Banking: It's about the relationship

"Small business is the single most profitable segment of the banking market now," says Seamus McMahon, a vice president of consultancy Booz Allen Hamilton.

He adds, "Because their companies generally aren't large enough to employ CFOs, they don't manage money as carefully as the big corporations. They'll park money in low-interest accounts, which banks love. They're wealthy, conservative, and like all their money under one roof. From a banker's perspective, that's a terrific customer."

Broughton believes that small-business banking is all about the relationship. Ted Thomas, 61, is the owner of two companies: Ted's Garage and Specialty Aviation Underwriters, both headquartered in Birmingham. Ted's Garage is a 20,000-square-foot facility used to store and restore classic cars; Specialty Aviation insures high-performance and experimental aircraft. Thomas banks with Broughton because, he says, he was the only banker who took the time to really understand his company. The insurance business is complicated.

"You've got to read a lot of fine print to understand the credit needs of an underwriting company," Thomas says.

Typically, Broughton is on his cellphone with customers or visiting them in their offices from early morning till night. Tall and lean as a whippet, he's perpetually jumpy with nervous energy. He has trekked through coal mines, construction sites, farm fields, factories, and strip clubs chasing down new business. His wingtips are often mud-crusted and paint-spattered.

On a recent day he showed up at MS&R Equipment, a Birmingham coal-mining company, to do some good ol' boy backslapping with owners Randy and Kenny Robinson. Next on the agenda: Broughton attended a funeral for his accountant's mother, who died at 98. She'd made arrangements for her death in 1984, buying a solid-copper casket.

"Sorry for your loss," Broughton said to his accountant, who is also one of the bank's customers. "Does your mama realize she's burying one of her best investments?"

For all its down-home attitude, ServisFirst offers customers lots of technology. One of the most popular services is remote deposit, which lets customers submit checks without running to the bank. Customers scan checks into terminals in their shops or offices and then send them electronically to the bank, where the money is credited to the customers' accounts. Fees for the service are high - $300 a month for the average user - but the service eliminates time-consuming trips to the bank with sacks of checks.

Broughton gives his bankers broad latitude in making loans of as much as $500,000. ServisFirst's median loan is $700,000, and its biggest loan to date was $14 million. There's no loan committee, no computer program to evaluate applications - in fact, no applications. Business owners are required to submit only their company's financials.

"A good banker doesn't sit at his desk waiting for the computer to decide whether to make a loan," Broughton says. "Your banker should know your story, and he's the one who makes the case for your loan - to me."

To be sure, not every small business that asks for a loan gets one - Broughton has to either believe in you or like your collateral. And questions loom. Will ServisFirst will be able to maintain its high level of service as it grows larger? Will the economic slowdown hurt its business?

Also, in the wake of the real estate meltdown, federal regulators have been clamping down on banks, forcing them to tighten their lending standards. Could this hamper Broughton's lending practices?

No way, he argues, pointing out that most of the banks under scrutiny lent heavily for real estate, a strategy that ServisFirst eschewed.

Broughton's guidelines on collateral are, let us say, fluid. For startups, the bank's only security may be the entrepreneur's reputation.

"We'll take a chance on a new business, but we're not crazy," Broughton says. "We're looking for you to win at your first rodeo." Broughton lists some of the factors involved in granting a loan: "Your character, your daddy's character, your granddaddy's character, your track record in business, your wife's spending habits, your ex-wife's spending habits, and whether you go to church on Sunday."

Take the case of Kelly Conklin. The graphic artist wanted to paint custom camouflage on all-terrain vehicles. Hunters, he figured, would love them. Armed with little more than a business plan and a hunch, he asked Broughton for a loan of $150,000.

"I went to the big banks, and they were going to handcuff me with rules," he recalls. Broughton says the Conklin loan wasn't particularly risky, considering what he knew about Conklin. Says Broughton: "I had met his boss. He was one of the biggest S.O.B.s in Alabama, but a brilliant businessman. Conklin was so enthusiastic that I knew he'd make it work. Besides, a company selling camouflage to rednecks? You can't miss with that idea."

Conklin's Conversion Technologies (see the December 2007 issue of FSB) raked in $5 million in sales in 2007. "Opportunities come and go while you're filling out the paperwork at the big banks," Conklin says. "Tom looks at the numbers, and he decides that day."

Another decision Broughton made was to require all potential investors in ServisFirst to move their companies' deposits and loans to the new bank before they could buy the stock. That strategy helped build a sturdy foundation of core deposits for the bank. Other startup banks typically raise capital with a combination of brokered deposits and certificates of deposit, which is costly. ServisFirst's first 325 shareholders are all customers who have every incentive to refer friends to the bank.

Their initial investment has appreciated handsomely so far. ServisFirst's private stock sold for $10 in the months before the bank opened its doors in 2005. Today a share is worth $25. 

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