ServisFirst Bancshares has created a simple, straightforward
business model built for the future.
Birmingham, Alabama-based bank has an efficiency ratio of a mere 33%, well
below the industry average of 56%. Its average return on assets over the past
five years is 1.6%, meaningfully above the industry average of 1.15%. And it
has grown in a decade and a half from a de novo bank to $9 billion in assets,
almost entirely through organic means (it’s made just one acquisition).
The secret to ServisFirst’s success is a combination of leveraging technology to keep costs low, investing in people and focusing intently on their clients and strategy.
“They have a
business model that is built for the new age and future of banking,” says Brad Milsaps,
managing director of equity research at Sandler O’Neill + Partners. “The branch-light model … means
they’re an efficient company,” Milsaps says. “It’s built around the premise of
serving commercial and middle-market clients.”
The inspiration for ServisFirst came when its founder and
CEO Tom Broughton III worked at Synovus, which had acquired the first bank he
founded, First Commercial Bank, in 1992. At the time, an analysis by the Columbus, Georgia-based bank revealed
that just 4% of its clients generated 90% of its revenue. So Broughton founded
ServisFirst in 2005 to focus on those super-clients.
“We opened our first bank in 1985, and thought we had a way
to start a better bank,” Broughton says. “After you do it for 20 years, you think
‘Well, I think I could start a better bank than when I did it the first time.’”
Broughton’s strategy to build a better bank started with abandoning one of the industry’s sacred cows: branches. For ServisFirst, branches haven’t been needed to establish customer relationships. Broughton says customers will blank when asked about the last time they went into a branch or the name of their loan officer.
“Technology has been really a boon for banks with our
business model,” Broughton says. “A branch network is a perceived – rather than
an actual – need.”
This branch-light approach has allowed ServisFirst to focus on
its commercial and industrial middle-market customer base and expand into new
markets, rather than worry about accumulating scale in any one city. It has 22 branches or loan production
offices in 11 cities across five states in the southern U.S.
“We want a
diverse client base. We want diverse geography,” Broughton says. “We never say,
‘We want to be in a certain place.’ We just say, ‘We want to have good bankers
in a good market.’”
to ServisFirst’s branching strategy is that its cost of funds is significantly
higher than its peers. Through the first six months of this year, it paid 1.28%
to fund its earning assets – the industry average is only 0.75%. Despite this,
ServisFirst spends just a third of its net revenue on operating expenses,
compared to more than half at a typical bank.
Not investing in physical branches also allows the bank to invest more in its people. In fact, Broughton talks about its producers as a regular feature on earnings calls.
“We did add six
new bankers in the third quarter,” he said on the latest call. “We hired 20 new
bankers year-to-date, just an outstanding group of new bankers. [E]xcluding
trainees, we have 139 bankers total today.”
that Broughton is a “no-nonsense” CEO who answers his own phone and has cultivated
a production-driven culture.
“If you don’t
want to work hard, it’s not a place for you,” he says.
The bank doesn’t use recruiters or headhunters to attract new lenders and teams, relying instead on word-of-mouth. It also runs its own training program to equip homegrown lenders with the diverse set of skills the bank needs. New college graduates spread across the bank’s footprint start as credit analysts, then graduate to assistant relationship managers before becoming lenders.
Of the bank’s
“best production people,” as Broughton calls them, 80% are homegrown.
“If you hire
people from a branch system of another bank, they don’t really have credit
skills because they have centralized loan underwriting,” he says.
pairs its branch-light approach with a hands-off attitude, leveraging regional
CEOs and boards that empower local decision-making and accountability while
centralizing back-office operations and functions. Milsaps says this
“mini-bank” approach appeals to entrepreneurial lenders. Broughton adds that
many of these regional CEOs have built and sold their own successful
banks in the past, and its externally hired lenders tend to come from smaller
banks where they wear many hats.
But the biggest secret to ServisFirst’s rapid growth has been its laser-like concentration on its simple business model. Two-thirds of its loan portfolio is either commercial and industrial or owner-occupied commercial real estate. ServisFirst focuses in particular on building deep relationships with owner-managed, middle-market private companies.
Even with that narrow focus, Broughton sees the diversity
within the C&I space across ServisFirst’s markets. Nashville has
healthcare; Huntsville, Alabama, has defense; Mobile, Alabama, and Charleston,
South Carolina, have marine and maritime industries.
To service them, he encourages bankers to cultivate expertise in different areas and industries, but not a specialty. The bank doesn’t do specialty lending, doesn’t offer hedges to customers and doesn’t have many business lines that generate fee income, like wealth management.
The declining interest rate environment has led Broughton to
focus in public comments on net interest income growth, rather than net
interest margin maintenance. He believes banks need a “bare minimum” margin of
350 basis point to operate, but would like at least 400 basis points for
ServisFirst. Given that its NIM in the third quarter was just 3.36%, the
challenge for the bank now is stabilizing it at 350 basis points, which it
plans to do by reducing deposit costs and staying consistent and selective in
“One problem is [other] lenders. If you start with a number
in the 3s, you’re certainly going to have a margin less than 400 basis points,”
he says. “We can’t control what other people do. If we miss on a deal, we just
move onto the next one.”
A lot has changed in the two decades between Broughton’s
founding of two banks. The banking landscape, the technology, the regulations –
all of those have morphed and evolved over time. But in all that, he sees one major
“The relationship with clients hasn’t changed a bit,” he
says. “And you can’t do it with a computer over the internet.”