Tom Broughton, CEO of ServisFirst Bank: Successful Banks Keep It Simple

Friday, May 14, 2010
Birmingham Business Journal – by Tom Broughton

                                                      
                                                                                 Tom Broughton, CEO of ServisFirst Bank

The majority of community banks have escaped most of the turmoil that has roiled the banking industry since 2008, and many people have asked me why the crisis hasn’t come to our doorstep.

In my view, there are a few keys to success for a community bank:

• Seasoned management. As in almost every business, there is no substitute for experience. The last decade brought an explosion of new community banks, and many have experienced problems. The common thread is a lack of experienced bank management who have successfully operated a bank in the past.

• Simple investment portfolio. Successful community banks have an investment portfolio any high school graduate could understand. In fixed income investments, if you are offered a high yield, you will always have higher risk. Successful banks have never bought exotic fixed income securities, but rather buy United States government securities and high quality municipal bonds.

• Asset diversity. Any investment professional would explain that proper asset diversity is the key to managing and investment portfolio. The same holds true for a bank’s loan portfolio. Most of the community and regional banks that have experienced problems have loans that are too concentrated in residential construction and development. In fact, most bank failures are due to leans concentrated in this sector. While bank management is never able to predict future problems, proper diversity in the loan portfolio can avoid the problems many banks are currently experiencing.

Bank regulators are demanding that the banking industry reduce lending in the commercial real estate area, which does not bode will for the economy. Many market’s economics are dominated by home building, and these areas, typically high growth, will be slow to recover due to the lack of lending available to the real estate market.

In addition to diversity in types of loans, geographic diversity has proven to be important as well. If a bank had a concentration of loans in one geographic area (like Atlanta), they have suffered greatly. Having a loan portfolio spread throughout several areas has benefited the successful banks.

• Profitability. Many community banks have been profitable, albeit at a reduced level, throughout the current recession. At ServisFirst, we are proud of our 18 consecutive quarters of profitability, and make no apologies for it.

I cringe when I read articles that are critical of profits at investment banking firms like Goldman Sachs, that seem to make the new headlines every week. Profits enable the banking industry to be aggressive in lending. Profits are the best way for a bank to absorb any unforeseen losses in its loan portfolio, which is not good for the markets it serves.

On the funding side, banks or thrifts that advertise high interest rates are typically weak financial institutions that are trying to survive. A review of the failed banks over the past 18 months shows that they were all paying above market rates for deposits. In addition, customers who were attracted to a bank only for interest rates paid on deposits are generally not loyal customers who do most of their business with a bank. If your bank advertises their rates, you should be concerned and inquire into their financial stability.

• Liquidity. The quick and sudden failure of a number of banks and thrifts was partially due to the lack of liquidity in the bank. When a bank becomes financially weak, the largest depositors move their funds before anyone else. This leads to a lack of liquidity and can quickly lead to regulators closing the bank. Reliance on what bankers refer to as “noncore funding” has proven to be dangerous during the current recession.

Most successful banks have a simple business model and try to have core competency in just a few areas, rather than being all things to all people. “The simpler the better” has proven to be successful for many banks in this recession.

Tom Broughton is CEO of ServisFirst Bank in Birmingham. He can be reached at (205) 949-0302.