Servisfirst Bancshares, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Servisfirst Bancshares Inc. is a bank holding company providing commercial and retail banking, insurance, and other financial services in the Southeast US, known for its high-touch relationship banking model.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Servisfirst Bancshares Inc. (SFBS) operates as a bank holding company that provides a range of financial services primarily in the Southeast US, particularly in Alabama, Florida, Georgia, South Carolina, and Tennessee. It focuses on a high-touch relationship banking model, emphasizing personalized service for its clientele. The company’s operations span traditional banking services as well as insurance and other financial products, primarily targeting businesses and affluent individuals.

  • Revenues Distribution: SFBS generates revenue mainly through three principal lines of business:

    • Interest Income: A substantial portion of the bank’s revenue is derived from interest earned on loans and other lending activities. This is further influenced by fluctuations in interest rates and is dependent on overall economic conditions.
    • Fees and Commissions: Income generated from banking services such as account maintenance, loan origination, and wealth management. As customer preference shifts towards digital banking, the revenue composition may change.
    • Other Income: Includes any other non-interest related earnings, such as net gains from investment securities, service charges on checking accounts, and other miscellaneous sources of income.

  • Trends in the Industry: The banking industry is currently experiencing significant change due to the increasing interest rate environment, evolving technological innovations, and changing consumer preferences. Digital banking, while enhancing convenience for customers, also poses challenges for branch-heavy models of operation. Additionally, increased regulatory oversight, competition from non-traditional financial players, and a potential slowdown in lending activity are key factors to monitor.

  • Margins: The company’s net interest margin, which is essentially the difference between the interest it earns on loans and pays on deposits, is a key indicator of profitability. A higher margin means the bank makes more profit on its lending activities, but is subject to interest rate risks. Furthermore, operating costs are affected by factors like employee compensation, IT expenses, and compliance costs.

  • Competitive Landscape: SFBS competes with a diverse set of financial institutions including national and regional banks, credit unions, insurance companies, and non-bank financial providers. Competition is mostly based on the following three points: pricing, customer service, and breadth of offerings. Regional banks like SFBS will try to compete with their better customer service but will also face strong pricing pressure from larger and more cost efficient players.

  • What Makes SFBS Different: SFBS differentiates itself primarily through a high-touch, high-service model. Unlike larger, national players who often focus on digital or transaction-based banking, SFBS focuses on building and cultivating client relationships through personalized service, fast decision making and readily accessible executives. The focus on personal relationship and quality of service is further underlined through the large number of branch offices and the relatively small client size and volume.

Financial Analysis

SFBS’s financials have shown a generally upward trend, but with some important points to note. They have seen an increase in deposits and have managed to improve their net interest margin, which is a strong sign for a bank. Revenue is expected to increase mainly from the growth in their core markets and interest rate hikes. But there are areas of concerns such as increasing operating expenses that has been caused by higher wages to attract and retain talent. Also loan defaults and credit quality have become a greater concern.

  • Income Statement:
    • SFBS has generally been able to grow its net interest income, which is the primary driver of its earnings, steadily over the past few years. Net Interest income for year-end 2022 was reported at $368.8 million which decreased to $318.9 million for 2023, and this is because of increasing competition for customer funds which has reduced the net interest margin.
    • They have had a decent track record of managing their operating expenses but those seem to be slowly increasing as they expand their reach and add new branches.
    • They had a net income of $152.9 million for the year ended December 2023, compared to $267 million for 2022. The reduction in net income is mainly due to the increasing cost of funds and the reduced interest rate margin.
    • They had a solid return on assets (ROA) of 1.7% for the year ended December 2023 compared to 2.6% for 2022. However, the ROA is not expected to remain at this level in 2024 due to pressure on lending rates.
    • Earnings per share (EPS) has come down to $4.02 for the year ended December 2023 compared to $6.15 in 2022.
  • Balance Sheet:
    • SFBS has been able to increase its total assets to about $16.2 billion as of December 2023. This asset base is dominated by loans with $11 billion followed by investment securities with $2.9 billion.
    • Deposits form the vast majority of funding for the company as they are a primary tool for raising capital. The company’s deposits also grew from $10.6 billion in 2022 to $12.1 billion as of December 2023.
    • Loans are largely concentrated in commercial, financial, and agricultural loans, which can increase the credit risk during an economic downturn. The company also has exposure to real-estate loans and consumer loans.
    • Stockholders’ Equity reached $1.5 billion as of December 2023 due to retained earnings from the business.
  • Cash Flow Statement:
    • SFBS’s cash flow from operations is positive and healthy for all reporting periods, which is expected for a bank. They have reported $617 million in cash flow from operations for 2023 compared to $1068 million in 2022. The bank has a good record of having consistent positive cash flow that can be used to meet long and short term liabilities.
    • They have had increased investments over time to fuel growth in the business by opening new branches and offering more loans.
    • They have had to increase debt and equity funding to support business growth.
  • Capitalization:
    • The company had 25,573,073 outstanding common shares as of December 31, 2022, which increased to 30,460,939 as of December 31, 2023.
    • The company’s total market capitalization was approximately $1.6 billion as of December 2023.

Moat Assessment

SFBS’s primary source of moat is from switching costs created by a high touch personalized approach and building deep relationships with their customers, which is difficult to replicate. But the high concentration on only a few geographical areas makes their moat vulnerable. Overall, SFBS does not have a very strong moat when compared to other businesses.

  • Moat Rating: 3 / 5

    • Justification:

    • Narrow Moat: SFBS benefits from modest competitive advantages in specific regions through established customer relations and high-touch banking services, resulting in a narrow moat. Their high-touch business model which is reliant on personal relationship building gives them an edge over competition that focuses on providing services online or in digital form. However, they have no unique product and their services can be replicated by other banks and financial institutions. Furthermore, their dependence on physical branch networks exposes them to intense competition from online and larger banks that focus on cutting costs. The limited geographic diversity also hurts their ability to expand or shield from competitive pressure.

  • Legitimate Risks that Could Harm the Moat
    • Increased Competition: Competition from large national banks with their better technologies and lower cost base can affect their market share, especially in the digital age. Additionally, new entrants to the financial sector, like online lenders and fintechs, can take away SFBS’s customers.
    • Technology Disruption: The rapid pace of technological advancement might render SFBS’s brick-and-mortar model less competitive. Customers might start preferring digital banking solutions instead of in-person banking, where SFBS gets its edge.
    • Regulatory Changes: Changes in banking regulations, especially regarding capital requirements or lending practices, could negatively impact SFBS’s profitability and growth. This will also affect their ability to attract and retain capital.
    • Economic Downturn: Changes in the economic climate, such as a regional or national recession, can result in increased loan defaults, decreased deposit volumes, and reduced loan demand. A higher interest rate environment can lead to higher defaults as well if the client’s borrowing rates are unable to sustain their cashflows.
    • Credit Risks: The company is exposed to credit risks due to its focus on loans, which includes real estate, commercial and construction loans. A prolonged downturn might increase the risk of defaults and lead to lower profitability. Also, increasing delinquencies and defaults will lead to higher provisions that will hurt their bottom line.
    • Changes in Customer Demands: SFBS has to stay ahead of customer preferences and should offer services demanded by new customer base. Any slowdown or poor execution in this area can result in reduced customer loyalty and churn.
  • Business Resilience: While SFBS’s high-touch banking model provides a competitive advantage by fostering customer loyalty, this model may be vulnerable to market and technological changes. The company has to invest significantly in technology to retain customers and increase its growth in areas beyond core geographies. Diversifying their geographical reach will also be beneficial for the company to reduce the risk in reliance on particular market.

Understandability Assessment

SFBS is in the banking business and provides various financial services, but its complex accounting metrics and balance sheet and sensitivity to interest rate risk make the business difficult for the average investor to fully grasp.

  • Understandability Rating: 2 / 5
    • Justification: The basic business model of SFBS as a bank is easy to understand. However, digging into their numbers is much more complicated.
      • Their accounting can get complex quickly due to issues such as loan classification, credit quality measurements, allowance for loan losses, goodwill and intangibles accounting, and more. Also, since SFBS is a bank, it is much more subject to changes in interest rates and the macro economic environment compared to other types of companies.
      • An understanding of the financial statements of banks and other financial institutions often needs special knowledge and experience to understand the numbers and to properly evaluate the business.
      • There are also several aspects of the business that an outside analyst can never be completely aware of as it relates to regulations and management’s perspective.

Balance Sheet Health Assessment

SFBS has shown good ability to grow both its asset and liabilities. But they have not been able to generate profits according to their risk. This implies that they are having trouble in managing their loan quality and/or their revenue generation is very slow when compared to the growth in their asset base. In this environment, SFBS should focus on improving profitability and lowering their liability risk.

  • Balance Sheet Health Rating: 4 / 5
    • Justification:
      • SFBS has a strong asset base with total assets of more than $16 billion as of Dec 2023, with the majority composed of loans. They have increased total assets by $1.8 billion from last year.
      • They have consistently grown their deposit base from 10.6 billion to 12.1 billion this year. Deposits are their largest liability. The high percentage of deposits to assets shows good investor confidence in the bank. This growth in deposits also reflects an increased consumer demand for SFBS’s services.
      • There has been an increase in net loans to $11.2 billion from $9.3 billion last year which shows an appetite to lend and a willingness to grow their balance sheet.
      • They have shown a strong growth in book value from $29.24 to $37.15 over the past two years, a strong indication of value creation.
    • There has been a significant increase in the total debt. Long term debt has increased to 710 million in December 2023 from $175 million in 2022. This is primarily due to a decrease in the banks cash flows because of increased interest rate. * The company has a tier 1 risk based capital of 13% which is well above the regulatory requirement of 10%. The company is very unlikely to face regulatory restrictions due to low capital levels and they should continue to maintain such levels of capital. * The company has shown a slight decrease in their assets/liabilities ratio. While they have enough capital to cover for their liabilities, some of their liabilities are from long term debt which may be dangerous if not effectively managed. * The company’s liquidity position looks good. Their liquidity ratio has increased from 77% in 2020 to 86% in 2022. Their cash levels are also relatively high, which gives them enough leeway for investment and operational purposes.

Recent Concerns and Management Outlook

SFBS has been affected by reduced net interest margins due to increasing interest rates and competition for deposits. The increasing cost of hiring and retaining talent and higher loan losses has put pressure on their profits.

  • Recent Concerns: In recent earnings calls, management has noted concerns about the impact of the higher interest rates on loan defaults, higher operating expenses, and slow loan growth. They highlighted the increase in provisioning for credit losses due to deterioration in the loan market. They also mentioned the increase in non-performing loans and higher risk classified assets, which indicates that their loan book is facing stress. They highlighted the decreasing yield on loan assets, and increasing interest expense on deposits and borrowings due to increasing interest rates as some key points that are impacting profitability.

  • Management Outlook: Management’s guidance has been that they are focused on mitigating the rising funding costs by repricing deposits, as they are committed to keeping their deposit base and minimizing outflows. Additionally, they also highlighted the increased focus on lending to stronger customers, who will provide increased profitability. The management also stated that they are seeing an increase in the number of new client relationships, and they expect this to lead to future growth. They also expect the rising interest rates to affect their financial performance, as well as a possible recessionary climate. Finally, they noted that their high capital ratios will protect them against any further economic downturn.