Description

ServisFirst is an Alabama bank with a 16% ROE trading at 2x tangible book and 13x run-rate P/E. SFBS has one of the industry’s best loan and deposit growth profiles.

The net interest margin troughed at 2.67% in Q3 following one final repricing in deposit costs and a temporary pause in loan growth. I believe profitability will expand from here to >3.5% within 2 years, resulting in sustainable 20-25% ROEs. The TBV and P/E multiples are very likely to expand if that financial forecast proves correct. The bank is targeting >4% NIM eventually.

SFBS is the dominant local C&I bank in Alabama metros for privately owned businesses with $2-250m sales. Organic core deposit growth has been excellent YTD and double-digit over the last decade, despite a minimalist branch footprint. The efficiency ratio is best-in-class at <40%. 

SFBS pays higher rates on deposits than many of the best regional banking franchises (72% interest-bearing beta this cycle) but earns comparable NIMs because it doesn’t use any FHLB funding or wholesale deposits. The securities book duration is short without any buried HTM problems. The balance sheet is asset-sensitive going forward because the majority of loans are variable rate, with new production yields at 8.25% and accelerating demand from borrowers. Yet the financial performance was strong during the ZIRP era as well.

Loan growth has also averaged >10% long-term. SMB customers prefer higher-touch personal banking relationships over the bureaucracy of a larger Wells or Regions type. In total, the Alabama banking market is less competitive than other states, in part because the state’s depositors took significant losses in the Wachovia failure and seem to mistrust larger NYC/Atlanta institutions more than other southerners. SFBS has 9% total deposit share in Birmingham and 11% in Huntsville. Another growth lever is that ServisFirst recently began expanding into several out-of-state southeastern markets such as Asheville through de novo branches by poaching good local banking teams from larger competitors. 

Founder/CEO Tom Broughton owns $40m of shares. Several other board members have stayed on since the bank’s 2005 inception, including a retired metals recycler with $70m. Broughton has compiled an excellent personal track record since founding his first bank at age 28 (First Commercial), which he sold to Synovus before successfully running their Alabama branches for >20 years. He left SNV because of bureaucratic headaches and then set up ServisFirst to minimize the distractions for commercial banking producers and customers. 68 years young, I don’t believe Tom will retire any time soon or sell the bank. ServisFirst avoids M&A itself because Broughton, from personal experience, believes that acquisitions instill institutional mediocrity into banks. 

Non-performing loans and charge-offs have been historically low in recent years and quarters for SFBS, as well as every other bank. As a rule, C&I loan losses are more idiosyncratic than CRE credits and less systemically sensitive to higher rates. In its early days, SFBS sailed through the financial crisis with <60 bps peak annual charge-offs. Bankers can lose 100% of their personal bonuses if their portfolios record >10 bps of net charge-offs in any year, one of the strictest metrics I’ve ever heard about for the industry.

Yes, there are cheaper banks out there today. You would not want to own most of them as the credit cycle turns or for multiple years.  

Catalyst

Higher NIM and ROE, loan growth