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Should You Be Concerned About ServisFirst Bancshares, Inc.’s (NASDAQ:SFBS) Risks?

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Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$1.9b, ServisFirst Bancshares, Inc.’s (NASDAQ:SFBS) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off ServisFirst Bancshares’s bottom line. Today we will analyse ServisFirst Bancshares’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.

See our latest analysis for ServisFirst Bancshares

NASDAQGS:SFBS Historical Debt February 19th 19
NASDAQGS:SFBS Historical Debt February 19th 19

How Good Is ServisFirst Bancshares At Forecasting Its Risks?

The ability for ServisFirst Bancshares to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. Given its large bad loan to bad debt ratio of 247.03%, ServisFirst Bancshares excessively over-provisioned by 147.03% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.

What Is An Appropriate Level Of Risk?

If ServisFirst Bancshares does not engage in overly risky lending practices, it is considered to be in good financial shape. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts ServisFirst Bancshares’s bottom line. The bank’s bad debt only makes up a very small 0.42% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.

How Big Is ServisFirst Bancshares’s Safety Net?

Handing Money Transparent
Handing Money Transparent

ServisFirst Bancshares operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given the relatively stable interest rate and amount available. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. ServisFirst Bancshares’s total deposit level of 95% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.

Next Steps:

The recent acquisition is expected to bring more opportunities for SFBS, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. I’ve bookmarked SFBS’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:

  1. Future Outlook: What are well-informed industry analysts predicting for SFBS’s future growth? Take a look at our free research report of analyst consensus for SFBS’s outlook.

  2. Valuation: What is SFBS worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether SFBS is currently mispriced by the market.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.

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