Since it opened 14 years ago, Birmingham-based ServisFirst Bancshares has remained focused on its initial game plan to keep things simple — and the numbers say that’s working.
For the fifth year in a row, ServisFirst has been honored as a Raymond James Cup winner, which recognizes the nation’s best community banks. ServisFirst ranked fourth overall of 258 banks considered for the award in 2018 and was the only bank in the Southeast chosen.
The Raymond James award was based on various profitability, operational efficiency and balance sheet metrics. Banks eligible for the award included all exchange-traded domestic banks, excluding mutual holding companies and potential acquisition targets, with assets between $500 million and $10 billion. ServisFirst’s assets stood at $8.3 billion at the end of March this year.
ServisFirst doesn’t concern itself with everything, but it’s obsessed with fostering strong customer relationships and a disciplined approach to controlling costs and pricing loans.
“We try to do just core banking,” says ServisFirst Chief Financial Officer Bud Foshee. “We make loans and take in deposits, and our board has been really good at keeping us on that path.”
ServisFirst has not taken on the risks associated with having a wealth management unit, a trust department or a capital markets group. And it has opted not to offer other services provided by some banks, such as insurance. Says Foshee: “We have insurance companies as customers; why would we want to compete with them?”
To reduce costs, ServisFirst outsources as much of its work as possible, including its core systems, all audits and asset liability management. Such services can be handled by outside vendors instead of higher-overhead employees. Since it was founded, ServisFirst has always stressed the use of technology — such as remote capture of deposits — to keep overhead low, according to Foshee.
“There are some things we do and some things we don’t,” says ServisFirst CEO Tom Broughton. “You just have to know what’s in your wheelhouse. You can’t be everything to everybody, and we don’t try to be. We try to concentrate on and be good at a few things.”
Measurements that Raymond James used to choose its Community Bank Cup winners were efficiency ratio, return on average assets, return on average tangible common equity, 5-year core deposit percentage, net interest margin and nonperforming assets to loans, and real estate owned.
All of those measurements are related to — and support — each other. In the Raymond James analysis, ServisFirst scored exceptionally high in efficiency ratio, return on average assets and return on average tangible common equity. But what, exactly, does that mean when it comes to the company’s operation?
The efficiency ratio is a valuable measurement because it shows how much money it takes for a bank to create a dollar of revenue. “It takes ServisFirst about 35 cents to create $1 in revenue, with a lot of banks above 50 cents, some are above 60 cents,” says Clarence Pouncey, chief operating officer at ServisFirst. “So, we’re about 35 percent on our efficiency ratio, which shows we’re very efficient with the capital we’ve been entrusted with.”
The bank’s return on average assets for 2018 was 1.88 percent, well above the 1.33 percent return other commercial banks reported last year, according to the Federal Deposit Insurance Corp. Return on assets is a key measurement because it shows how well a bank uses its assets to generate income.
The return on average tangible common equity at ServisFirst was 20.96 percent last year, almost double that of other commercial banks, according to the FDIC. Return on equity shows shareholders the return on their investments. Also, a higher return on equity is a sign that a bank is increasing its ability to generate profit without needing as much capital.
ServisFirst also graded extremely high on its 5-year average core deposits, which indicates a stable source of funds from a pool of loyal customers in the geographic areas it serves. The compounded annual growth rate on deposits for the five years ending last December was 18 percent, with total deposits standing at $6.9 billion at that time.
Of the measurements used in the Raymond James analysis, Foshee believes ServisFirst concentrates the most on achieving a healthy net interest margin. Having a good net interest margin requires a never-ending quest to make rates on deposits attractive enough to gain and keep customers while pricing loans high enough to create profitable margins.
Doing those things and staying competitive is easier said than done, but ServisFirst has managed to stay well ahead of the curve. The bank grew its gross loans from 2013 to 2018 at a compounded annual rate of 18 percent, and it ended last year with a net interest margin of 3.75 percent. That easily beats the 3.45 percent posted by other commercial banks last year, according to the FDIC.
ServisFirst has been able to increase its loans without sacrificing loan quality. That’s the main reason that the bank’s percentage of nonperforming assets to loans and real estate owned at the end of March was only 0.49 percent, well below that of most other banks.
“Since day one, we’ve always grown but when you do that, you’ve got to have controls in place, especially when it comes to loans,” Foshee says. “We have a very disciplined risk management platform.”
Solid loans are nice, but they must be complemented by controlling rates on deposits. “Right now, loan rates are not going up, so you’ve got to look at a way to control deposit costs,” Foshee says. “At our annual directors’ retreat in May, one of the things we discussed in our management meeting was how to control deposit costs going forward.
“If the Federal Reserve cuts rates, we’re going to have to tell our clients we’re cutting their (deposit) rates, and that’s not easy. Other banks will have to do that, too, but it’s still not a conversation you look forward to having with clients.”
Foshee and Broughton have been with ServisFirst since it started, and Pouncey joined the company a year later. Although recent interviews with them were to be based on numbers and ratios, each of them quickly segued to talking about ServisFirst customers.
“All of our bankers are customer focused,” says Broughton. “It’s just our kind of thing. Some people would call us a cult bank because we are a bit of a cult. Eighty percent of our customers come from referrals by satisfied customers. We don’t do any marketing to speak of and practically zero advertising. All we have to do is take care of our customers, and we’ll keep going. A lot of bankers spend time in meetings. We’re the exact opposite. We like spending time with clients.”
ServisFirst now has 10 regions stretching from Nashville to Charleston to Tampa. The company’s net income almost tripled between 2013 and 2018, from $52.3 million to $137 million last year. That, Broughton says, is largely because each of the bank’s regional CEOs has the same mindset regarding customers.
In considering leadership teams for regional locations, “If we talk with someone and they have a warm-chair concept, they’re not going to work with us,” Broughton says. “The main reason we won’t work with someone is if they don’t like getting out and meeting with customers.”
Charlie Ingram and Cary Norton are freelance contributors to Business Alabama. Both are based in Birmingham.
