our cash flow expectations for purchased credit impaired loans on a quarterly basis, which involves estimates of expected cash flows and significant judgment on timing of loan resolution. If our assumptions prove to be incorrect, our current allowance for loan and lease losses may not be sufficient, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio.

        Real Estate Loans

Loans secured by real estate are the principal component of our loan portfolio. Real estate loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value of real estate. Increases in interest rates, declines in occupancy rates, fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively affect a borrower's cash flow, creditworthiness and ability to repay the loan. When we make loans, we obtain a security interest in real estate whenever possible, in addition to any other available collateral, to increase the likelihood of the ultimate repayment of the loan. To control concentration risk, we monitor collateral type and industry concentrations within this portfolio.

Other Commercial Real Estate Loans.   At December 31, 2016, other commercial real estate loans amounted to $1.0 billion, or 36.4%, of our loan portfolio. These loans generally have terms of five years or less, although payments may be structured on a longer amortization. We evaluate each loan on an individual basis and attempt to determine the business risks and credit profile of each borrower.

Residential Real Estate Loans.  We generally originate and hold certain first mortgage and traditional second mortgage residential real estate loans, adjustable rate mortgages and home equity lines of credit. We also originate fixed and adjustable rate residential real estate loans with terms of up to 30 years for third-party investors. At December 31, 2016, residential real estate loans amounted to $343.4 million, or 12.2%, of our loan portfolio, of which home equity loans totaled $77.9 million, or 22.7%, of the residential real estate loan portfolio.


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Real Estate Construction and Development Loans

At December 31, 2016, real estate construction and development loans amounted to $567.8 million, or 20.2%, of our loan portfolio. We offer fixed and adjustable rate residential and commercial construction loans to builders and developers and to consumers who wish to build their own homes. Construction and development loans generally carry a higher degree of risk than long-term financing of existing properties because repayment depends on the ultimate completion of the project and usually on the subsequent leasing and/or sale of the property. Specific risks include:

cost overruns;
mismanaged construction;
inferior or improper construction techniques;
economic changes or downturns during construction;
a downturn in the real estate market;
rising interest rates which may prevent sale of the property; and
failure to lease or sell completed projects in a timely manner.

We attempt to reduce the risks associated with construction and development loans by obtaining personal guarantees, as appropriate, monitoring the construction process, and by keeping the loan-to-value ratio of the completed project within regulations as promulgated by both the FDIC and the Georgia Department of Banking and Finance.

We make residential land loans to both commercial entities and consumer borrowers for the purpose of financing land upon which to build a residential home. Residential land loans are reclassified as residential construction loans once construction of the residential home commences. These loans are further categorized as:

pre-sold commercial, which is a loan to a commercial entity with a pre-identified buyer for the finished home;
owner-occupied consumer, which is a loan to an individual who intends to occupy the finished home; and
nonowner-occupied commercial (speculative), which is a loan to a commercial entity intending to lease or sell the finished home.

We make commercial land loans to commercial entities for the purpose of financing land on which to build a commercial project. These loans are for projects that typically involve small-and medium-sized single and multi-use commercial buildings.

We make commercial construction loans to borrowers for the purpose of financing the construction of a commercial development. These loans are further categorized depending on whether the borrower intends (a) to occupy the finished development (owner-occupied) or (b) to lease or sell the finished development (nonowner-occupied). At issuance of the certificate of occupancy these loans are no longer considered construction loans.

Commercial, Financial and Agricultural and Owner-Occupied Real Estate Loans

Commercial, Financial and Agricultural. At December 31, 2016, commercial, financial and agricultural loans amounted to $368.1 million, or 13.1%, of our total loan portfolio. We make loans for commercial purposes in various lines of businesses, including the manufacturing, professional service, and crop production industries. Commercial, financial and agricultural loans also includes loans to states and political subdivisions, as well as equipment finance agreements originated through Patriot Capital, a division of State Bank. While these loans may have real estate as partial collateral, many are secured by various other assets of the borrower including but not limited to accounts receivable, inventory, furniture, fixtures, and equipment. Our underwriting and management of the credit take into consideration the fluid nature of receivables and inventory collateral, where appropriate. Our repayment analysis includes a consideration of the cash conversion cycle, historical cash flow coverage, the predictability of future cash flows, together with the overall capitalization of the borrower. We also participate in loan syndications of senior secured commercial loans either directly with the lead bank or through purchases in the secondary market. These loans are primarily to large publicly traded companies throughout the United States and are secured by all assets of the issuing company. These loans are underwritten to the same standards as our organic portfolio.
Owner-Occupied Real Estate Loans.  At December 31, 2016, owner-occupied real estate loans amounted to $395.9 million, or 14.1%, of our loan portfolio. These loans are underwritten based on the borrower’s ability to service the debt from income from the business, as cash flow from the business is considered the primary source of repayment.


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Leases

At December 31, 2016 leases amounted to $71.7 million, or 2.5%, of our loan portfolio. Leases include purchased commercial, business purpose and municipal leases. For purchased leases, the stream of payments and a first security interest in the collateral is assigned to us. Our lease funding is based on a present value of the lease payments at a discounted interest rate, which is determined based on the credit quality of the lessee, the term of the lease compared to expected useful life, and the type of collateral. Types of collateral include, but are not limited to, medical equipment, rolling stock, franchise restaurant equipment and hardware/software. Servicing of purchased leases is primarily retained by the loan originator, as well as ownership of all residuals, if applicable. Lease financing is underwritten by our Specialized Finance Group using similar underwriting standards as would be applied to a secured commercial loan requesting high loan-to-value financing. Risks that are involved with lease financing receivables are credit underwriting and borrower industry concentrations.

Consumer

At December 31, 2016, consumer loans amounted to $42.6 million, or 1.5%, of our loan portfolio. We make a variety of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit. We underwrite consumer loans based on the borrower's income, current debt level, personal financial statement composition, past credit history and the availability and value of collateral. Consumer loan interest rates are both fixed and variable. Although we typically require monthly payments of interest and a portion of the principal on our loan products, we may offer consumer loans with a single maturity date when a specific source of repayment is available. Consumer loans not secured by real estate are generally considered to have higher risk because they may be unsecured, or, if they are secured, the value of the collateral may be more difficult to assess, more likely to decrease in value, and is more difficult to control, than real estate. During 2015, we began emphasizing the underwriting of consumer loans secured by cash value life insurance policies which presents a lower collateral risk than other non-real estate secured consumer loans. We also purchase pools of retail installment contracts which are underwritten by our Specialized Finance Group. Servicing of purchased retail installment contracts is primarily retained by the loan originator. These loans are underwritten to the same standards as our organic portfolio.

Loan Approval

Certain credit risks are inherent in making loans. These credit risks include repayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. We attempt to mitigate repayment risks by adhering to internal credit policies and procedures. We employ consistent analysis and underwriting to examine credit information and prepare underwriting documentation. We monitor and approve exceptions to policy as required, and we also track and address document exceptions.

Our loan approval policy generally provides for all consumer and commercial relationship exposures less than $500,000 to be handled through a centralized underwriting group. We also have specific officer lending limits entrusted to senior sales leadership. Approval concurrence from experienced credit risk managers is required as the size of the transaction increases. Loans underwritten outside of our Centralized Underwriting group are required to be post reported to our Loan Committees. Our Loan Committees include the Enterprise Risk Officer, President of State Bank, Chief Credit Officer, Senior Credit Officer, Regional Credit Officers, Director of Credit Administration, Retail Credit Manager and Director of The Commercial Financial Group. State Bank maintains an internal single borrower lending limit of $20.0 million and no more than $5.0 million may be unsecured. Internal policy has established lending authority up to $40.0 million for any relationship, of which no more than $10.0 million may be unsecured. During Credit Steering Committee meetings all (i) single transaction requests greater than $10.0 million, (ii) non-recourse single transaction requests $5.0 million or greater, (iii) single transaction requests greater than $1.0 million resulting in total credit exposure greater than $20.0 million, or (iv) transaction requests resulting in unsecured total credit exposure of $5.0 million or greater are post reported to our executive officers.

State Bank maintains a policy not to originate loans to any director, employee (officer or non-officer), or principal shareholder, or the related interests (as defined in Regulation O) of each. This prohibition does not apply to residential mortgage loans originated for sale in the secondary market to employees not designated as Regulation O officers. Certain of the Acquired Banks previously extended loans from time to time to certain of their directors, their related interests and members of the immediate families of the directors, executive officers and employees of the Acquired Banks. These loans were made in the ordinary course of business on substantially the same terms, including interest rates, collateral and repayment terms, as those prevailing at the time for comparable transactions with persons not affiliated with the Acquired Banks, and did not involve more than the normal risk of collectability or present other unfavorable features. All loans made to previous Acquired Bank directors or executive officers, their related interests and members of the immediate families of the directors and executive officers who continued in a similar role at State Bank were paid off.

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Credit Administration and Loan Review

Organic loans are rated at inception according to our credit grading system. Purchased credit impaired loans and purchased non-credit impaired loans are rated at acquisition date. Purchased non-credit impaired loans are subsequently managed and monitored in the same manner as organic loans. The credit rating for consumer loans and commercial loans with relationship debt less than $500,000 is determined by our Centralized Underwriting group. The credit rating for commercial loans is recommended by the relationship manager and ultimately determined by the applicable approval authority of the loan. It is the responsibility of the relationship manager to assess the accuracy of the credit ratings assigned to relationships with total credit exposure greater than $100,000 on a quarterly basis. The credit rating on loans less than $100,000 will remain unchanged unless the loan is part of a larger relationship or payment issues arise. As such, the primary review mechanism for managing these loans is the past due report. In our quarterly analysis of the allowance for loan and lease losses on organic and purchased non-credit impaired loans, loans that are less than $100,000 and are over 60 days past due are reclassified and are treated as substandard and are reserved for as a homogeneous pool, subject to the appropriate loss factor. A reassessment of a loan's credit rating may also be triggered by the noncompliance with financial or reporting covenants, review of financial information, or changes in the primary collateral securing the loan.

Our Credit Administration and Risk Departments assess portfolio trends, concentration risk, and other loan portfolio measurements to gauge the systemic risk that may be inherent in our lending practices and procedures. Our loan review activity is primarily coordinated by the Internal Loan Review Department. Our internal loan review is risk-based, concentrating on those areas with the highest perceived risk. For the year ended December 31, 2016, loans reviewed totaled $1.0 billion, representing 41.0% of recorded investment balances at year-end excluding the loans acquired in our acquisitions of National Bank of Georgia and S Bank. The objective of each review was to assess the accuracy of our internal risk ratings; adherence to applicable regulations and bank policies; documentation exceptions; and potential loan administration deficiencies.
Lending Limits

Our lending activities are subject to a variety of lending limits imposed by federal and state law. In general, State Bank is subject to a legal limit on loans to a single borrower equal to 15% of the bank's capital and unimpaired surplus, or 25% if the loan is fully secured. This limit increases or decreases as the bank's capital increases or decreases. Based upon the capitalization of State Bank at December 31, 2016, our legal lending limits were approximately $59.5 million (15%) and $99.2 million (25%), and we maintained a relationship internal lending limit of $10.0 million (if unsecured) and $40.0 million (if secured). We may seek to sell participations in our larger loans to other financial institutions, which will allow us to manage the risk involved in these loans and to meet the lending needs of our customers requiring extensions of credit in excess of these limits.

Mortgage Banking Activity

We engage in mortgage banking as part of an overall strategy to deliver fixed and variable rate residential real estate loan products to customers. The loans are primarily originated for sale into the secondary market with servicing released, and are approved for purchase by a third party investor prior to closing. We also operate wholesale lending to facilitate the purchase of loans from qualified brokers and correspondents for resale in the secondary market. We bear minimal interest rate risk on these loans and only hold the loans temporarily until documentation can be completed to finalize the sale to the investor. In addition, we originate and hold certain first mortgage and traditional second mortgage residential real estate loans and adjustable rate mortgages in our residential real estate loan portfolio.
       
Deposit Products

We offer a full range of deposit products and services that are typically available in most banks and savings institutions, including checking accounts, commercial operating accounts, savings and money market accounts, individual retirement accounts and short-term to longer-term certificates of deposit. Transaction accounts and certificates of deposit are tailored to and offered at rates competitive to those offered in our primary market areas. We solicit accounts from individuals, businesses, associations, organizations and governmental authorities. We believe that our direct banking strategy will assist us in obtaining deposits from local customers in the future.


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Treasury and Management Services

We provide advanced treasury management tools and payment solutions to small business, business and commercial customers. We have embraced market payment solutions to initiate deeper core operating relationships in targeted segments and industry verticals. Payment solutions for funds collection and concentration services include ACH origination, Electronic Bill Presentment and Payment (EBPP), Remote Deposit Capture, Remote Cash Deposit, retail and wholesale lockbox, and wire services. Our cash management accounts include enhanced analysis with complex grouping structures, targeted balance sweeps, zero balance accounts, and multiple entity grouping. Our disbursement services include ACH origination, wire services, enhanced on-line bill pay, person-to-person payments and bank-to-bank transfers. Our enhanced fraud controls include Positive Pay, ACH Decisioning, and IBM® Security Trusteer Rapport® malware protection. Our on-line cash management systems can be controlled and managed from multiple locations, through multiple access devices including mobile and desktop with around-the-clock access.

Payroll Services

In October 2012, we acquired substantially all of the assets of Altera Payroll, Inc., a payroll services company. The acquisition diversified our revenue beyond existing business lines and complements our other commercial banking services. Altera Payroll and Insurance, formed from the Altera Payroll acquisition, operates as a division of State Bank, in partnership with treasury services, to provide payroll services, human resources services, payroll cards and employee health insurance. Altera Payroll and Insurance can also provide property and casualty insurance, employer liability insurance and workman's compensation may also be provided through licensed insurance agents.

Employees

At December 31, 2016, we had 731 employees on a full-time equivalent basis.

Availability of Information

Our investor website can be accessed at www.statebt.com under "Investors." Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished to the Securities and Exchange Commission (the "SEC") pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our investor website under the caption "SEC Filings" promptly after we electronically file such materials with, or furnish such materials to, the SEC. No information contained on any of our websites is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K. Documents filed with the SEC are also available free of charge on the SEC's website at www.sec.gov.

SUPERVISION AND REGULATION

State Bank Financial Corporation, and our subsidiary bank, State Bank are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws generally are intended to protect depositors and not shareholders. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects. Our operations may be affected by legislative changes and the policies of various regulatory authorities. We cannot predict the effect that fiscal or monetary policies, economic conditions or new federal or state legislation may have on our business and earnings in the future.

The following discussion is not intended to be a complete list of all of the activities regulated by the banking laws or of the impact of those laws and regulations on our operations. It is intended only to briefly summarize some material provisions.

Legislative and Regulatory Initiatives to Address the Financial Crisis

Although the financial crisis has now passed, two legislative and regulatory responses - the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III-based capital rules - will continue to have an impact on our operations.



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The Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law, which, among other things, changed the oversight and supervision of banks, bank holding companies, and other financial institutions, revised minimum capital requirements, created a new federal agency to regulate consumer financial products and services and implemented changes to corporate governance and compensation practices. Several provisions affect us, including:

Deposit Insurance Modifications.  The Dodd-Frank Act modified the FDIC's assessment base upon which deposit insurance premiums are calculated. The new assessment base equals our average total consolidated assets minus the sum of our average tangible equity during the assessment period. The FDIC has continued to modify some of the rules on assessments. The Dodd-Frank Act also permanently raised the standard maximum federal deposit insurance limits from $100,000 to $250,000.

Creation of New Governmental Authorities.  The Dodd-Frank Act created various new governmental authorities such as the Financial Stability Oversight Council and the Consumer Financial Protection Bureau (the “CFPB”), an independent regulatory authority housed within the Federal Reserve. The CFPB has broad authority to regulate the offering and provision of consumer financial products. The CFPB officially came into being on July 21, 2011, and rulemaking authority for a range of consumer financial protection laws (such as the Truth in Lending Act, the Electronic Funds Transfer Act and the Real Estate Settlement Procedures Act, among others) transferred from the Federal Reserve and other federal regulators to the CFPB on that date. The act gives the CFPB authority to supervise and examine depository institutions with more than $10 billion in assets for compliance with these federal consumer laws. The authority to supervise and examine depository institutions with $10 billion or less in assets for compliance with federal consumer laws will remain largely with those institutions’ primary regulators. However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. The CFPB may participate in examinations of our subsidiary bank, which currently has assets of less than $10 billion, and could supervise and examine our other direct or indirect subsidiaries that offer consumer financial products or services. In addition, the act permits states to adopt consumer protection laws and regulations that are stricter than the regulations promulgated by the CFPB, and state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against certain institutions.
The Dodd-Frank Act also authorized the CFPB to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay. Under the act, financial institutions may not make a residential mortgage loan unless they make a “reasonable and good faith determination” that the consumer has a “reasonable ability” to repay the loan. The act allows borrowers to raise certain defenses to foreclosure but provides a full or partial safe harbor from such defenses for loans that are “qualified mortgages.” CFPB rules now in effect specify the types of income and assets that may be considered in the ability-to-repay determination, the permissible sources for verification, and the required methods of calculating a loan’s monthly payments. The rules also extend the requirement that creditors verify and document a borrower’s income and assets to include all information that creditors rely on in determining repayment ability. The rules also define “qualified mortgages,” imposing both underwriting standards - for example, a borrower’s debt-to-income ratio may not exceed 43% - and limits on the terms of such loans. Points and fees are subject to a relatively stringent cap, and payments that may be made in the course of closing a loan are limited as well. Certain loans, including interest-only loans and negative amortization loans, cannot be qualified mortgages.

Executive Compensation and Corporate Governance Requirements.  The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act (1) grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhances independence requirements for compensation committee members; (3) requires the SEC to adopt rules directing national securities exchanges to establish listing standards requiring all listed companies to adopt incentive-based compensation clawback policies for executive officers; and (4) provides the SEC with authority to adopt proxy access rules that would allow shareholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company's proxy materials. The SEC has completed the bulk (although not all) of the rulemaking necessary to implement these provisions.

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Separately, the Dodd-Frank Act requires several federal agencies, including the banking agencies and the SEC, to jointly issue a rule restricting incentive compensation arrangements at financial institutions, including bank holding companies and banks. The agencies proposed a rule in 2011, which was replaced with a new proposed rule in May 2016, but the rule has not yet been finalized.

Basel Capital Standards

Regulatory capital rules released in July 2013 to implement capital standards referred to as Basel III and developed by an international body known as the Basel Committee on Banking Supervision, impose higher minimum capital requirements for bank holding companies and banks. The rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies with more than $1 billion in total consolidated assets. More stringent requirements are imposed on “advanced approaches” banking organizations-those organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures, or that have opted in to the Basel II capital regime. The requirements in the rule began to phase in on January 1, 2015 for us. The requirements in the rule will be fully phased in by January 1, 2019.

The rule includes certain new and higher risk-based capital and leverage requirements than those previously in place. Specifically, the following minimum capital requirements apply to us:

a new common equity Tier 1 risk-based capital ratio of 4.5%;
a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement);
a total risk-based capital ratio of 8% (unchanged from the former requirement); and
a leverage ratio of 4% (also unchanged from the former requirement).

Under the rule, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income ("AOCI") is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rule provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of our investment securities portfolio.
 
In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. As of January 1, 2017, we are required to hold a capital conservation buffer of 1.25%, increasing by 0.625% each successive year until 2019.

In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.


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Volcker Rule

Section 619 of the Dodd-Frank Act, known as the “Volcker Rule,” prohibits any bank, bank holding company, or affiliate (referred to collectively as “banking entities”) from engaging in two types of activities: “proprietary trading” and the ownership or sponsorship of private equity or hedge funds that are referred to as “covered funds.” Proprietary trading is, in general, trading in securities on a short-term basis for a banking entity's own account. Funds subject to the ownership and sponsorship prohibition are those not required to register with the SEC because they have only accredited investors or no more than 100 investors. In 2013, the federal banking agencies together with the SEC and the Commodity Futures Trading Commission, issued the final Volcker Rule regulations. The Volcker rule does not have a material effect on our operations as we do not engage in proprietary trading or own or sponsor covered funds.  The Company may incur costs to adopt additional policies and systems to ensure compliance with the Volcker Rule, but any such costs are not expected to be material.

State Bank Financial Corporation

We own 100% of the outstanding capital stock of State Bank, and therefore we are required to be registered as a bank holding company under the federal Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Board of Governors of the Federal Reserve (the "Federal Reserve") under the Bank Holding Company Act and the regulations promulgated under it. As a bank holding company located in Georgia, the Georgia Department of Banking and Finance also regulates and monitors our operations.

Permitted Activities

Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, the following activities:

banking or managing or controlling banks;
furnishing services to or performing services for its subsidiaries; and
any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

factoring accounts receivable;
making, acquiring, brokering or servicing loans and usual related activities;
leasing personal or real property;
operating a nonbank depository institution, such as a savings association;
trust company functions;
financial and investment advisory activities;
conducting discount securities brokerage activities;
underwriting and dealing in government obligations and money market instruments;
providing specified management consulting and counseling activities;
performing selected data processing services and support services;
acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
performing selected insurance underwriting activities.


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Our only subsidiary is State Bank. Additionally, we do not currently engage in other activities other than the management and control of State Bank, although we may choose to engage in other activities in the future. As a bank holding company, we also can elect to be treated as a "financial holding company," which would allow us to engage in a broader array of activities. In sum, a financial holding company can engage in activities that are financial in nature or incidental or complementary to financial activities, including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services and underwriting services, and engaging in limited merchant banking activities. We have not sought financial holding company status, but we may elect that status in the future as our business matures. If we were to elect in writing for financial holding company status, we would be required to be well capitalized and well managed, and each insured depository institution we control would also have to be well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act (discussed below).

The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company's continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

Change in Control

Two statutes, the Bank Holding Company Act and the Change in Bank Control Act, together with regulations promulgated under them, require some form of regulatory review before any company acquires “control” of a bank or a bank holding company. Under the Bank Holding Company Act, control is deemed to exist if a company acquires 25% or more of any class of voting securities of a bank holding company; controls the election of a majority of the members of the board of directors; or exercises a controlling influence over the management or policies of a bank or bank holding company. In guidance issued in 2008, the Federal Reserve has stated that it would not expect control to exist if a person acquires, in aggregate, less than 33% of the total equity of a bank or bank holding company (voting and nonvoting equity), provided such person’s ownership does not include 15% or more of any class of voting securities. Prior Federal Reserve approval is necessary before an entity acquires sufficient control to become a bank holding company. Natural persons, certain non-business trusts, and other entities are not treated as companies (or bank holding companies), and their acquisitions are not subject to review under the Bank Holding Company Act. State laws generally, including Georgia law, require state approval before an acquirer may become the holding company of a state bank.

Under the Change in Bank Control Act, a person or company is required to file a notice with the Federal Reserve if it will, as a result of the transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank or bank holding company and either if the bank or bank holding company has registered securities or if the acquirer would be the largest holder of that class of voting securities after the acquisition. For a change in control at the holding company level, both the Federal Reserve and the subsidiary bank's primary federal regulator must approve the change in control; at the bank level, only the bank's primary federal regulator is involved. Transactions subject to the Bank Holding Company Act are exempt from Change in Control Act requirements. For state banks, state laws, including that of Georgia, typically require approval by the state bank regulator as well.

Source of Strength

The Dodd-Frank Act confirmed a longstanding Federal Reserve policy that a bank holding company must serve as a source of financial strength to its subsidiary bank and to commit resources to support the bank in circumstances in which the bank holding company might not otherwise do so. If State Bank was to become "undercapitalized," we would be required to provide a guarantee of the Bank's plan to return to capital adequacy. (See "Bank Regulation-Prompt Corrective Action" below.) Additionally, under the Bank Holding Company Act, the Federal Reserve may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary, other than a nonbank subsidiary of a bank, upon the Federal Reserve's determination that the activity or control constitutes a serious risk to the financial soundness or stability of any depository institution subsidiary of the bank holding company. Federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiaries if the agency determines that divestiture may aid the depository institution's financial condition. Further, any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and certain other indebtedness of the subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank at a certain level would be assumed by the bankruptcy trustee and entitled to priority payment.




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Dividends and Capital Requirements

The Federal Reserve imposes certain capital requirements on bank holding companies under the Bank Holding Company Act, including a minimum leverage ratio and minimum ratios of capital to risk-weighted assets. These requirements are essentially the same as those that apply to State Bank and are described above under “Basel Capital Standards” and below under "Bank Regulation-Prompt Corrective Action." Subject to our capital requirements and certain other restrictions, including the consent of the Federal Reserve, we are able to borrow money to make capital contributions to State Bank, and these loans may be repaid from dividends paid from State Bank to the Company.

Our ability to pay dividends depends on State Bank's ability to pay dividends to us, which is subject to regulatory restrictions as described below in "Bank Regulation-Dividends." The Federal Reserve imposes limits on dividends paid by a bank holding company, but because we have no operations apart from management of State Bank, the bank-level restrictions dictate our ability to make capital distributions. We are also able to raise capital for contribution to State Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.

Bank Regulation

State Bank operates as a state bank incorporated under the laws of the State of Georgia and is subject to examination by the Georgia Department of Banking and Finance and the FDIC. The deposits of State Bank are insured by the FDIC up to a maximum amount of $250,000.

The Georgia Department of Banking and Finance and the FDIC regulate or monitor virtually all areas of State Bank's operations, including:

security devices and procedures;
adequacy of capitalization and loss reserves;
loans;
investments;
borrowings;
deposits;
mergers;
issuances of securities;
payment of dividends;
interest rates payable on deposits;
interest rates or fees chargeable on loans;
establishment of branches;
corporate reorganizations;
maintenance of books and records; and
adequacy of staff training to carry on safe lending and deposit gathering practices.

These agencies and the federal and state laws applicable to State Bank’s operations extensively regulate various aspects of our banking business, including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of reserves on demand deposit liabilities, and the safety and soundness of our banking practices.

All insured depository institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured depository institutions file quarterly call reports with their federal regulatory agency and their state supervisor, when applicable. The FDIC has developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution. The FDIC and the other federal banking regulatory agencies also have issued standards for all insured depository institutions relating, among other things, to the following:


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internal controls;
information systems and audit systems;
loan documentation;
credit underwriting;
interest rate risk exposure; and
asset quality.

Prompt Corrective Action

As an insured depository institution, State Bank is required to comply with the capital requirements promulgated under the Federal Deposit Insurance Act and the regulations under it, which set forth five capital categories, each with specific regulatory consequences. The following is a list of the criteria for each prompt corrective action category:

Well Capitalized - The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution:

has a total risk-based capital ratio of 10% or greater; and
has a Tier 1 risk-based capital ratio of 8% or greater; and
has a common equity Tier 1 risk-based capital ratio of 6.5% or greater; and
has a leverage capital ratio of 5% or greater; and
is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

Adequately Capitalized - The institution meets the required minimum level for each relevant capital measure. The institution may not make a capital distribution if it would result in the institution becoming undercapitalized. An adequately capitalized institution:

has a total risk-based capital ratio of 8% or greater; and
has a Tier 1 risk-based capital ratio of 6% or greater; and
has a common equity Tier 1 risk-based capital ratio of 4.5% or greater; and
has a leverage capital ratio of 4% or greater.

Undercapitalized - The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution:

has a total risk-based capital ratio of less than 8%; or
has a Tier 1 risk-based capital ratio of less than 6%; or
has a common equity Tier 1 risk-based capital ratio of less than 4.5% or greater; or
has a leverage capital ratio of less than 4%.

Significantly Undercapitalized - The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution:

has a total risk-based capital ratio of less than 6%; or
has a Tier 1 risk-based capital ratio of less than 4%; or
has a common equity Tier 1 risk-based capital ratio of less than 3% or greater; or
has a leverage capital ratio of less than 3%.

Critically Undercapitalized - The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution has a ratio of tangible equity to total assets that is equal to or less than 2%.


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If the FDIC determines, after notice and an opportunity for hearing, that the institution is in an unsafe or unsound condition, the FDIC is authorized to reclassify the institution to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.

If the institution is not well capitalized, it cannot accept brokered deposits without prior FDIC approval. Even if approved, the rates the institution may pay on the brokered deposits will be limited. In addition, a bank that is undercapitalized cannot offer an effective yield in excess of 75 basis points over the "national rate" paid on deposits (including brokered deposits, if approval is granted for the bank to accept them) of comparable size and maturity. The "national rate" is defined as a simple average of rates paid by insured depository institutions and branches for which data are available and is published weekly by the FDIC. Institutions subject to the restrictions that believe they are operating in an area where the rates paid on deposits are higher than the "national rate" can use the local market to determine the prevailing rate if they seek and receive a determination from the FDIC that it is operating in a high-rate area. Regardless of the determination, institutions must use the national rate to determine conformance for all deposits outside their market areas.

Moreover, if the institution becomes less than adequately capitalized, it must adopt a capital restoration plan acceptable to the FDIC. The institution also would become subject to increased regulatory oversight, and is increasingly restricted in the scope of its permissible activities. Each company having control over an undercapitalized institution also must provide a limited guarantee that the institution will comply with its capital restoration plan. Except under limited circumstances consistent with an accepted capital restoration plan, an undercapitalized institution may not grow. An undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless it is determined by the appropriate federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action. The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and the loss of its charter to conduct banking activities.

An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital, to the owners of the institution if following such a distribution the institution would be undercapitalized.

At December 31, 2016, State Bank's regulatory capital surpassed the levels required to be considered "well capitalized."

Transactions with Affiliates and Insiders

The Company is a legal entity separate and distinct from State Bank. Various legal limitations restrict State Bank from lending or otherwise supplying funds to the Company or its nonbank subsidiaries, if any. The Company and State Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.

Section 23A of the Federal Reserve Act places limits on the amount of loans or extensions of credit by a bank to any affiliate, including its holding company, and on a bank's investments in, or certain other transactions with, affiliates and on the amount of advances by a bank to third parties that are collateralized by the securities or obligations of any affiliates of the bank. Section 23A also applies to derivative transactions, repurchase agreements and securities lending and borrowing transactions that cause a bank to have credit exposure to an affiliate. The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of State Bank's capital and surplus and, as to all affiliates combined, to 20% of State Bank's capital and surplus. Furthermore, within the foregoing limitations as to amount, each extension of credit or certain other credit exposures must meet specified collateral requirements. These limits apply to any transaction with a third party if the proceeds of the transaction benefit an affiliate of a bank. State Bank is forbidden to purchase low quality assets from an affiliate.

Section 23B of the Federal Reserve Act, among other things, prohibits a bank from engaging in certain transactions with certain affiliates unless the transactions are on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to such bank or its subsidiaries, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies. If there are no comparable transactions, a bank’s (or one of its subsidiaries’) affiliate transaction must be on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies. These requirements apply to all transactions subject to Section 23A as well as to certain other transactions.


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The affiliates of a bank include any holding company of the bank, any other company under common control with the bank (including any company controlled by the same shareholders who control the bank), any subsidiary of the bank that is itself a bank, any company in which the majority of the directors or trustees also constitute a majority of the directors or trustees of the bank or holding company of the bank, any company sponsored and advised on a contractual basis by the bank or an affiliate, and any mutual fund advised by a bank or any of the bank's affiliates. Regulation W generally excludes all nonbank subsidiaries of banks from treatment as affiliates, except for subsidiaries engaged in certain nonbank financial activities or to the extent that the Federal Reserve decides to treat these subsidiaries as affiliates.

State Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Extensions of credit include derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions to the extent that such transactions cause a bank to have credit exposure to an insider. Any extension of credit to an insider:

must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties; and
must not involve more than the normal risk of repayment or present other unfavorable features.

In some circumstances, approval of an extension of credit to an insider must be approved by a majority of the disinterested directors. Extensions of credit to any one insider are capped at 10% of a bank's unimpaired capital and unimpaired surplus, with an additional 10% for loans secured by readily marketable collateral. Extensions of credit to all insiders are capped at 100% of unimpaired capital and unimpaired surplus. State Bank has a policy not to extend credit to its employees, directors, certain principal shareholders and their related interests.

In addition, State Bank may not purchase an asset from or sell an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the majority of disinterested directors.

Branching

Under current Georgia and federal law, we may open branch offices throughout Georgia with the prior approval of the Georgia Department of Banking and Finance and the FDIC. In addition, with prior regulatory approval, we will be able to acquire branches of existing banks located in Georgia. Furthermore, the Dodd-Frank Act authorizes a state or national bank to branch into any state as if they were chartered in that state.

Anti-Tying Restrictions

Under amendments to the Bank Holding Company Act and Federal Reserve regulations, a bank is prohibited from engaging in certain tying or reciprocity arrangements with its customers. In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on the condition that:

the customer obtain or provide some additional credit, property, or services from or to the bank, the bank holding company or its subsidiaries; or
the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to ensure the soundness of the credit extended.

Certain arrangements are permissible: a bank may offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products, and certain foreign transactions are exempt from the general rule. A bank holding company or any bank affiliate also is subject to anti-tying requirements in connection with electronic benefit transfer services.


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Community Reinvestment Act

The Community Reinvestment Act requires a financial institution's primary regulator, which is the FDIC for State Bank, to evaluate the record of each financial institution in meeting the credit needs of the communities within the institution's assessment area, including low- and moderate-income neighborhoods and individuals. This record is considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately address the needs for bank products and services in low- and moderate-income communities and by low- and moderate-income individuals could result in the imposition of additional requirements and limitations on the institution. Additionally, the institution must publicly disclose the terms of various Community Reinvestment Act-related agreements. In its most recent CRA examination, State Bank was rated Satisfactory.

Financial Subsidiaries

Under the Gramm-Leach-Bliley Act (the "GLBA"), subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form "financial subsidiaries" that may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible. The GLBA imposes several safeguards and restrictions on financial subsidiaries, including that the parent bank's equity investment in the financial subsidiary be deducted from the bank's assets and tangible equity for purposes of calculating the bank's capital adequacy. In addition, the GLBA imposes restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and nonbank affiliates. State Bank has no financial subsidiaries

Consumer Protection Regulations

Activities of State Bank are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected or contracted for by State Bank are subject to state usury laws and federal laws concerning interest rates. The loan operations of State Bank are also subject to federal laws applicable to credit transactions, such as:

the Truth-In-Lending Act and Regulation Z, governing disclosures of credit and servicing terms to consumer borrowers and including substantial new requirements for mortgage lending and servicing, as mandated by the Dodd-Frank Act;
the Home Mortgage Disclosure Act of 1975 and Regulation C, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the communities they serve;
the Equal Credit Opportunity Act and Regulation B, prohibiting discrimination on the basis of race, color, religion, or other prohibited factors in extending credit;
the Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act and Regulation V, as well as the rules and regulations of the FDIC governing the use and provision of information to credit reporting agencies, certain identity theft protections and certain credit and other disclosures;
the Fair Debt Collection Practices Act and Regulation F, governing the manner in which consumer debts may be collected by collection agencies; and
the Real Estate Settlement Procedures Act and Regulation X, which governs aspects of the settlement process for residential mortgage loans.

The deposit operations of State Bank are also subject to federal laws, such as:

the Federal Deposit Insurance Act, which, among other things, limits the amount of deposit insurance available per account to $250,000 and imposes other limits on deposit-taking;
the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
the Electronic Funds Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services; and
the Truth in Savings Act and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.


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Enforcement Powers

State Bank and its respective "institution-affiliated parties," including its respective managements, employees, agents, independent contractors and consultants, such as attorneys and accountants and others who participate in the conduct of the financial institution's affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1,375,000 a day for certain violations. Criminal penalties for some financial institution crimes have been increased to 20 years.

In addition, regulators have considerable flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies have expansive power to issue cease-and-desist orders. These orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts or take other actions as determined by the ordering agency to be appropriate.

The number of government entities authorized to take action against State Bank has expanded under the Dodd-Frank Act. The FDIC continues to have primary enforcement authority. The CFPB has back-up enforcement authority with respect to the consumer protection statutes above. Specifically, the CFPB may request reports from and conduct limited examinations of State Bank in conducting investigations involving the consumer protection statutes. Further, state attorneys general may bring civil actions or other proceedings under the Dodd-Frank Act or regulations against state-chartered banks, including State Bank. Prior notice to the CFPB and the FDIC would be necessary for a state civil action against State Bank.

Anti-Money Laundering

Financial institutions must maintain anti-money laundering programs governed by the Bank Secrecy Act, that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and "knowing your customer" in their dealings with foreign financial institutions, foreign customers and other high risk customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions. Recent laws provide law enforcement authorities with increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened as a result of the USA PATRIOT Act, enacted in 2001 and renewed through 2019, as described below. Bank regulators routinely examine institutions for compliance with these obligations and are required immediately to consider compliance in connection with the regulatory review of applications. In recent years, several merger and acquisition transactions have been held up because of regulatory concerns about compliance with anti-money laundering requirements. The regulatory authorities have been active in imposing "cease and desist" orders and money penalty sanctions against institutions that have not complied with these requirements.

USA PATRIOT Act

The USA PATRIOT Act became effective on October 26, 2001, and amended the Bank Secrecy Act. The USA PATRIOT Act provides, in part, for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanisms for the U.S. government, including:

standards for verifying customer identification at account opening;
rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering;
reports of nonfinancial trades and businesses filed with the Treasury Department's Financial Crimes Enforcement Network for transactions exceeding $10,000; and
filing suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S. laws and regulations.


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The USA PATRIOT Act requires financial institutions to undertake enhanced due diligence of private bank accounts or correspondent accounts for non-U.S. persons that they administer, maintain or manage. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

Under the USA PATRIOT Act, the Financial Crimes Enforcement Network (“FinCEN”) can send State Bank lists of the names of persons suspected of involvement in terrorist activities or money laundering. State Bank may be requested to search its records for any relationships or transactions with persons on those lists. If State Bank identifies any such relationships or transactions, it must report those relationships or transactions to FinCEN.

The Office of Foreign Assets Control

The Office of Foreign Assets Control ("OFAC"), which is an office in the U.S. Department of the Treasury, is responsible for helping to ensure that United States entities do not engage in transactions with "enemies" of the United States, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If a bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze or block the transaction on the account. State Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. State Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. These checks are performed using software that is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

Privacy, Data Security and Credit Reporting

Financial institutions are required to protect the confidentiality of the nonpublic personal information of individual customers and to disclose their policies for doing so. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers. State Bank's policy is not to disclose any personal information unless permitted by law.

Recent cyber attacks against banks and other institutions that resulted in unauthorized access to confidential customer information have prompted the Federal banking agencies to issue several warnings and extensive guidance on cyber security. The agencies are likely to devote more resources to this part of their safety and soundness examination than they have in the past.

Like other lending institutions, State Bank uses credit bureau data in its underwriting activities. Use of that data is regulated under the Federal Credit Reporting Act on a uniform, nationwide basis. The act and its implementing regulation, Regulation V, cover credit reporting, prescreening, sharing of information between affiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 allows states to enact identity theft laws that are not inconsistent with the conduct required by the provisions of the act.

Payment of Dividends

The Company is a legal entity separate and distinct from its subsidiary, State Bank. While there are various legal and regulatory limitations under federal and state law on the extent to which State Bank can pay dividends or otherwise supply funds to the Company, the principal source of the Company's cash revenues is dividends from State Bank. The relevant federal and state regulatory agencies also have authority to prohibit a bank or bank holding company, which would include the Company and State Bank, from engaging in what, in the opinion of the regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of the subsidiary, be deemed to constitute an unsafe or unsound practice in conducting its business.


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Under Georgia law, the prior approval of the Georgia Department of Banking and Finance is required before any cash dividends may be paid by a state bank if:

total classified assets at the most recent examination of the bank exceed 80% of the equity capital (as defined, which includes the allowance for loan and lease losses) of the bank;
the aggregate amount of dividends declared or anticipated to be declared in the calendar year exceeds 50% of the net profits (as defined) for the previous calendar year; and
the ratio of equity capital to adjusted total assets is less than 6%.

Effect of Governmental Monetary Policies

Our earnings are affected by domestic economic conditions and the monetary policies of the United States Government and its agencies. The Federal Open Market Committee's monetary policies have had, and are likely to continue to have, an important effect on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board have major effects on the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. We cannot predict the nature or effect of future changes in monetary policies. In December 2016, the Federal Open Market Committee raised the target range for the federal funds rate by 25 basis points, and indicated the potential for further gradual increases in the federal funds rate depending on the economic outlook.

Insurance of Accounts and Regulation by the FDIC

The deposits of State Bank are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Dodd Frank Act permanently increased the maximum amount of deposit insurance for banks, savings associations and credit unions to $250,000 per account. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund.

FDIC-insured institutions are required to pay a Financing Corporation assessment to fund the interest on bonds issued to resolve thrift failures in the 1980s. These assessments, which may be revised based upon the level of deposits, will continue until the bonds mature in the years 2017 through 2019.

The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a notice and hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, remain insured for a period of six months to two years, as determined by the FDIC.

Limitations on Incentive Compensation

In June 2010, the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency and the Office of Thrift Supervision issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.


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The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not "large, complex banking organizations." These reviews will be tailored to each organization based on the scope and complexity of the organization's activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization's supervisory ratings, which can affect the organization's ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

The Dodd-Frank Act required the federal banking agencies, the SEC, and certain other federal agencies to jointly issue a regulation on incentive compensation. The agencies proposed such a rule in 2011, which reflected the 2010 guidance. However, the 2011 proposal was replaced with a new proposed rule in May 2016, which makes explicit that the involvement of risk management and control personnel includes not only compliance, risk management and internal audit, but also legal, human resources, accounting, financial reporting, and finance roles responsible for identifying, measuring, monitoring or controlling risk-taking. A final rule had not been adopted as of December 31, 2016.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that contain wide-ranging provisions for altering the structures, regulations and competitive relationships of the nation's financial institutions. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Item 1A.    Risk Factors.

Our business is subject to certain risks, including those described below. If any of the events described in the following risk factors actually occurs, then our business, results of operations and financial condition could be materially adversely affected. More detailed information concerning these risks is contained in other sections of this report, including "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Risks Related to Our Business

A return of recessionary conditions could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.

Economic conditions have improved since the end of the economic recession; however, economic growth has been slow and uneven, unemployment remains relatively high, and concerns still exist over the federal deficit, government spending and economic risks. A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate value and sales volumes and high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.

Furthermore, the Board of Governors of the Federal Reserve System, in an attempt to help the overall economy, has among other things, kept interest rates low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. The Federal Reserve Board increased the target range for the federal funds rate by 25 basis points in December 2016 and indicated the potential for further gradual increases in the target rate depending on the economic outlook. As the federal funds rate increases, market interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery.

An adverse change in real estate market values may result in losses and otherwise adversely affect our profitability.

At December 31, 2016, approximately 82.9% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral. The real estate collateral in each loan 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. At December 31, 2016, approximately 56.6% of our loan portfolio consists of loans secured by commercial real estate, comprising $1.6 billion of total loans.


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A decline in real estate values could impair the value of our collateral and our ability to sell the collateral upon any foreclosure. In the event of a default with respect to any of these loans, the amounts we receive on the sale of the collateral may be insufficient to recover the outstanding principal and interest on the loan. As a result, our profitability and financial condition may be adversely affected.

If we fail to effectively manage credit risk, our business and financial condition will suffer.
      
 We must effectively manage credit risk. There are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. There is no assurance that our credit risk monitoring and loan approval procedures are or will be adequate or will reduce the inherent risks associated with lending. Our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio. Any failure to manage such credit risks may materially adversely affect our business and our results of operations and financial condition.

To the extent that we are unable to identify and consummate attractive acquisitions, or increase loans through organic loan growth, we may be unable to successfully implement our growth strategy, which could materially and adversely affect us.

A substantial part of our historical growth has been a result of acquisitions of other financial institutions and we intend to continue to grow our business through strategic acquisitions of banking franchises coupled with organic loan growth. Previous availability of attractive acquisition targets may not be indicative of future acquisition opportunities, and we may be unable to identify any acquisition targets that meet our investment objectives. To the extent that we are unable to find suitable acquisition candidates, an important component of our strategy may be lost. If we are able to identify attractive acquisition opportunities, we must generally satisfy a number of conditions prior to completing any such transaction, including obtaining certain bank regulatory approvals, which may involve time-consuming applications and discussions with regulators and which ultimately may not be granted. Additionally, any future acquisitions may not produce the revenue, earnings or synergies that we anticipated. As our purchased credit impaired loan portfolio, which produces substantially higher yields than our organic and purchased non-credit impaired loan portfolios, is paid down, we expect downward pressure on our income. For the year ended December 31, 2016, we recognized $43.3 million of accretion income, or 26.2% of our total interest income for the year, from the realization of accretable discounts on our purchased credit impaired loans. If we are unable to replace our purchased credit impaired loans and the related accretion with a significantly higher level of new performing loans and other earning assets due to our inability to identify attractive acquisition opportunities, a decline in loan demand, competition from other financial institutions in our markets, stagnation or continued deterioration of economic conditions, or other conditions, our financial condition and earnings may be adversely affected.

Our strategic growth plan contemplates additional acquisitions, which could expose us to additional risks.

We periodically evaluate opportunities to acquire additional financial institutions. As a result, we may engage in negotiations or discussions that, if they were to result in a transaction, could have a material effect on our operating results and financial condition, including short and long-term liquidity.

Our acquisition activities could be material and could require us to use a substantial amount of common stock, cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with our prior or potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized.


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Our acquisition activities could involve a number of additional risks, including the risks of:

incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in management's attention being diverted from the operation of our existing business;

using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets;

incurring time and expense required to integrate the operations and personnel of the combined businesses, creating an adverse short-term effect on results of operations; and

losing key employees and customers as a result of an acquisition.

Future acquisitions may be delayed, impeded, or prohibited due to regulatory issues.

Future acquisitions by the Company, particularly those of financial institutions, are subject to approval by a variety of federal and state regulatory agencies. The process for obtaining these required regulatory approvals has become substantially more difficult in recent years. Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues we have, or may have, with regulatory agencies, including, without limitation, issues related to anti-money laundering/Bank Secrecy Act compliance, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations, Community Reinvestment Act issues, and other similar laws and regulations. We may fail to pursue, evaluate or complete strategic and competitively significant acquisition opportunities as a result of our inability, or perceived or anticipated inability, to obtain regulatory approvals in a timely manner, under reasonable conditions or at all. Difficulties associated with potential acquisitions that may result from these factors could have a material adverse effect on our business, and, in turn, our financial condition and results of operations.

We may be exposed to difficulties in combining the operations of acquired institutions into our own operations, which may prevent us from achieving the expected benefits from our acquisition activities.

We may not be able to fully achieve the strategic objectives and operating efficiencies that we anticipate in our acquisition activities. Inherent uncertainties exist in integrating the operations of an acquired institution. In addition, the markets in which we and our potential acquisition targets operate are highly competitive. We may lose existing customers, or the customers of an acquired institution, as a result of an acquisition. We also may lose key personnel from the acquired institution as a result of an acquisition. We may not discover all known and unknown factors when examining an institution for acquisition during the due diligence period. These factors could produce unintended and unexpected consequences. Undiscovered factors as a result of an acquisition could bring civil, criminal and financial liabilities against us, our management and the management of the institutions we acquire. In addition, if difficulties arise with respect to the integration process, the economic benefits expected to result from acquisitions might not occur. Failure to successfully integrate businesses that we acquire could have an adverse effect on our profitability, return on equity, return on assets, or our ability to implement our strategy, any of which in turn could have a material adverse effect on our business, financial condition and results of operations. These factors could contribute to our not achieving the expected benefits from our acquisitions within desired time frames, if at all.

Lack of seasoning of our organic loan portfolio may increase the risk of credit defaults in the future.

We have significantly grown our organic loan portfolio over the past several years. Due to this rapid growth, a large portion of our organic loan portfolio and of our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because a significant majority of our organic loan portfolio is relatively new, the current level of delinquencies and defaults in our organic loan portfolio may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition.


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Our business is subject to interest rate risk, and fluctuations in interest rates may adversely affect our earnings and capital levels and overall results.

The majority of our assets and liabilities are monetary in nature and, as a result, we are subject to significant risk from changes in interest rates. Changes in interest rates may affect our net interest income as well as the valuation of our assets and liabilities. Our earnings depend significantly on our net interest income, which is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. We expect to periodically experience "gaps" in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates move contrary to our position, this "gap" may work against us, and our earnings may be adversely affected.

An increase in the general level of interest rates may also, among other things, adversely affect our current borrowers' ability to repay variable rate loans, the demand for loans and our ability to originate loans. Conversely, a decrease in the general level of interest rates, among other things, may lead to prepayments on our loan and mortgage-backed securities portfolios and increased competition for deposits. Accordingly, changes in the general level of market interest rates may adversely affect our net yield on interest-earning assets, loan origination volume and our overall results.

Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in the general level of market interest rates, those rates are affected by many factors outside of our control, including inflation, recession, unemployment, money supply, international disorder, instability in domestic and foreign financial markets and policies of various governmental and regulatory agencies, particularly the Board of Governors of the Federal Reserve. Adverse changes in the U.S. monetary policy or in economic conditions could materially and adversely affect us. We may not be able to accurately predict the likelihood, nature and magnitude of those changes or how and to what extent they may affect our business. We also may not be able to adequately prepare for or compensate for the consequences of such changes. Any failure to predict and prepare for changes in interest rates or adjust for the consequences of these changes may adversely affect our earnings and capital levels and overall results.

We could be subject to changes in tax laws, regulations and interpretations or challenges to our income tax provision.

We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. Any change in enacted tax laws, rules or regulatory or judicial interpretations, or any change in the pronouncements relating to accounting for income taxes could adversely affect our effective tax rate, tax payments and results of operations. The taxing authorities in the jurisdictions in which we operate may challenge our tax positions, which could increase our effective tax rate and harm our financial position and results of operations. We are subject to audit and review by U.S. federal and state tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, changes in enacted tax laws, such as adoption of a lower income tax rate in any of the jurisdictions in which we operate, could impact our ability to obtain the future tax benefits represented by our deferred tax assets. In addition, the determination of our provision for income taxes and other liabilities requires significant judgment by management. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and could have a material adverse effect on our financial results in the period or periods for which such determination is made.

Any expansion into new lines of business might not be successful

As part of our ongoing strategic plan, we will continue to consider expansion into new lines of business through the acquisition of third parties or through organic growth and development. There are substantial risks associated with such efforts, including risks that (a) revenues from such activities might not be sufficient to offset the development, compliance, and other implementation costs, (b) competing products and services and shifting market preferences might affect the profitability of such activities, and (c) our internal controls might be inadequate to manage the risks associated with new activities. Furthermore, it is possible that our unfamiliarity with new lines of business might adversely affect the success of such actions. If any such expansions into new product markets are not successful, there could be an adverse effect on our financial condition and results of operations.

We depend on our management team, and the loss of our senior executive officers or other key employees could impair our relationship with customers and adversely affect our business and financial results.

Our success largely depends on the continued service and skills of our existing senior executive management team, as well as other key employees with long-term customer relationships. Our growth strategy is built primarily on our ability to retain

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employees with experience and business relationships within their respective segments. The loss of one or more of these key personnel could have an adverse effect on our business because of their skills, knowledge of our markets, years of industry experience and the difficulty of finding qualified replacement personnel.

We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies, including the Federal Reserve, the FDIC and the Georgia Department of Banking and Finance, among others. Our compliance with these regulations is costly and restricts our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. Our failure to comply with these requirements can lead to, among other remedies, administrative enforcement actions, termination or suspension of our licenses, rights of rescission for borrowers, and class action lawsuits. Many of these regulations are intended to protect depositors, the public and the FDIC rather than our shareholders. The burden of regulatory compliance has increased under current legislation and banking regulations and is likely to continue to have or may have a significant impact on the financial services industry. Legislative and regulatory changes, including increases in capital requirements, as well as changes in regulatory enforcement policies and capital adequacy guidelines, are increasing our costs of doing business and, as a result, may create an advantage for our competitors who may not be subject to similar legislative and regulatory requirements. In addition, future regulatory changes, including changes to regulatory capital requirements, could have an adverse impact on our future results. Furthermore, the federal and state bank regulatory authorities who supervise us have broad discretionary powers to take enforcement actions against banks for failure to comply with applicable regulations and laws. If we fail to comply with applicable laws or regulations, we could become subject to enforcement actions that have a material adverse effect on our future results.

This and other potential changes in government regulation or policies could increase our costs of doing business and could adversely affect our operations and the manner in which we conduct our business.

The final Basel III capital rules generally require insured depository institutions and their holding companies to hold more capital, which could adversely affect our financial condition and operations.

In July 2013, the federal banking agencies published new regulatory capital rules based on the international standards, known as Basel III, that had been developed by the Basel Committee on Banking Supervision. The new rules raised the risk-based capital requirements and revised the methods for calculating risk-weighted assets, usually resulting in higher risk weights. The new rules became effective as applied to the Company and State Bank on January 1, 2015, with a phase in period that generally extends from January 1, 2015 through January 1, 2019.

The Basel III-based rules increase capital requirements and include two new capital measurements that will affect us, a risk-based common equity Tier 1 ratio and a capital conservation buffer. Common Equity Tier 1 (CET1) capital is a subset of Tier 1 capital and is limited to common equity (plus related surplus), retained earnings and certain other items. Other instruments that have historically qualified for Tier 1 treatment, including noncumulative perpetual preferred stock, are consigned to a category known as Additional Tier 1 capital and must be phased out of CET1 over a period of nine years beginning in 2014. Tier 2 capital consists of instruments that have historically been placed in Tier 2, as well as cumulative perpetual preferred stock.

Beginning on January 1, 2015, our Basel III-based minimum risk-based capital requirements were (i) a CET1 ratio of 4.5%, (ii) a Tier 1 capital (CET1 plus Additional Tier 1 capital) of 6% (up from 4%) and (iii) a total capital ratio of 8% (unchanged from the former requirement). Our leverage ratio requirement will remain at the 4% level now required. These requirements remain in place today. Beginning in 2016, a capital conservation buffer began to phase in over three years, ultimately resulting in a requirement of 2.5% on top of the CET1, Tier 1 and total capital requirements, resulting in a required CET1 ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. As of January 1, 2017, our capital conservation buffer is 1.25%. Failure to maintain the buffer or to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions. While the final rules results in higher regulatory capital standards, it is not expected to significantly impact the Company and State Bank as our current capital levels far exceed those required under the new rules.
 

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In addition to the higher required capital ratios and the new deductions and adjustments, the final rules increased the risk weights for certain assets, meaning that we will have to hold more capital against these assets. For example, commercial real estate loans that do not meet certain new underwriting requirements must be risk-weighted at 150%, rather than the former requirement of 100%. We will also be required to hold capital against short-term commitments that are not unconditionally cancelable. All changes to the risk weights took effect in full in 2015.

In addition, in the current economic and regulatory environment, bank regulators may impose capital requirements that are more stringent than those required by applicable existing regulations. The application of more stringent capital requirements for us could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we are unable to comply with such requirements. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital or additional capital conservation buffers, could result in management modifying our business strategy and could limit our ability to make distributions, including paying dividends or buying back our shares.

The federal banking agencies are implementing new liquidity standards that could result in our having to lengthen the term of our funding, restructure our business lines by forcing us to seek new sources of liquidity for them, and/or increase our holdings of liquid assets.

In 2014, the federal banking agencies adopted a "liquidity coverage ratio" requirement for banking holding companies with $250 billion or more in total assets or $10 billion or more in on-balance sheet foreign exposures and their subsidiary depository institutions with $10 billion or more in total consolidated assets. The requirement calls for sufficient “high quality liquid assets” to meet liquidity needs for a 30 calendar day liquidity stress scenario. In 2016, the agencies proposed a net stable funding ratio for these institutions, which imposes a similar requirement over a one-year period. Neither the liquidity coverage standard nor the net stable funding standard apply directly to us, but the substance of the standards - adequate liquidity over a 30-day period and one-year periods - may inform the regulators’ assessment of our liquidity. We could be required to reduce our holdings of illiquid assets which could adversely affect our results of operations and financial condition. The U.S. regulators have not yet proposed a net stable funding ratio requirement.

We incur increased costs as a result of being a public company.

As a public company, we incur significant legal, accounting and other expenses, including costs associated with public company reporting requirements. We also incur costs associated with the Sarbanes-Oxley Act, the Dodd-Frank Act and related rules implemented or to be implemented by the SEC and the NASDAQ Stock Market. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to continue to invest resources to comply with evolving laws, regulations and standards and this continued investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

The value of securities in our investment portfolio may decline in the future.

As of December 31, 2016, we owned $914.2 million of investment securities. The fair value of our investment securities may be adversely affected by market conditions, including changes in interest rates, and the occurrence of any events adversely affecting the issuer of particular securities in our investments portfolio. We analyze our securities on a quarterly basis to determine if an other-than-temporary impairment has occurred. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgments about the future financial performance of the issuer in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairment in future periods, which could have a material adverse effect on our business, financial condition or results of operations.

If our allowance for loan and lease losses and fair value adjustments with respect to acquired loans is not sufficient to cover actual loan losses, our earnings will be adversely affected.

Our success depends significantly on the quality of our assets, particularly loans. Like other financial institutions, we are

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exposed to the risk that our borrowers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be insufficient to fully compensate us for the outstanding balance of the loan plus the costs to dispose of the collateral. As a result, we may experience significant loan losses that may have a material adverse effect on our operating results and financial condition.

We maintain an allowance for loan and lease losses with respect to our loan portfolio, in an attempt to cover loan losses inherent in our loan portfolio. In determining the size of the allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. We also make various assumptions and judgments about the collectability of our loan portfolio, including the diversification in our loan portfolio, the effect of changes in the economy on real estate and other collateral values, the results of recent regulatory examinations, the effects on the loan portfolio of current economic conditions and their probable impact on borrowers, the amount of charge-offs for the period and the amount of nonperforming loans and related collateral security.

The application of the acquisition method of accounting in our acquisitions has impacted our allowance for loan and lease losses. Under the acquisition method of accounting, all acquired loans were recorded in our consolidated financial statements at their fair values at the time of acquisition and the related allowance for loan and lease losses was eliminated because credit quality, among other factors, was considered in the determination of fair value. To the extent that our estimates of fair values are too high, we will incur losses associated with the acquired loans. The allowance associated with our purchased credit impaired loans reflects deterioration in cash flows since acquisition resulting from our quarterly re-estimation of cash flows which involves complex cash flow projections and significant judgment on timing of loan resolution.

If our analysis or assumptions prove to be incorrect, our current allowance may not be sufficient, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to the allowance for loan and lease losses would materially decrease our net income and adversely affect our general financial condition.

In addition, federal and state regulators periodically review our allowance for loan and lease losses and may require us to increase our allowance for loan and lease losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan and lease losses or loan charge-offs required by these regulatory agencies could have a material adverse effect on our operating results and financial condition.

We are exposed to higher credit risk by construction and development, other commercial real estate, and commercial, financial and agricultural lending.

Construction and development, commercial real estate, and commercial, financial and agricultural lending may involve higher credit risks than other forms of lending. At December 31, 2016, the following loan types accounted for the stated percentages of our total loan portfolio: real estate construction and development — 20.2%, other commercial real estate — 36.4%, and commercial, financial and agricultural — 13.1%.

Risk of loss on a construction and development loan depends largely upon whether our initial estimate of the property's value at completion of construction equals or exceeds the cost of the property construction (including interest), the availability of permanent take-out financing and the builder's ability to ultimately sell the property. During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral.

Other commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers' ability to repay their loans depends on successful development of their properties, in addition to the factors affecting residential real estate borrowers. These loans also involve greater risk because they generally are not fully amortizing over the loan period but have a balloon payment due at maturity. A borrower's ability to make a balloon payment typically will depend on being able to either refinance the loan or sell the underlying property in a timely manner.

Commercial, financial and agricultural loans are typically based on the borrowers' ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the assets securing the loans have the following characteristics: (a) they depreciate over time, (b) they are difficult to appraise and liquidate, and (c) they fluctuate in value based on the success of the business.


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Construction and development loans, other commercial real estate loans, and commercial, financial and agricultural loans are more susceptible to a risk of loss during a downturn in the business cycle. Our underwriting, review and monitoring cannot eliminate all of the risks related to these loans.

At December 31, 2016, our outstanding commercial real estate loans were equal to 325.2% of the Bank's total risk-based capital. Our commercial real estate level is considered to be a concentration by the banking regulators. The banking regulators are giving commercial real estate lending greater scrutiny, and require banks with concentrations in commercial real estate loans such as us to have an appropriate risk management framework consisting of (i) board and management oversight, (ii) portfolio management, (iii) market analysis, (iv) credit underwriting standards, (v) portfolio stress testing and sensitivity analysis and (vi) credit risk review function.

During 2015 and 2016, the banking regulators issued several warnings about higher credit risk in commercial lending, particularly in commercial real estate loans.

We face additional risks due to our increase in mortgage banking activities that could negatively impact our net income and profitability.

We acquired mortgage banking operations in our acquisitions of Bank of Atlanta and First Bank of Georgia, which in addition to our legacy mortgage banking operations, expose us to risks that are different from our retail and commercial banking operations. During higher and rising interest rate environments, the demand for mortgage loans and the level of refinancing activity tends to decline, which can lead to reduced volumes of business and lower revenues, which could negatively impact our earnings. While we have been experiencing historically low interest rates, the low interest rate environment likely will not continue indefinitely. Because we sell a substantial portion of the mortgage loans we originate, the profitability of our mortgage banking operations also depends in large part on our ability to aggregate a high volume of loans and sell them in the secondary market at a gain. Thus, in addition to our dependence on the interest rate environment, we are dependent upon (a) the existence of an active secondary market and (b) our ability to profitably sell loans into that market. If our level of mortgage production declines, the profitability will depend upon our ability to reduce our costs commensurate with the reduction of revenue from our mortgage operations. In addition, mortgages sold to third-party investors are typically subject to certain repurchase provisions related to borrower refinancing, defaults, fraud or other reasons stipulated in the applicable third-party investor agreements. If the fair value of a loan when repurchased is less than the fair value when sold, we may be required to charge such shortfall to earnings.

A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers or other third parties, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

We rely heavily on communications and information systems to conduct our business. Information security risks for financial institutions such as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. As client, public, and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns. Our business, financial, accounting and data processing systems, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunications outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and, as described below, cyber attacks.

As noted above, our business relies on our digital technologies, computer and email systems, software, and networks to conduct its operations. Although we have information security procedures and controls in place, our technologies, systems, networks, and our clients' devices may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients' confidential, proprietary and other information, or otherwise disrupt our or our clients' or other third parties' business operations. Third parties with whom we do business or that facilitate our business activities, including financial intermediaries, or vendors that provide services or security solutions for our operations, and other third parties could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.


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While we have disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Our risk and exposure to these matters remains heightened because of the evolving nature of these threats. As a result, cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or cyber attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

We may not be able to retain or develop a strong core deposit base or other low-cost funding sources.

We depend on checking, savings and money market deposit account balances and other forms of customer deposits as our primary source of funding for our lending activities. Our future growth will largely depend on our ability to retain and grow a strong deposit base. If we are unable to continue to attract and retain core deposits, to obtain third party financing on favorable terms, or to have access to interbank or other liquidity sources, our cost of funds will increase, adversely affecting the ability to generate the funds necessary for lending operations, reducing net interest margin and negatively affecting results of operations. We derive liquidity through core deposit growth, maturity of money market investments, and maturity and sale of investment securities and loans. Additionally, we have access to financial market borrowing sources on an unsecured and a collateralized basis for both short-term and long-term purposes including, but not limited to, the Federal Reserve and Federal Home Loan Banks, of which we are a member. If these funding sources are not sufficient or available, we may have to acquire funds through higher-cost sources.

We face strong competition for customers, which could prevent us from obtaining customers or may cause us to pay higher interest rates to attract customer deposits.

The banking business is highly competitive, and we experience competition in our markets from many other financial institutions. Customer loyalty can be easily influenced by a competitor's new products, especially offerings that could provide cost savings or a higher return to the customer. Moreover, this competitive industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, as well as super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere.

We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions, such as SunTrust Bank, Bank of America, Wells Fargo and BB&T. We also compete with regional and local community banks in our market. We may not be able to compete successfully with other financial institutions in our market, and we may have to pay higher interest rates to attract deposits, accept lower yields on loans to attract loans and pay higher wages for new employees, resulting in reduced profitability. In addition, competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us.

Future growth or operating results may require us to raise additional capital, but that capital may not be available or may be dilutive.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We may at some point need to raise additional capital to support our operations and any future growth.

Our ability to raise capital will depend on conditions in the capital markets, which are outside of our control and largely do not depend on our financial performance. Accordingly, we may be unable to raise capital when needed or on favorable terms. If we cannot raise additional capital when needed, we will be subject to increased regulatory supervision and the imposition of restrictions on our growth and business. These restrictions could negatively affect our ability to operate or further expand our operations through loan growth, acquisitions or the establishment of additional branches. These restrictions may also result in increases in operating expenses and reductions in revenues that could have a material adverse effect on our financial condition, results of operations and the price of our common stock.


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Our deposit insurance premiums could be substantially higher in the future, which could have a material adverse effect on our future earnings.

The FDIC insures deposits at FDIC-insured depository institutions, such as State Bank, up to $250,000 per account. The amount of a particular institution's deposit insurance assessment is based on that institution's risk classification under an FDIC risk-based assessment system. An institution's risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. As a result of recent FDIC assessment charges, banks are now assessed deposit insurance premiums based on the bank's average consolidated total assets less the sum of its average tangible equity, and the FDIC has modified certain risk-based adjustments, which increase or decrease a bank's overall assessment rate. This has resulted in increases to the deposit insurance assessment rates and thus raised deposit premiums for many insured depository institutions. If these increases are insufficient for the Deposit Insurance Fund to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay higher FDIC premiums than the recent levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could reduce our profitability, may limit our ability to pursue certain business opportunities or otherwise negatively impact our operations.

Any deficiencies in our financial reporting or internal controls could materially and adversely affect us, including resulting in material misstatements in our financial statements, and could materially and adversely affect the market price of our common stock.

If we fail to maintain effective internal controls over financial reporting, our operating results could be harmed and it could result in a material misstatement in our financial statements in the future. Inferior controls and procedures or the identification of accounting errors could cause our investors to lose confidence in our internal controls and question our reported financial information, which, among other things, could have a negative impact on the trading price of our common stock. Additionally, we could become subject to increased regulatory scrutiny and a higher risk of shareholder litigation, which could result in significant additional expenses and require additional financial and management resources.

The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are included in this report, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider "critical" because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures. As a result, if future events differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures.

We face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations and corresponding enforcement proceedings.

The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the “PATRIOT Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and to file suspicious activity and currency transaction reports as appropriate. FinCEN, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the OFAC. Federal and state bank regulators also have focused on compliance with Bank Secrecy Act and anti-money laundering regulations. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as 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, which would negatively impact our business, financial condition and results of operations. Sanctions that the regulators have imposed on banks that have not complied with all requirements have been especially severe. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

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We must respond to rapid technological changes, and these changes may be more difficult or expensive than anticipated.

We will have to respond to future technological changes. Specifically, if our competitors introduce new banking products and services embodying new technologies, or if new banking industry standards and practices emerge, then our existing product and service offerings, technology and systems may be impaired or become obsolete. Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards, then we may lose current and future customers, which could have a material adverse effect on our business, financial condition and results of operations. The financial services industry is changing rapidly, and to remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. These changes may be more difficult or expensive than we anticipate.
We are subject to losses due to the errors or fraudulent behavior of employees or third parties.

We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical record-keeping errors and transactional errors. Our business is dependent on our employees as well as third-party service providers to process a large number of increasingly complex transactions. We could be materially adversely affected if one of our employees causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. When we originate loans, we rely upon information supplied by loan applicants and third parties, including the information contained in the loan application, property appraisal and title information, if applicable, and employment and income documentation provided by third parties. If any of this information is misrepresented and such misrepresentation is not detected prior to loan funding, we generally bear the risk of loss associated with the misrepresentation. Any of these occurrences could result in a diminished ability of us to operate our business, potential liability to customers, reputational damage and regulatory intervention, which could negatively impact our business, financial condition and results of operations.

Risks Related to the Acquisition of our Acquired Banks

We are subject to risks related to our acquisition transactions.

The ultimate success of our past acquisition transactions and any acquisitions (whether FDIC-assisted or unassisted transactions) in which we may participate in the future, will depend on a number of factors, including our ability:

to fully integrate, and to integrate successfully, the branches acquired into our operations;
to limit the outflow of deposits held by our new customers in the acquired branches and to successfully retain and manage interest-earning assets (loans) acquired;
to retain existing deposits and to generate new interest-earning assets in the geographic areas previously served by the acquired banks;
to effectively compete in new markets in which we did not previously have a presence;
to control the incremental noninterest expense from the acquired operations in a manner that enables us to maintain a favorable overall efficiency ratio;
to retain and attract the appropriate personnel to staff the acquired operations;
to earn acceptable levels of interest and noninterest income, including fee income, from the acquired operations; and
to reasonably estimate cash flows for acquired loans to mitigate exposure greater than estimated losses at the time of acquisition.

As with any acquisition involving a financial institution there may be higher than average levels of service disruptions that would cause inconveniences to our new or existing customers or potentially increase the effectiveness of competing financial institutions in attracting our customers. We anticipate challenges and opportunities because of the unique nature of each acquisition. Integration efforts will also likely divert our management's attention and resources. We may be unable to integrate acquired branches or their personnel successfully, and the integration process could result in the loss of key employees, the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of our acquisition transactions. We may also encounter unexpected difficulties or costs during the integration that could adversely affect our results of operation and financial condition, perhaps materially. Additionally, we may be unable to achieve results in the future similar to those achieved by our existing banking business, to compete effectively in the market areas previously served by the acquired branches or to manage effectively any growth resulting from our acquisition transactions.


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The accounting for loans acquired in connection with our acquisitions is based on numerous subjective determinations that may prove to be inaccurate and have a negative impact on our results of operations.

The loans we acquired in connection with our acquisitions have been recorded at their estimated fair value on the respective acquisition date without a carryover of the related allowance for loan and lease losses. In general, the determination of estimated fair value of acquired loans requires management to make subjective determinations regarding discount rate, estimates of losses on defaults, market conditions and other factors that are highly subjective in nature. Although we have recorded fair value adjustments based on our estimates at the date of acquisition, the loans we acquired may become impaired or may further deteriorate in value, resulting in additional losses and charge-offs to the loan portfolio. The fluctuations in national, regional and local economic conditions, including those related to local residential, commercial real estate and construction markets, may increase the level of charge-offs that we make to our loan portfolio and consequently reduce our capital. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our results of operations and financial condition even if other favorable events occur.

Loans we acquired in connection with acquisitions that have evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, or ASC 310-30. These purchased credit impaired loans, like purchased non-credit impaired loans, acquired in connection with our acquisitions, have been recorded at their estimated fair value on the respective acquisition date, based on subjective determinations regarding risk ratings, expected future cash flows and fair value of the underlying collateral, without a carryover of the related allowance for loan and lease losses. We evaluate these loans quarterly to assess expected cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of any previously-recorded provision for loan and lease losses and related allowance for loan and lease losses, and then as a prospective increase in the accretable discount on the purchased credit impaired loans. Because the accounting for these loans is based on subjective measures that can change frequently, we may experience fluctuations in our net interest income and provisions for loan losses attributable to these loans. These fluctuations could negatively impact our results of operations.

Risks Related to Our Common Stock

Shares of our common stock are subject to dilution.

At February 23, 2017, we had 38,869,395 shares of common stock issued and outstanding, warrants outstanding to purchase another 114,912 shares of our common stock, and options to purchase 28,918 shares of our common stock. Our outstanding shares of common stock include 991,909 shares of restricted stock. In addition, we have 1,892,322 unallocated shares under our 2011 Omnibus Equity Compensation Plan, as amended, that remain available for future grants. If we issue additional shares of common stock in the future and do not issue those shares to all then-existing common shareholders proportionately to their interests, the issuance will result in dilution to each shareholder by reducing the shareholder's percentage ownership of the total outstanding shares of our common stock.

The market price of our common stock may be volatile, which could cause the value of an investment in our common stock to decline.

        The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:

general market conditions;
domestic and international economic factors unrelated to our performance;
actual or anticipated fluctuations in our quarterly operating results;
changes in or failure to meet publicly disclosed expectations as to our future financial performance;
downgrades in securities analysts' estimates of our financial performance or lack of research and reports by industry analysts;
changes in market valuations or earnings of similar companies;
any future sales of our common stock or other securities; and
additions or departures of key personnel.


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The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of our common stock. In the past, shareholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert management's attention and resources and harm our business or results of operations.

We may issue shares of preferred stock that would adversely affect the rights of our common shareholders.

Our authorized capital stock includes 2,000,000 shares of preferred stock of which no preferred shares are issued or outstanding. Our board of directors, in its sole discretion, may designate and issue one or more series of preferred stock from the authorized and unissued shares of preferred stock. Subject to limitations imposed by law or our articles of incorporation, our board of directors is empowered to determine:

the designation of, and the number of, shares constituting each series of preferred stock;
the dividend rate for each series;
the terms and conditions of any voting, conversion and exchange rights for each series;
the amounts payable on each series on redemption or our liquidation, dissolution or winding-up;
the provisions of any sinking fund for the redemption or purchase of shares of any series; and
the preferences and the relative rights among the series of preferred stock.
We could issue preferred stock with voting and conversion rights that could adversely affect the voting power of the shares of our common stock and with preferences over the common stock with respect to dividends and in liquidation.

Our securities are not FDIC-insured.

Our securities, including our common stock, are not savings or deposit accounts or other obligations of the Bank, are not insured by the Deposit Insurance Fund, the FDIC or any other governmental agency and are subject to investment risk, including the possible loss of principal.

Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

The Company is headquartered at 3399 Peachtree Road, N.E., Suite 1900, Atlanta, Georgia 30326 and State Bank's main office is located at 4219 Forsyth Road, Macon, Georgia 31210. We lease the Company's main office and own State Bank's main office location. We currently operate 30 additional full-service branches located in Bibb, Chatham, Clarke, Cobb, Columbia, Dooly, Fulton, Gwinnett, Hall, Houston, Jones, Liberty, McDuffie, Richmond, and Tattnall counties, Georgia. We lease five of our branches and own the remaining locations. We also operate eight mortgage origination offices. We lease seven of our mortgage origination offices and own the remaining office. State Bank also leases office spaces in Macon, Dunwoody and Dalton, Georgia for its payroll, equipment finance and insurance divisions, respectively.

Item 3.    Legal Proceedings.

In the ordinary course of operations, we may be party to various legal proceedings from time to time. We do not believe that there is any pending or threatened proceeding against us, which, if determined adversely, would have a material effect on our business, results of operations, or financial condition.

Item 4.    Mine Safety Disclosures.

Not applicable.


36



PART II
 

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information and Holders of Record

On April 14, 2011, our common stock became listed on The NASDAQ Capital Market under the symbol "STBZ".

The following table shows the high and low sales prices for shares of our common stock reported by the NASDAQ Capital Market and the dividends we paid per common share for the periods indicated:
 
2016
 
2015
 
High
 
Low
 
Cash Dividends Per Share
 
High
 
Low
 
Cash Dividends Per Share
Fourth Quarter
$
27.50

 
$
21.15

 
$
.14

 
$
23.73

 
$
19.28

 
$
.14

Third Quarter
23.30

 
19.77

 
.14

 
22.95

 
18.72

 
.07

Second Quarter
21.99

 
18.65

 
.14

 
22.59

 
19.47

 
.06

First Quarter
20.81

 
17.34

 
.14

 
21.19

 
17.98

 
.05


At February 23, 2017, we had 38,869,395 shares of common stock issued and outstanding and approximately 569 shareholders of record.

Dividends

Our ability to pay dividends depends on the ability of our subsidiary bank to pay dividends to us. Under Georgia law, the prior approval of the Georgia Department of Banking and Finance is required before State Bank may pay any cash dividends if:

a.
total classified assets at the Bank's most recent examination exceed 80% of equity capital (which includes the allowance for loan and lease losses);
b.
the aggregate amount of dividends declared or anticipated to be declared in the calendar year exceeds 50% of the net profits for the previous calendar year; or
c.
the Bank's ratio of equity capital to adjusted total assets is less than 6%.

As noted in the above table, we paid cash dividends totaling $.56 and $.32 per common share for the years ended December 31, 2016 and 2015, respectively. On February 8, 2017, we declared a quarterly dividend of $.14 per common share to be paid on March 14, 2017 to shareholders of record of our common stock as of March 6, 2017.

Unregistered Sales of Equity Securities

On November 18, 2016, we issued 924 shares of our common stock in a cashless exchange for a warrant to purchase 1,667 shares of our common stock. Pursuant to the terms of the warrant, the holder of the warrant used the amount by which 743 shares were deemed to be "in the money" as consideration for the $11.21 per share exercise price for the 924 shares we issued, and the entire warrant was canceled in the exchange. The shares issued were exempt from registration under Section 3(a)(9) of the Securities Act of 1933, as amended, because we exchanged the shares with our existing security holder exclusively, and no commission or other remuneration was paid or given directly or indirectly for soliciting the exchange.

37




On November 21, 2016, we issued 2,009 shares of our common stock in a cashless exchange for a warrant to purchase 3,333 shares of our common stock. Pursuant to the terms of the warrant, the holder of the warrant used the amount by which 1,324 shares were deemed to be "in the money" as consideration for the 10.00 per share exercise price for the 2,009 shares we issued, and the entire warrant was canceled in the exchange. The shares issued were exempt from registration under Section 3(a)(9) of the Securities Act of 1933, as amended, because we exchanged the shares with our existing security holder exclusively, and no commission or other remuneration was paid or given directly or indirectly for soliciting the exchange.

On December 13, 2016, we issued 20,000 shares of our common stock pursuant to the exercise by the holder of a warrant to purchase 20,000 shares of our common stock at $10.00 per share, resulting in cash consideration to us of $200,000. The 20,000 shares issued were exempt from registration as a transaction by an issuer not involving a public offering under Section 4(a)(2) of the Securities Act of 1933, as amended, and, in particular, the safe harbor provisions afforded by Rule 506 of Regulation D, as promulgated thereunder.

All of the warrants were exercised by certain of our current and former employees.

Repurchases of Common Stock

The following table provides information regarding the Company's purchase of common stock during the three months ended December 31, 2016:
Period
 
(a) Total Number of Shares Purchased (1)
 
(b) Average Price Paid per Share
 
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2)
Repurchases from October 1, 2016 - October 31, 2016
 
2,621

 
$
22.82

 

 
1,229,285

Repurchases from November 1, 2016 - November 30, 2016
 

 

 

 
1,229,285

Repurchases from December 1, 2016 - December 31, 2016
 

 

 

 
1,229,285

Total
 
2,621

 
$
22.82

 

 
1,229,285

 
(1) Represents shares of the Company's common stock acquired by the Company in connection with satisfaction of tax
withholding obligations on vested restricted stock.
(2) On February 10, 2016, the board of directors authorized the repurchase of up to 1.5 million shares of the Company's outstanding common stock. On February 25, 2016, the Company announced it entered into a written trading plan with a broker for the purpose of purchasing up to 1.5 million shares of the Company's outstanding common stock in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. On February 10, 2017, the Company extended this existing written trading plan for an additional year. The trading plan will now expire on the earlier of (a) February 24, 2018, (b) the date on which the maximum aggregate number of shares authorized to be repurchased has been repurchased, or (c) after written notice by the broker or the Company as specified in the trading plan. To date, 270,715 shares have been repurchased by the Company under the plan.

Stock Performance Graph

The following stock performance graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent the Company specifically incorporates it by reference into such filing. The stock performance graph represents past performance and should not be considered an indication of future performance.


38



The stock performance graph compares the cumulative annual shareholder return over the past five years on the Company's common stock, assuming an investment of $100 on December 31, 2011 and the reinvestment of dividends thereafter, with the cumulative total return of such an amount on the SNL U.S. Bank Index and the common stocks reported in the NASDAQ Composite Index. The SNL U.S. Bank Index was made up of 324 U.S. bank stocks as of December 31, 2016. The NASDAQ Composite Index is a market capitalization-weighted index and includes all domestic and international based common type stocks listed on The NASDAQ Stock Market.

stbz10kcharta02.jpg
 
Cumulative Total Return (1)
 
December 31
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
State Bank Financial Corporation (STBZ)
$
100

 
$
105

 
$
122

 
$
135

 
$
144

 
$
189

NASDAQ Composite
100

 
117

 
165

 
189

 
202

 
220

SNL U.S. Bank
100

 
135

 
185

 
207

 
211

 
266

 
(1) Total return includes reinvestment of dividends.

39


Item 6.  Selected Financial Data.

The following table provides selected historical consolidated financial information at the dates indicated and for the periods presented. This data should be read in conjunction with the consolidated financial statements and the notes thereto in Item 8, the information contained in this Item 6, including Table 2 below, "Non-GAAP Measure Reconciliation", and with "Management's Discussion and Analysis of Results of Operations and Financial Condition" contained in Item 7.

The historical GAAP information at and for the years ended December 31, 2016 and 2015 is derived from our audited consolidated financial statements that appear in this report. The historical results shown below and elsewhere in this report, including GAAP and non-GAAP financial measures, are not necessarily indicative of our future performance.
Table 1 - Financial Highlights
Selected Financial Information
 
December 31
(dollars in thousands, except per share data)
2016
 
2015
 
2014
 
2013
 
2012
SELECTED RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
Interest income on loans
$
103,024

 
$
92,938

 
$
64,176

 
$
61,010

 
$
55,228

Accretion income on loans
43,310

 
49,830

 
78,857

 
122,466

 
102,413

Interest income on invested funds
18,923

 
15,823

 
10,488

 
10,198

 
11,390

Total interest income
165,257

 
158,591

 
153,521

 
193,674

 
169,031

Interest expense
9,619

 
7,922

 
7,520

 
7,933

 
9,749

Net interest income
155,638

 
150,669

 
146,001

 
185,741

 
159,282

Provision for loan and lease losses (organic & PNCI loans)
3,596

 
2,951

 
2,775

 
1,920

 
5,035

Provision for loan and lease losses (purchased credit impaired loans)
(3,359
)
 
535

 
121

 
(4,407
)
 
10,081

Total provision for loan losses
237

 
3,486

 
2,896

 
(2,487
)
 
15,116

Amortization of FDIC receivable for loss share agreements

 
(16,488
)
 
(15,785
)
 
(87,884
)
 
(32,569
)
Other noninterest income (1)
39,301

 
36,599

 
15,387

 
16,937

 
12,803

Total noninterest income
39,301

 
20,111

 
(398
)
 
(70,947
)
 
(19,766
)
Total noninterest expense
120,927

 
123,422

 
93,468

 
97,967

 
89,236

Income before income taxes
73,775

 
43,872

 
49,239

 
19,314

 
35,164

Income tax expense
26,184

 
15,449

 
18,321

 
6,567

 
12,422

Net income
47,591

 
28,423

 
30,918

 
12,747

 
22,742

 
 
 
 
 
 
 
 
 
 
COMMON SHARE DATA
 
 
 
 
 
 
 
 
 
Basic net income per share
$
1.29

 
$
.79

 
$
.96

 
$
.40

 
$
.72

Diluted net income per share
1.28

 
.77

 
.93

 
.39

 
.69

Cash dividends declared per share
.56

 
.32

 
.15

 
.12

 
.06

Book value per share
15.80

 
14.47

 
14.38

 
13.62

 
13.48

Tangible book value per share (2)
13.48

 
13.22

 
13.97

 
13.24

 
13.06

Dividend payout ratio
43.75
 %
 
41.56
%
 
16.13
%
 
30.77
%
 
8.70
%
 
 
 
 
 
 
 
 
 
 
COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
 
 
Common stock
38,845,573

 
37,077,848

 
32,269,604

 
32,094,145

 
31,908,665

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
35,931,528

 
34,810,855

 
31,723,971

 
31,640,284

 
31,540,628

Diluted
36,033,643

 
36,042,719

 
32,827,943

 
32,654,104

 
32,567,780

 
 
 
 
 
 
 
 
 
 

40


Table 1 - Financial Highlights
Selected Financial Information
 
December 31
(dollars in thousands, except per share data)
2016
 
2015
 
2014
 
2013
 
2012
AVERAGE BALANCE SHEET HIGHLIGHTS
 
 
 
 
 
 
 
 
 
Loans (3)
$
2,354,276

 
$
2,109,908

 
$
1,481,730

 
$
1,427,501

 
$
1,512,367

Assets
3,550,650

 
3,366,505

 
2,661,512

 
2,600,583

 
2,666,606

Deposits
2,892,726

 
2,773,351

 
2,166,229

 
2,107,198

 
2,165,606

Equity
551,420

 
528,682

 
449,552

 
428,383

 
420,157

Tangible common equity (2)
506,062

 
487,876

 
437,095

 
415,474

 
411,882

 
 
 
 
 
 
 
 
 
 
SELECTED ACTUAL BALANCES
 
 
 
 
 
 
 
 
 
Total assets
$
4,224,859

 
$
3,470,067

 
$
2,882,210

 
$
2,605,388

 
$
2,662,575

Investment securities
914,241

 
887,705

 
640,086

 
387,048

 
303,901

Organic loans
2,090,564

 
1,774,332

 
1,320,393

 
1,123,475

 
985,502

Purchased non-credit impaired loans
563,362

 
240,310

 
107,797

 

 

Purchased credit impaired loans
160,646

 
145,575

 
206,339

 
257,494

 
474,713

Allowance for loan and lease losses
(26,598
)
 
(29,075
)
 
(28,638
)
 
(34,065
)
 
(70,138
)
Interest-earning assets
3,917,356

 
3,266,042

 
2,748,397

 
2,359,145

 
2,202,452

Total deposits
3,431,165

 
2,861,962

 
2,391,682

 
2,128,325

 
2,148,436

Interest-bearing liabilities
2,521,831

 
2,069,737

 
1,817,158

 
1,667,085

 
1,768,264

Noninterest-bearing liabilities
1,089,395

 
863,840

 
600,957

 
501,120

 
464,095

Shareholders' equity
613,633

 
536,490

 
464,095

 
437,183

 
430,216

 
 
 
 
 
 
 
 
 
 
PERFORMANCE RATIOS
 
 
 
 
 
 
 
 
 
Return on average assets
1.34
 %
 
.84
%
 
1.16
%
 
.49
 %
 
.85
%
Return on average equity
8.63

 
5.38

 
6.88

 
2.98

 
5.41

Cost of funds
.33

 
.28

 
.35

 
.38

 
.45

Net interest margin (4)
4.68

 
4.78

 
5.91

 
8.32

 
7.59

Net interest margin excluding accretion income (5)
3.52

 
3.39

 
3.00

 
3.35

 
3.94

Interest rate spread (4)
4.50

 
4.64

 
5.76

 
8.20

 
7.52

Efficiency ratio (6)
62.03

 
72.27

 
64.19

 
85.34

 
63.96

 
 
 
 
 
 
 
 
 
 
CAPITAL RATIOS (7)
 
 
 
 
 
 
 
 
 
Average equity to average assets
15.53
 %
 
15.70
%
 
16.89
%
 
16.47
%
 
15.76
%
Leverage ratio
14.90

 
14.48

 
15.90

 
16.55

 
15.49

CET1 risk-based capital ratio
14.78

 
17.71

 
N/A

 
N/A

 
N/A

Tier 1 risk-based capital ratio
14.78

 
17.71

 
23.12

 
27.85

 
29.25

Total risk-based capital ratio
15.53

 
18.75

 
24.37

 
29.11

 
30.54

 
 
 
 
 
 
 
 
 
 

41


Table 1 - Financial Highlights
Selected Financial Information
 
December 31
(dollars in thousands, except per share data)
2016
 
2015
 
2014
 
2013
 
2012
ORGANIC ASSET QUALITY RATIOS
 
 
 
 
 
 
 
 
 
Net charge-offs (recoveries) to total average organic loans
.16
 %
 
%
 
.08
%
 
(.01
)%
 
.07
%
Nonperforming organic loans to organic loans
.30

 
.29

 
.42

 
.20

 
.48

Nonperforming organic assets to organic loans + OREO
.31

 
.29

 
.43

 
.29

 
.59

Past due organic loans to organic loans
.06

 
.10

 
.17

 
.09

 
.37

Allowance for loan and lease losses on organic loans to organic loans
1.01

 
1.20

 
1.39

 
1.48

 
1.49

PURCHASED NON-CREDIT IMPAIRED ASSET QUALITY RATIOS
 
 
 
 
 
 
 
 
 
Net charge-offs (recoveries) on PNCI loans to average PNCI loans
.08
 %
 
.01
%
 
%
 
 %
 
%
Nonperforming PNCI loans to PNCI loans
.60

 
.77

 
.10

 

 

Nonperforming PNCI assets to PNCI loans + OREO
.60

 
.77

 
.10

 

 

Past due PNCI loans to PNCI loans
.68

 
.39

 
.46

 

 

Allowance for loan and lease losses on PNCI loans to PNCI loans
.08

 
.02

 

 

 

PURCHASED CREDIT IMPAIRED ASSET QUALITY RATIOS (8)
 
 
 
 
 
 
 
 
 
Net (recoveries) charge-offs on PCI loans to average PCI loans
(.48
)%
 
2.30
%
 
1.96
%
 
1.03
 %
 
8.34
%
Past due PCI loans to PCI loans
8.92

 
16.64

 
15.62

 
20.03

 
41.06

Allowance for loan and lease losses on PCI loans to PCI loans
3.16

 
5.36

 
4.97

 
6.76

 
11.69

 
(1) Includes all line items of noninterest income other than amortization of FDIC receivable for loss share agreements.
(2) Denotes a non-GAAP financial measure. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial
Measures" and Table 2, "Non-GAAP Measures Reconciliation" for further information.
(3) Includes average nonaccrual loans of $8.9 million for 2016, $5.6 million for 2015, $2.9 million for 2014, $3.3 million
for 2013, $3.7 million for 2012.
(4) Interest income calculated on a fully tax-equivalent basis using a tax rate of 35%.
(5) Excludes accretion income on loans and average purchased credit impaired loans.
(6) Noninterest expenses divided by net interest income plus noninterest income.
(7) Beginning January 1, 2015, the Company's ratios are calculated using the Basel III framework. Capital ratios for prior
periods were calculated using the Basel I framework. The Common Equity Tier 1 (CET1) capital ratio is a new ratio
introduced under the Basel III framework.
(8) For each period presented, a portion of the Company's purchased credit impaired loans were contractually past due;
however, such delinquencies were included in the Company's performance expectations in determining the fair values of
purchased credit impaired loans at each acquisition and at subsequent valuation dates. All purchased credit impaired loan
cash flows and the timing of such cash flows continue to be estimable and probable of collection and thus accretion income
continues to be recognized on these assets. As such, purchased credit impaired loans are not considered to be nonperforming
assets.
 






42


GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Certain financial measures included in this report, tangible book value per common share and average tangible equity, are financial measures that are not recognized by generally accepted accounting principles in the United States, or GAAP. These non-GAAP measures exclude the effect of the period end or average balance of intangible assets. Management believes that these non-GAAP measures provides additional useful information to investors, particularly since these measure are widely used by industry analysts for companies with prior merger and acquisition activities, such as us.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure is presented in the accompanying table. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. These non-GAAP financial measures should not be considered as a substitute for GAAP financial measures, and we strongly encourage investors to review the GAAP financial measures included in this report and not to place undue reliance upon any single financial measure. In addition, because non-GAAP financial measures are not standardized, it may not be possible to compare the non-GAAP financial measures presented in this report with other companies’ non-GAAP financial measures having the same or similar names.
Table 2 - Non-GAAP Measures Reconciliation
Selected Financial Information
 
December 31
(dollars in thousands, except per share data)
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
TANGIBLE BOOK VALUE PER COMMON SHARE RECONCILIATION
 
 
 
 
 
 
 
 
 
Book value per common share (GAAP)
$
15.80

 
$
14.47

 
$
14.38

 
$
13.62

 
$
13.48

Effect of goodwill and other intangibles
(2.32
)
 
(1.25
)
 
(.41
)
 
(.38
)
 
(.42
)
Tangible book value per share
$
13.48

 
$
13.22

 
$
13.97

 
$
13.24

 
$
13.06

 
 
 
 
 
 
 
 
 
 
AVERAGE TANGIBLE EQUITY RECONCILIATION
 
 
 
 
 
 
 
 
 
Average equity (GAAP)
$
551,420

 
$
528,682

 
$
449,552

 
$
428,383

 
$
420,157

Effect of average goodwill and other intangibles
(45,358
)
 
(40,806
)
 
(12,457
)
 
(12,909
)
 
(8,275
)
Average tangible equity
$
506,062

 
$
487,876

 
$
437,095

 
$
415,474

 
$
411,882

 
 
 
 
 
 
 
 
 
 


43



Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods.

       We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this report.

Introduction

The Company is a bank holding company that was incorporated under the laws of the State of Georgia in January 2010 to serve as the holding company for State Bank. State Bank is a Georgia state-chartered bank that opened in October 2005 in Pinehurst, Georgia. From October 2005 until July 23, 2009, State Bank operated as a small community bank from two branch offices located in Dooly County.

       On July 24, 2009, State Bank raised approximately $292.1 million in gross proceeds (before expenses) from investors in a private offering of its common stock. In connection with the private offering, the FDIC and the Georgia Department of Banking and Finance approved the Interagency Notice of Change in Control application filed by our new management team, which took control of State Bank on July 24, 2009. As a result of our private offering and acquisition, we were transformed from a small community bank to a much larger commercial bank.

Between July 24, 2009 and December 31, 2016, we successfully completed 16 bank acquisitions totaling $5.1 billion in assets and $4.5 billion in deposits. The acquisitions included 12 different failed bank transactions in which we acted as receiver for the FDIC, which we refer to as our FDIC-assisted transactions or failed bank transactions. Concurrently with each of the failed bank transactions, we entered into loss share agreements with the FDIC that covered certain of the acquired loans and other real estate owned. Our acquisitions also include the acquisition of Atlanta Bancorporation, Inc. and its wholly-owned subsidiary bank, Bank of Atlanta, in October 2014, the acquisition of Georgia-Carolina Bancshares, Inc., the holding company for First Bank of Georgia ("First Bank"), in January 2015, the acquisition of NBG Bancorp, Inc. and its wholly-owned subsidiary bank, The National Bank of Georgia, in December 2016, and the acquisition of S Bankshares, Inc. and its wholly-owned subsidiary bank, S Bank, in December 2016.

 We are now operating 31 full-service branches throughout seven of Georgia's eight largest MSAs. We also operate eight mortgage origination offices. At December 31, 2016, our total assets were approximately $4.2 billion, our total loans receivable were approximately $2.8 billion, our total deposits were approximately $3.4 billion and our total shareholders' equity was approximately $613.6 million.

During the second quarter of 2015, we entered into an agreement with the FDIC to terminate our loss share agreements for all 12 of our FDIC-assisted acquisitions, resulting in a one-time after-tax charge of approximately $8.9 million, or $14.5 million pre-tax. All rights and obligations of the parties under the FDIC loss share agreements, including the clawback provisions and the settlement of historic loss share expense reimbursement claims, were eliminated under the early termination agreement. All future charge-offs, recoveries, gains, losses and expenses related to assets previously covered by FDIC loss share agreements will now be recognized entirely by us since the FDIC will no longer be sharing in such charge-offs, recoveries, gains, losses and expenses.


44



Historically, we have referred to loans subject to loss share agreements with the FDIC as “covered loans” and loans that are not subject to loss share agreements with the FDIC as “noncovered loans.” With the early termination of all of our loss share agreements as discussed above, we now segregate our loan portfolio into the following three categories:

(1) organic loans, which refers loans not purchased in the acquisition of an institution or credit impaired portfolio,

(2) purchased non-credit impaired loans ("PNCI"), which refers to loans acquired in our acquisitions that did not show
signs of credit deterioration at acquisition, and

(3) purchased credit impaired loans ("PCI"), which refers to loans we acquired that, at acquisition, we determined it was
probable that we would be unable to collect all contractual principal and interest payments due.

Overview

The following provides an overview of the major factors impacting our financial performance in 2016 as well as information on certain important recent events.

Net income for the year ended December 31, 2016 was $47.6 million, or $1.28 per diluted share, compared to net income of $28.4 million for 2015, or $.77 per diluted share.
Noninterest income was $39.3 million for the year ended December 31, 2016, compared to $20.1 million for 2015. The increase is partially due to the $16.5 million decrease in amortization of the FDIC receivable for loss share agreements as a result of ceasing amortization on the FDIC receivable after we terminated our loss share coverage in May 2015. Mortgage banking, payroll fee income and SBA income also contributed $2.6 million to the increase in 2016.
Our net interest income on a taxable equivalent basis was $156.2 million for 2016, an increase of $5.0 million, or 3.3%, from 2015. Our interest income increased $6.7 million in 2016, primarily as a result of an increase of $10.1 million in interest income on loans and an increase of $3.4 million in interest income on investment securities which was partially offset by a $6.5 million decline in accretion income.
We completed our acquisitions of NBG Bancorp, Inc. and S Bankshares, Inc. on December 31, 2016.
We experienced strong loan growth in 2016. At December 31, 2016, total organic loans were $2.1 billion, an increase of $316.2 million, or 17.8%, from 2015.
The accretable discount on purchased credit impaired loans, which represents the excess cash flows expected at acquisition over the estimated fair value of the loans, decreased $16.8 million to $69.3 million at December 31, 2016, compared to $86.1 million at December 31, 2015. The decrease is primarily a result of $43.3 million in accretion income recognized on purchased credit impaired loans, offset by additions from acquisitions of $5.8 million and transfers from nonaccretable to accretable discount of $20.7 million during 2016.
Asset quality remained solid at December 31, 2016 with a ratio of nonperforming assets to total loans plus other real estate owned of .73% and a ratio of nonperforming loans to total loans of .34%.
Our cost of deposits remained low as the average cost of funds was 33 basis points for the year ended December 31, 2016, compared to 28 basis points for the year ended December 31, 2015.
The Company's capital ratios exceeded all regulatory "well capitalized" guidelines, with a Tier 1 leverage ratio of 14.90%, CET1 and Tier 1 risk-based capital ratios of 14.78% and a Total risk-based capital ratio of 15.53% at December 31, 2016.
In 2016, we paid cash dividends totaling $.56 per common share to our shareholders.
On February 8, 2017, we declared a quarterly dividend of $.14 per common share to be paid on March 14, 2017 to shareholders of record of our common stock as of March 6, 2017.


45



Critical Accounting Policies

In preparing financial statements, management is required to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. The accounting principles and methods we use conform with accounting principles generally accepted in the United States and general banking practices. Estimates and assumptions most significant to us relate primarily to the calculation of the allowance for loan and lease losses, the accounting for acquired loans and, with respect to those loans subject to loss share agreements with the FDIC before the early termination of our loss share agreements, the related FDIC receivable for loss share agreements on such covered assets, the valuation of goodwill and income taxes. These significant estimates and assumptions are summarized in the following discussion and are further analyzed in the notes to the consolidated financial statements.

Acquisition Accounting

We determined the fair value of our acquired assets and liabilities in accordance with accounting requirements for fair value measurement and acquisition transactions as promulgated in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30), ASC Topic 805, Business Combinations (ASC 805), and ASC Topic 820, Fair Value Measurements and Disclosures. The determination of the initial fair values on loans and other real estate purchased in an acquisition require significant judgment and complexity. All identifiable assets acquired, including loans, are recorded at fair value. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic No. 820. These fair value estimates associated with the purchased loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.

Where a loan exhibits evidence of credit deterioration since origination and it is probable at the acquisition date that we will not collect all principal and interest payments in accordance with the terms of the loan agreement, we account for the loan under ASC 310-30, as a purchased credit impaired loan. We account for our purchased credit impaired loans by dividing them into two categories, either: (1) specifically-reviewed loans or, (2) loans accounted for as part of a loan pool. We create loan pools by grouping loans with similar risk characteristics with the intent of creating homogeneous pools based on a combination of various factors including product type, cohort, risk classification and term. Loans accounted for in pools remain in the assigned pool until they are resolved. Any gains or losses are deferred and retained in the pool until the pool closes, which is either when all the loans are resolved or the pool’s recorded investment reaches zero.

Allowance for Loan and Lease Losses (ALLL)

The ALLL represents the amount considered adequate by management to absorb losses inherent in the loan portfolio at the balance sheet date. The ALLL is adjusted through provisions for loan losses charged or credited to operations. The provisions are generated through loss analyses performed on organic loans, estimated additional losses arising on PNCI loans subsequent to acquisition and impairment recognized as a result of decreased expected cash flows on PCI loans due to further credit deterioration since the previous quarterly cash flow re-estimation. The ALLL consists of both specific and general components. Individual loans are charged off against the ALLL when management determines them to be uncollectible. Subsequent recoveries, if any, of loans previously charged-off are credited to the ALLL.

All known and inherent losses that are both probable and reasonable to estimate are recorded. While management utilizes available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance. Such agencies may require adjustments to the ALLL based on their judgment about information available at the time of their examination.

The Company assesses the adequacy of the ALLL quarterly with respect to organic and purchased loans. The assessment begins with a standard evaluation and analysis of the loan portfolio. All loans are consistently graded and monitored for changes in credit risk and possible deterioration in the borrower’s ability to repay the contractual amounts due under the loan agreements.


46



Allowance for loan and lease losses for organic loans

The ALLL for organic loans consists of two components:
(1)
a specific amount against identified credit exposures where it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreements; and
(2)
a general amount based upon historical losses that are then adjusted for qualitative factors representative of various economic indicators and risk characteristics of the loan portfolio.

Management establishes the specific amount by examining impaired loans. The majority of the Company's impaired loans are collateral dependent; therefore, nearly all of the specific allowances are calculated based on the fair value of the collateral less disposal costs, if applicable.

Management establishes the general amount by reviewing the remaining loan portfolio (excluding those impaired loans discussed above) and incorporating allocations based on historical losses. The calculation of the general amount is subjected to qualitative factors that are somewhat subjective. The qualitative testing attempts to correlate the historical loss rates with current economic factors and current risks in the portfolio. The qualitative factors consist of but are not limited to:

(1)economic factors including changes in the local or national economy;
(2)the depth of experience in lending staff, credit administration and internal loan review;
(3)asset quality trends; and
(4)seasoning and growth rate of the portfolio segments.

After assessing the applicable factors, the remaining amount is evaluated based on management's experience and the level of the organic ALLL is compared with historical trends and peer information as a reasonableness test.

Allowance for loan and lease losses for purchased loans

Purchased loans are initially recorded at their acquisition date fair values. The carryover of ALLL is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for purchased loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, default rates, loss severity, collateral values, discount rates, payment speeds, prepayment risk and liquidity risk.

The Company maintains an ALLL on purchased loans based on credit deterioration subsequent to the acquisition date. Purchased credit impaired loans are accounted for under ASC 310-30. Management establishes an allowance for credit deterioration subsequent to the date of acquisition by quarterly re-estimating expected cash flows with any decline in expected cash flows recorded as impairment in the provision for loan losses. Impairment is measured as the excess of the recorded investment in a loan over the present value of expected future cash flows discounted at the pre-impairment accounting yield of the loan. For any increases in cash flows expected to be collected, the Company first reverses only previously recorded ALLL, then adjusts the amount of accretable yield recognized on a prospective basis over the loan’s remaining life.

For purchased loans that are not deemed impaired at acquisition, also referred to as purchased non-credit impaired loans, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the asset. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to organic loans, and if necessary, additional reserves are recognized in the allowance for loan and lease losses.

Accounting for the FDIC Receivable

In conjunction with our FDIC-assisted acquisitions, State Bank entered into loss share agreements with the FDIC and we recorded an indemnification asset which reflected the reimbursements expected to be received from the FDIC, using an appropriate discount rate, that discounted future cash flows and other uncertainties for losses incurred on the covered assets. We refer to the FDIC indemnification asset as the "FDIC Receivable." The FDIC receivable at acquisition was recognized at the same time as the covered loans and was measured on the same basis, subject to contractual limitations or collectability. We made various estimates when assessing collectability, including the likelihood that a loss would be incurred or that concerns raised by the FDIC on claims initially denied could be resolved before the loss share period ended.


47



The FDIC receivable was measured on the same basis as the related formerly covered loans. All of the covered loans were deemed to be purchased credit impaired loans and therefore, subject to the accounting prescribed by ASC Topic 310-30. Deterioration in the credit quality or cash flows of the formerly covered loans were immediately recorded as an adjustment to the allowance for loan and lease losses which immediately increased the basis of the FDIC receivable, with the offset recorded through our consolidated statement of income. Improvements in the credit quality or cash flows on formerly covered loans (reflected as an adjustment to yield and accreted into income over the remaining life of the formerly covered loans) decreased the basis of the FDIC receivable, with such decreases being amortized as expense in non-interest income over the remaining life of the covered loan or the life of the loss share agreement, whichever was shorter. Loss assumptions used during the re-estimation of cash flows on formerly covered loans were consistent with the loss assumptions used to measure the FDIC receivable. Fair value accounting incorporated into the fair value of the FDIC receivable an element of the time value of money, which was accreted back into income over the life of the related loss share agreement.

Upon the determination of an incurred loss on a covered asset, the FDIC receivable was reduced by the amount owed by the FDIC. A corresponding claim receivable was recorded until cash was received from the FDIC. The FDIC receivable and claims receivable from the FDIC are both included in "FDIC Receivable for Loss Share Agreements" on our Consolidated Statements of Financial Condition. On May 21, 2015, State Bank entered into an agreement to terminate loss share coverage on all 12 FDIC-assisted acquisitions. The early termination resulted in the elimination of the FDIC receivable for loss share agreements and the associated clawback liability.

For further discussion of our acquisitions, loan and indemnification asset accounting, see Notes 1, 4, 5 and 10 of the notes to the consolidated financial statements located in Item 8 of this Annual Report on Form 10-K.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. We review goodwill for impairment annually, or more frequently if deemed necessary, as goodwill is deemed to have an indefinite life. On our annual assessment date, December 31, we performed a qualitative assessment of whether it was more likely than not that the fair value exceeded carrying value. Based on this assessment, we determined that it was more likely than not that the fair value exceeded its carrying value, resulting in no impairment to goodwill.

Income Taxes

Income Tax Expense. The calculation of our income tax expense requires significant judgment and the use of estimates. We periodically assess tax positions based on current tax developments, including enacted statutory, judicial, regulatory and industry guidance. In analyzing our overall tax position, we consider the amount and timing of recognizing income tax liabilities and benefits. In applying the tax and accounting guidance to the facts and circumstances, we adjust income tax balances appropriately through the income tax provision. We maintain reserves for income tax uncertainties at levels we believe are adequate to absorb probable payments. Actual amounts paid, if any, could differ significantly from these estimates.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We assess deferred tax assets based on expected realizations, and we establish a valuation allowance in situations where it is more likely than not that a deferred tax asset is not realizable. Management has reviewed all evidence, both positive and negative, and concluded that no valuation allowance against the net deferred tax asset is needed at December 31, 2016.


48



Results of Operations

Net Income

We reported net income of $47.6 million, $28.4 million, and $30.9 million for December 31, 2016, 2015, and 2014, respectively. Diluted earnings per common share was $1.28, $.77, and $.93 for December 31, 2016, 2015, and 2014, respectively.

Net Interest Income (Taxable Equivalent)

       Net interest income, which is our primary source of earnings, is the difference between interest earned on interest-earning assets, as well as accretion income on purchased credit impaired loans, and interest incurred on interest-bearing liabilities. Net interest income depends upon the relative mix of interest-earning assets and interest-bearing liabilities, the ratio of interest-earning assets to total assets and of interest-bearing liabilities to total funding sources, and movements in market interest rates.

2016 compared to 2015

Our net interest income on a taxable equivalent basis was $156.2 million for 2016, an increase of $5.0 million, or 3.3%, from 2015. This increase was primarily attributable to increases in average loans, excluding purchased credit impaired loans, of $287.1 million and investment securities of $68.2 million compared to the year ended December 31, 2015. A decrease of $6.5 million in accretion income on purchased credit impaired loans, a decline in the yield on average loans, excluding purchased credit impaired loans, of 17 basis points and an increase in average interest-bearing deposits of $25.4 million compared to the year ended December 31, 2015 partially offset the impact of the increases in average loans, excluding purchased credit impaired loans, and investment securities.

Our net interest spread on a taxable equivalent basis, which is the difference between the yields earned on average earning assets and the rates paid on average interest-bearing liabilities was 4.50% for 2016, compared to 4.64% for 2015, a decrease of 14 basis points. Our net interest margin on a taxable equivalent basis, which is net interest income divided by average interest-earning assets, was 4.68% for 2016, compared to 4.78% for 2015, a decrease of 10 basis points.

The yield on average earning assets was 4.96% for 2016, compared to 5.03% for 2015, a decrease of seven basis points, driven primarily by a decline in our yield on loans, excluding purchased credit impaired loans. Our yield on loans, excluding purchased credit impaired loans, was 4.66% for 2016, compared to 4.83% for 2015, a decrease of 17 basis points. The decrease primarily resulted from a combination of payoffs of higher-yielding loans and new lower-yielding loan originations. The decrease in yield on loans, excluding purchased credit impaired loans, was partially offset by increases in the yields on purchased credit impaired loans and investment securities. Our yield on purchased credit impaired loans was 32.66% for 2016, compared to 28.41% for 2015, an increase of 425 basis points. The yield on our purchased credit impaired loans can vary significantly from period to period depending largely on the timing of loan pool closings for our purchased credit impaired loans that are accounted for in pools and the timing of customer payments. The increase in our yield on purchased credit impaired loans in 2016 was primarily due to gains on loan pool closings of $6.4 million in relation to average purchased credit impaired loans. The yield on our investment portfolio was 2.08% for 2016 and 1.84% for 2015. The increase of 24 basis points was primarily driven by variable rate securities repricing due to changes in index rates.

The average rate on interest-bearing liabilities was .46% for 2016, an increase of seven basis points from 2015. The average rate paid on interest-bearing deposits was .46% for 2016, an increase of eight basis points from 2015. This is primarily due to the increase in amortization on our interest rate caps of $625,000, as well as the reduction of $537,000 in amortization of time deposit premiums acquired in our acquisitions of First Bank of Georgia and Bank of Atlanta. Also contributing to the increase was a local time deposit special run during the fourth quarter of 2015 and the first quarter of 2016 as part of management's strategy to grow new retail deposits. Our cost of funds was 33 basis points for 2016, an increase of five basis points from 2015.

2015 compared to 2014

Our net interest income on a taxable equivalent basis was $151.2 million for 2015, an increase of $4.9 million, or 3.4%, from 2014. Our net interest spread on a taxable equivalent basis was 4.64% for 2015, compared to 5.76% for 2014, a decrease of 112 basis points. Our net interest margin on a taxable equivalent basis was 4.78% for 2015, compared to 5.91% for 2014, a decrease of 113 basis points.


49



The yield on average earning assets was 5.03% for 2015, compared to 6.21% for 2014, a decrease of 118 basis points, driven primarily by a $29.0 million decline in accretion income on purchased credit impaired loans. Our yield on purchased credit impaired loans was 28.41% for 2015, compared to 35.26% for 2014, a decrease of 685 basis points. The yield on our purchased credit impaired loans can vary significantly from period to period depending largely on the timing of loan pool closings for our purchased credit impaired loans that are accounted for in pools and the timing of customer payments. The decline in our yield on purchased credit impaired loans in 2015 was primarily due to a decrease of $19.9 million in gains on loan pool closings in relation to average purchased credit impaired loans. Our yield on loans, excluding purchased credit impaired loans, was 4.83% for 2015, compared to 5.12% for 2014, a decrease of 29 basis points. The decrease primarily resulted from a combination of payoffs of higher-yielding loans and new lower-yielding loan originations. The yield on our investment portfolio was 1.84% for 2015 and 1.81% for 2014. The increase of three basis points was primarily driven by our purchase of higher yielding investments.

The average rate on interest-bearing liabilities was .39% for 2015, a decrease of six basis points from 2014. The average rate paid on interest-bearing deposits was .38% for 2015 and .43% for 2014. The five basis point decrease was primarily the result of time deposits acquired in our acquisition of First Bank because the interest expense on these deposits incorporated the benefit of the fair value adjustment. Our cost of funds was 28 basis points for 2015, a decrease of seven basis points from 2014.


50



Average Balances, Net Interest Income, Yields and Rates

The following table shows our average balance sheet and our average yields on assets and average costs of liabilities for the periods indicated (dollars in thousands). We derive these yields by dividing income or expense by the average balance of the corresponding assets or liabilities, respectively. We have derived average balances from the daily balances throughout the periods indicated.
 
Years Ended December 31
 
2016
 
2015
 
2014
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in other financial institutions
$
88,072

 
$
294

 
.33
%
 
$
224,637

 
$
609

 
.27
%
 
$
483,523

 
$
1,276

 
.26
%
Investment securities (1)
897,521

 
18,633

 
2.08
%
 
829,370

 
15,253

 
1.84
%
 
510,142

 
9,245

 
1.81
%
Loans, excluding purchased credit impaired loans (2) (3)
2,221,650

 
103,586

 
4.66
%
 
1,934,530

 
93,453

 
4.83
%
 
1,258,074

 
64,462

 
5.12
%
Purchased credit impaired loans
132,626

 
43,310

 
32.66
%
 
175,378

 
49,830

 
28.41
%
 
223,656

 
78,857

 
35.26
%
Total earning assets
3,339,869

 
165,823

 
4.96
%
 
3,163,915

 
159,145

 
5.03
%
 
2,475,395

 
153,840

 
6.21
%
Total nonearning assets
210,781

 
 
 
 
 
202,590

 
 
 
 
 
186,117

 
 
 
 
Total assets
$
3,550,650

 
 
 
 
 
$
3,366,505

 
 
 
 
 
$
2,661,512

 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
540,593

 
$
661

 
.12
%
 
$
518,770