ServisFirst’s “Humble and Hungry” Approach to Success

A young man in Birmingham, Alabama, went to a restaurant recently and struck up a conversation with another customer. The customer wanted to know what he did for a living. “I’m a banker,” the man said. The response: “Well, you must work for ServisFirst, because you have on a tie.”

While the rest of the world has moved on from white shirts and ties, ServisFirst’s Birmingham-based commercial bankers — where the bank is headquartered — have steadfastly worn them five days per week. Although regional CEOs in markets outside Birmingham have autonomy to decide what to wear, the 68-year-old founder, chairman and CEO, Thomas Broughton III, is the standard bearer for all things ServisFirst. He isn’t one to chase fads, whether in outfits or operations. He and Rodney Rushing, the executive vice president and chief operating officer, made that clear in a recent video interview, sitting around a polished wood boardroom table, with Tom in a red tie and Rodney in a yellow one. (Broughton once offered staff casual Fridays but grew discouraged by the wrinkled khakis and denim jeans.)

As attentive as the bank is to details such as business attire, it’s also focused on providing a high level of service to small- and mid-sized businesses. The bank eschewed the construction of branches, preferring a low-cost business model that focuses on a sales mindset and serving the needs of owner-operators. “We’re a growth company that sets high standards for performance,” Broughton says. “We say we’re a disciplined growth company.”

For years, the numbers have proven him right at this banking company that had $14.6 billion in assets at the end of last year. ServisFirst Bancshares has nailed it as one of the top performing banks in the nation. It ranked No. 17 among the best 25 publicly traded U.S. banks in this year’s RankingBanking study, based on its performance in 2022. In previous years, it has consistently outperformed peers for profitability, based on return on average assets and return on average equity. But ServisFirst has watched its deposit costs rise in the current environment and has hit the pause button on loan growth. Can it sustain its performance in the years ahead?

There’s nothing secretive about the sauce that makes ServisFirst so profitable. Broughton, who has spent his entire career in Alabama, founded the banking company in 2005, shortly before the last financial crisis. It wasn’t the first bank he’d founded. In fact, Broughton came from a family of bankers. He grew up in a small town in southern Alabama called Andalusia. His father, his grandfather and his uncle were all bankers. In elementary school, when asked what they wanted to be when they grew up, the other kids would say firefighter or policeman. He said banker. Indeed, Broughton started putting in hours in his family’s bank when he was 11 years old, working after school and in the summers.

In 1985, he and a cousin founded First Commercial Bank. They sold it in 1992 to what’s now the $62 billion Synovus Financial Corp. in Columbus, Georgia.

Broughton eventually became a regional chief executive officer for Synovus, overseeing Alabama, Tennessee, Florida and parts of Georgia. In those days, Synovus had a decentralized structure with separate banks and individual executives in charge of each one. One day, a colleague proposed doing a revenue contribution analysis of his region. Broughton thought it was a great idea. It turned out 90% of his bank’s revenue came from 4% of its customers. “I couldn’t believe it,’’ he says. “I thought, ‘There’s a better way.’”

In 2005, Broughton founded ServisFirst in Birmingham. The mission: simplicity and a focus on the core business customer. “We don’t try to be all things to all people,” he says. The bank avoids acquisitions, even while its stock price has traded at a premium, preferring to grow organically and maintain its culture. The bank has very little fee-income businesses, which helps cut its cost structure. There’s no trust division, no wealth management, not many mortgages. “Most banks do a terrible job with wealth management,” Broughton says. “What do we bring to the table that [customers] can’t get somewhere else?”

He set out to build very few branches. His busy clients, he theorized, didn’t want to come into a branch. They wanted to handle their finances remotely, on their phones and their computers. Recently, the bank reported 64% of its deposits came in through remote deposit capture, according to Kevin Fitzsimmons, managing director and senior research analyst at D.A. Davidson Cos.

The low cost structure has translated into an incredibly low efficiency ratio — in banking, the lower the efficiency ratio, the better. It’s a simple metric: for every dollar of revenue earned, the efficiency ratio is the percent spent on expenses. “A good bank is putting up a mid-50s to low-50s efficiency ratio,” Fitzsimmons says. ServisFirst reported an efficiency ratio of 34.6% in the first quarter of 2023. That in turn has translated into superior profitability: For every dollar earned, more of that goes to the bottom line. “I think of them consistently as having the best efficiency ratio of peers and then being among the highest in terms of loan growth, typically,” Fitzsimmons says.

Graham Dick, a vice president and analyst at Piper Sandler & Co., sees a direct connection between ServisFirst’s simple business model and its profitability. “At the end of the day, if you’re producing a 3.5% [net interest margin] and you’re running a 30% efficiency ratio, you’re going to be generating better profitability than pretty much all your peers,” he says. The one exception to that simplicity is the correspondent division: ServisFirst is the credit card issuer and correspondent bank for a variety of community banks.

It hasn’t hurt that ServisFirst is solidly located in the growing Southeast, but even among Southeast banks, ServisFirst is an outlier. “When you ask banks around the Southeast, ‘Who do you want to be like?’ One answer you’ll hear, for the most part, is Pinnacle [Financial Partners] and ServisFirst,” Dick says. “I think people envy the management style and how it’s worked for shareholders over time.”

The simplicity of its business model makes its performance even more noteworthy. Couldn’t any bank do this well? “The business we run is pretty boring, honestly,” says Bart McBride, one of the bank’s long-term employees and an executive vice president. “We take deposits and make loans and make a spread [income].”

But what does distinguish the bank is its approach to culture. Early in his career, Broughton purchased a Huntsville, Alabama, area bank that made a lifelong impression on him. “We bought a handyman special,” he says. It wasn’t distressed, but it wasn’t easy to change, either. “I learned it’s easier to start a bank than it is to buy one and fix it,” he says. ServisFirst has resisted the urge to acquire banks, making an exception for a small bank outside Atlanta in 2014. Instead, the bank focuses on acquiring talent from other banks or training bankers.

The bank doesn’t decide to locate in a particular geography, Broughton says. Instead, it focuses on hiring the best bankers. “We never used a recruiter,” he says. “We have direct relationships with people or somebody that knows somebody that knows somebody.”

If those bankers happen to be in a low-growth market in a tiny town, so be it. That has helped ServisFirst avoid the competitive scramble in some of the top markets in the Southeast, helping it retain a business model that’s been more profitable than most.

All three of Broughton’s longtime executive vice presidents describe him as someone who empowers the best bankers to do well. Paul Schabacker, executive vice president in Birmingham, has worked for Broughton the longest, dating back to Broughton’s first bank in 1991. “I’ve got a more entrepreneurial spirit than a typical banker,” he says, explaining why he’s still working for the same person decades later. “Broughton’s a very hands-off manager. Most bankers are very controlling.”

Broughton once got a call from the bank’s regional CEO in southeast Alabama who wanted to recruit a team of agricultural bankers from another bank. Broughton didn’t think it was a good idea. But he didn’t say that. He let the regional CEO hire them, and they became some of the most profitable bankers in the company.

Instead of telling his bankers what to do, Broughton and his executive team prefer to set high goals and then let their commercial bankers reach them, all while ensuring they fit into the disciplined standards of good credit underwriting. Indeed, the bank had a ratio of nonperforming assets to loans and other real estate owned of 0.11% last year, one-third the median bank in its asset class, according to the RankingBanking analysis.

The bank calls the heads of each region “CEOs,” and they’re empowered to make credit decisions up to certain loan limits. “We have lending authority, not lending committees,” Rushing says. When a customer applies for a loan, “it’s sometimes hours, certainly not more than a few days at most, when we get back to [customers] about how we can structure the terms.”

To meet that standard, bankers are expected to be available to customers throughout the week. A few years ago, Karen Grahn, the senior vice president who heads ServisFirst’s credit card division, was attending an Auburn University football game on a Saturday. She got a call from the CEO of a correspondent bank customer, saying his daughter was traveling in Europe and her credit card wouldn’t work. Grahn had her laptop with her and solved the problem in five minutes. The daughter had exceeded her credit limit and temporarily got a higher limit, thanks to dad.

Not everyone wants to work for a bank where they’re supposed to respond to customers on a Saturday. “If you don’t want to work hard, it’s not a place for you,” says Brad Milsaps, who until recently covered the stock as an analyst at Piper Sandler. But when asked about whether bankers needed to work hard, several ServisFirst executives clarified that dedication. Nic Balanis, executive vice president, says he spends time with his family. But he doesn’t send automated out-of-office emails to go golfing on Friday afternoon. McBride says his phone rings seven days per week. “I’ve had several [deals] where we do work through Saturday and Sunday to get them done,” he says. “But it’s not a [sweatshop]. To your point, we do it because we like it. We’re doing deals and helping clients, and they don’t forget that.”

In return for high standards for service, good commercial lenders are rewarded. “We’re not on the high end of salaries,” says McBride. “We’re on the high end of year-end incentive pay, based on what you did that year production-wise … Producers get paid.”

Rushing says he doesn’t know how pay scales compare to other banks, but the real reason bankers come to ServisFirst is to take care of customers. “This is the God’s truth, if you’ve ever heard that phrase in the South,” he says. Broughton recruited him more than a decade ago from Compass Bank, telling him if he was looking to leave Compass for the money, it wasn’t going to work. “‘But if you’re looking to come over here to take care of your customers, this is the best place to be,’” Broughton said.

Getting rid of red tape and serving customers is the bank’s unofficial motto. Broughton appears at the center of that culture and makes sales calls himself, encouraging staff to stay “humble and hungry,” Balanis says. “We emulate him quite a bit. We think like him, and it permeates throughout the whole organization.”

Several executives talk about the strong sales focus of the culture, which McBride describes as an “eat what you kill” environment. To reward top performers, the bank assigns them support staff as they grow, rather than taking away their customers and giving them to other bankers when their loan book gets too big.

Despite the advantages, not everyone fits the culture. The executive team regularly has meetings with potential hires, and only about 10% of them are hired, Broughton says.

Rushing explains it this way. “We’ve had a lot of interviews where very early in the interview, the question will be, ‘Do I have to come into the office? How much can I work remote?’ That usually shortens the interview.”

Like a lot of businesses in the South, ServisFirst didn’t allow for much remote work during the early days of the Covid-19 pandemic in 2020. Back-office staff rotated time in the office and at home, with only about one-third in the office at one time. That lasted about two months, Broughton estimates. “We all thought we were going to get Covid from a soup can and die,” he says. Pretty soon, it became clear to him that wasn’t going to happen. He admits the decision to bring people back into the office full-time was controversial. “People said, ‘Tom Broughton was trying to kill me.’”

But for conservative bankers in conservative markets, the formula works.

Of course, another bank with a sales-driven culture and incentives got itself into a lot of trouble with regulators several years ago for fraudulently selling products to consumers — Wells Fargo & Co. ServisFirst, while regulated by the Consumer Financial Protection Bureau because it’s more than $10 billion in assets, doesn’t directly work with a lot of consumers. Consumer loans, for example, made up 0.62% of the bank’s total loans as of March 31, 2023, according to its first quarter earnings report.

The bank’s core customers are owner-operators of small- and mid-sized businesses. With such a simple business model, ServisFirst has always focused on loans and loan growth, and had a 100% loan-to-deposit ratio in the first quarter. Fees make up only about 5% of revenues, according to the analyst Graham Dick.

But does ServisFirst’s model make it particularly vulnerable in today’s environment of high-cost deposits? Will the bank struggle with slower loan growth in the years ahead? That is what investors are asking, according to analysts.

As rates rise, the correspondent division passes those rate increases over to its bank customers, which is making ServisFirst’s cost of funds higher. Only 39% of its deposits were in noninterest-bearing accounts as of June 30, 2023, according to its second quarter earnings report. In fact, the bank expects to have a higher cost of funds than peers because of its lack of a branch network, and focus on commercial customers and correspondent banking. The bank’s strategy is to offset those costs with firm pricing on loan products and lower operating expenses.

And the bank had about $6.9 billion in uninsured deposits out of $11.6 billion as of March 31, although much of that is correspondent banking deposits and municipal deposits, which are collateralized.

D.A. Davidson noted on April 18 that the bank’s loan growth train had slowed as of mid-2022, in part because of payoffs of fixed-rate loans. But the bank hoped to reaccelerate growth in the second half of 2023, taking advantage of in-market mergers and acquisitions to get new loans and growth in markets such as Asheville and Charlotte, in North Carolina, and the Florida towns of Panama City and Tallahassee.

The move to slow down loans has been purposeful. “We have not been as aggressive in our new loan growth,” Rushing says. “But I would tell you we’re getting better pricing today than we were a year ago, much better.”

Meanwhile, the bank made a switch more than a year ago to incentivize bankers to grow deposits. In the second quarter 2023, the pullback in loans helped it reduce its loan-to-deposit ratio to 94.4%, and “management clearly feels more comfortable about both the current economic outlook and funding environment than earlier this year,’’ Dick wrote in a note to investors.

Still, investors punished the stock in the early part of this year. The share price fell 13% year-to-date through July 26. Will ServisFirst’s culture save its performance in the end?

That remains to be seen. The bank has grown earnings per share about 10% every year since 2010, Dick says. This is the first year Piper Sandler modeled an earnings decline for the bank since its IPO in 2014. But the bank has very little in the way of losses in its bond and securities portfolio.

Perhaps its conservative nature will help the bank in the end. And investors haven’t entirely written this bank off their list. Piper expects it to produce a 1.40% return on assets this year and 14.53% return on tangible common equity.

Tough times could translate into market share growth for strong players that can acquire talented commercial lending teams. “The culture, to me, is what makes ServisFirst great,” McBride says. “We have a simple balance sheet … We view times like this, not as difficult, but as an opportunity.”

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