ServisFirst Bancshares, Inc. (NYSE:SFBS) is a bank holding company based in Birmingham, Alabama that provides a range of commercial and personal banking services through its wholly-owned subsidiary, ServisFirst Bank. Over the past two decades, ServisFirst has established itself as a well-capitalized, high-performing community bank, weathering various economic cycles and emerging as a trusted financial institution in its markets.
Founded in 2005, ServisFirst Bank was launched with a mission to provide exceptional service and customized solutions to small and medium-sized businesses, professionals, and affluent individuals. The bank's founder and CEO, Tom Broughton, had a vision to build a customer-centric organization that would challenge the status quo in the banking industry. Starting with just 19 employees and a single branch in Birmingham, ServisFirst has since expanded its footprint across the Southeastern United States, currently operating 21 full-service banking offices in Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee, and Virginia.
Financials
ServisFirst's financial performance has been consistently strong, with the company reporting annual net income of $206.85 million and annual revenue of $426.51 million in 2023. The bank's net interest margin, a key metric reflecting the profitability of its lending activities, has remained elevated at 2.73% as of the end of 2023. Additionally, ServisFirst has maintained a robust capital position, with a Tier 1 capital ratio of 11.38% and a total risk-based capital ratio of 12.52% as of December 31, 2023, well above the regulatory requirements for a "well-capitalized" institution.
The company's credit quality has also been a standout, with nonperforming assets to total assets ratio of just 0.19% as of the end of 2023. ServisFirst's proactive risk management and conservative underwriting standards have enabled the bank to navigate various economic cycles, including the COVID-19 pandemic, without significant deterioration in asset quality. In the third quarter of 2024, the bank's annualized net charge-off ratio stood at a mere 0.09%, showcasing its ability to maintain disciplined loan portfolio management.
ServisFirst's diversified business model has been another key factor in its success. The bank's revenue streams are well-balanced, with interest income from loans accounting for approximately 80% of total revenue, and noninterest income, primarily from deposit service charges, mortgage banking, and credit card activities, contributing the remaining 20%. This diversification has helped the bank withstand pressure on net interest margins due to the Federal Reserve's interest rate hikes.
In the most recent quarter, ServisFirst reported revenue of $256.43 million, net income of $59.91 million, operating cash flow of $48.25 million, and free cash flow of $47.21 million. Year-over-year, revenue increased by 7%, net income grew by 12%, while operating cash flow and free cash flow decreased by 2% and 3% respectively. The increase in revenue was primarily driven by growth in net interest income, up 4.5% year-over-year, as well as strong performance in non-interest income, up 19% year-over-year. The decrease in operating cash flow and free cash flow was due to higher operating expenses as the company continued to invest in growth initiatives.
Growth Strategy
The company's growth strategy has primarily centered on organic expansion, with strategic hires of experienced bankers to establish a presence in new markets. ServisFirst has a proven track record of successfully integrating new teams and building out de novo branches, as evidenced by the bank's expansion into markets such as Memphis, Tennessee, and Auburn, Alabama in recent years. These new markets have contributed to the bank's robust loan growth, which reached 5.80% year-over-year as of the third quarter of 2024.
ServisFirst's loan portfolio is diversified across various segments, with real estate loans comprising the largest portion. As of June 30, 2024, the loan portfolio consisted of 23.80% commercial, financial, and agricultural loans; 12.25% real estate construction loans; 19.46% owner-occupied commercial real estate mortgage loans; 10.95% 1-4 family real estate mortgage loans; 33.03% other real estate mortgage loans; and 0.52% consumer loans. The total loan portfolio stood at $12.33 billion, an increase of $674 million or 5.8% from December 31, 2023.
One area of concern for ServisFirst has been the impact of the COVID-19 pandemic on certain sectors of its loan portfolio, particularly hospitality and real estate development. However, the bank's proactive approach to risk management and its willingness to work closely with affected borrowers have helped mitigate the pandemic's impact. In the third quarter of 2024, ServisFirst reported a special reserve of $2.7 million related to the effects of Hurricane Helena, demonstrating the bank's commitment to supporting its communities during challenging times.
Risks and Outlook
Looking ahead, ServisFirst faces a range of risks and uncertainties, including the potential for rising loan losses in the event of an economic downturn, increased competition from larger regional and national banks, and the ongoing regulatory compliance challenges faced by the banking industry. The company's ability to navigate these headwinds will be crucial in maintaining its strong financial performance and market position.
Despite these challenges, ServisFirst's track record of prudent risk management, strong capital position, and customer-centric business model position the bank well for continued success. As the banking industry evolves, ServisFirst's commitment to providing personalized service, innovative solutions, and a deep understanding of its local markets will likely remain key differentiators in the years to come.
Liquidity
ServisFirst maintains a strong liquidity position, with a debt-to-equity ratio of 0.045 as of the most recent quarter. The company held $2.13 billion in cash and cash equivalents, with an additional $2.15 billion in available funding from the Federal Reserve Bank of Atlanta and $2.88 billion in available funding from the FHLB. ServisFirst also has $547 million in available unused federal funds lines of credit. The bank's current ratio and quick ratio both stand at 1.16, indicating a healthy short-term liquidity position.
The company's growth has been marked by several significant milestones. In 2008, ServisFirst completed its initial public offering, which provided crucial capital to fuel the bank's expansion. This influx of capital allowed the company to continue opening new banking offices and expanding its geographic footprint throughout the Southeast. However, this rapid growth presented challenges, particularly in terms of professionalizing back-office operations and ensuring the necessary infrastructure was in place to support the expanding business.
In 2017, ServisFirst faced a significant hurdle when it experienced back-office turnover. The company addressed this issue by bringing on Kirk Pressley as CFO in June 2023. Pressley played a key role in streamlining the bank's back-office operations and preparing the organization for continued growth. Later in 2023, when longtime CFO Bud Foshee retired, Pressley seamlessly transitioned into the CFO role, ensuring continuity in the company's financial leadership.
Today, ServisFirst Bancshares operates with 155 frontline commercial and private banking professionals across its regional banking franchise. The company's growth is evident in its quarterly expenses, which now stand at around $45 million, reflecting the scale and complexity of the organization. This significant increase from its initial 19 employees demonstrates ServisFirst's successful navigation of various challenges throughout its history to become a highly profitable regional bank serving communities across the Southeast.
Looking forward, ServisFirst expects loan demand to rebound in the fourth quarter of 2024, though they remain cautious about projecting it to be as strong as the second quarter. The bank is seeing more rational pricing from competitors on deposits, with CD rates coming down from around 5% to 4.25% in recent weeks. With over $300 million in CDs maturing in Q4 at yields around 4.85%-5%, ServisFirst has an opportunity to reduce funding costs. The bank expects its core quarterly expenses to be no more than $45 million going forward and projects an effective tax rate of around 19% in Q4.
Overall, ServisFirst Bancshares appears well-positioned to continue its growth trajectory, leveraging its strong market position, diversified loan portfolio, and prudent financial management to navigate the evolving banking landscape.