ServisFirst Bancshares share: Strong revenue growth shows in pricing (NYSE: SFBS)

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Earnings of ServisFirst Bancshares, Inc. (NYSE: SFBS) will likely continue to climb this year, driven primarily by strong loan growth. Additionally, a rising interest rate environment and a surplus cash position will provide good opportunities to increase revenue. The other On the other hand, higher provisioning this year compared to last year will limit earnings growth. Overall, I expect ServisFirst to report earnings of $4.52 per share for 2022, up 19% year over year. Compared to my last report on the company, I have upgraded my earnings estimate as I have upgraded my loan growth and margin estimates. The year-end target price suggests a significant decline from the current market price. Based on the expected total return, I maintain a holding rating on ServisFirst Bancshares.

Expansion efforts, regional economies to drive loan growth

ServisFirst Bancshares’ loan portfolio continued to grow strongly during the second quarter of 2022. Loan growth will likely slow for the remainder of the year due to some scheduled construction repayments, as mentioned in the conference call. As a result, loan repayments are expected to accelerate in the third and fourth quarters, which will hamper overall loan growth.

However, management’s expansion efforts will likely keep loan growth afloat. ServisFirst added 15 new bankers in the second quarter of 2022, as mentioned in the conference call. This is the largest hiring ever in a quarter. Additionally, the company recently announced plans to expand into western North Carolina, which will further support loan growth.

In addition, strong labor markets in ServisFirst Bancshares’ regions of operation will likely contribute to loan growth. The company operates in several southeastern states, including Alabama, Florida, Georgia, North Carolina, South Carolina and Tennessee. All of these states currently have stronger labor markets than the national average, indicating good economic activity. This strength in the labor market should translate into loan growth.

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Management mentioned on the conference call that it expects net loan growth of $150,000 per month. Given the factors listed above, I expect the loan portfolio to grow 6% in the second half of 2022, leading to 18% full-year loan growth. In my last ServisFirst report, I estimated loan growth at 13.5%. I raised my loan growth estimate primarily due to the strong second quarter performance.

Meanwhile, other balance sheet items will likely grow more or less in line with lending for the rest of the year. The following table shows my balance sheet estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
Financial situation
Net loans 5,792 6,465 7,185 8,378 9,416 11,128
Net loan growth 19.2% 11.6% 11.1% 16.6% 12.4% 18.2%
Other productive assets 935 1,176 1,217 3,017 5,479 3,263
Deposits 6,092 6,916 7,530 9,976 12,453 12,489
Loans and sub-debts 367 353 535 916 1,776 1,513
Common Equity 607 715 842 992 1,152 1,313
Book value per share ($) 11.2 13.2 15.6 18.3 21.1 24.1
Tangible BVPS ($) 10.9 12.9 15.3 18.0 20.9 23.8

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Excess cash presents a good opportunity

ServisFirst Bancshares’ balance sheet is slightly sensitive to assets as more assets than liabilities will be revalued this year. As mentioned in Filing 10-K, the asset-liability gap stood at 5.87% of interest-earning assets at the end of 2021. (ServisFirst Bancshares did not provide quarterly updates on the spread or rate sensitivity.)

The company’s excess cash position also presents an opportunity for margin expansion. Cash balances declined during the quarter as ServisFirst deployed excess cash into higher yielding assets. However, the cash balance is still high, which means there is still plenty of room to improve the asset mix and increase the margin.

Cash and cash equivalents ServisFirst Bancshares

SEC Filings

Even if ServisFirst is unable to further improve its asset mix, the company may earn higher returns on its cash equivalents due to the upward shift in the short end of the yield curve.

Treasury yield curve

The US Treasury Department

Given these factors, I expect the net interest margin to increase by 20 basis points in the last two quarters of 2022, compared to 3.26% in the second quarter of the year. Compared to my last report on ServisFirst, I have revised my margin estimate upwards.

High level of reserve to help in an environment of higher interest rates

ServisFirst Bancshares non-performing loans represented 0.15% of total loans, while provisions represented 1.21% of total loans at the end of June 2022, as mentioned in the earnings release. Thus, the portfolio’s credit risk appears to be well covered. The last time the federal funds rate was above 2%, i.e. in the third quarter of 2019, non-performing loans represented 0.58% of total loans. Even 0.58% is well covered by the existing allocation level. Therefore, I’m not too concerned that increased interest rates will exponentially increase non-performing loans. ServisFirst’s existing reserves appear large enough to weather the storm without the need for significant reinforcements.

As a result, I expect the provisioning charge to be close to a normal level in the second half of 2022. Combined with the lower than normal provisioning in the first half of the year, the provisioning for the full year of 2022 is likely to be slightly below the historical average. Overall, I expect ServisFirst to report a net provision charge of 0.31% for 2022. In comparison, the net provision charge averaged 0.35% of total loans from 2017 to 2019.

Profits are expected to increase by 19%

Expected loan growth and expanding margins are likely to be the main contributors to higher earnings this year. On the other hand, higher provisioning and operating expenses compared to last year will weigh on earnings. Overall, I expect ServisFirst to report earnings of $4.52 per share for 2022, up 19% year over year. The following table shows my income statement estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 227 263 288 338 385 466
Allowance for loan losses 23 21 23 42 32 35
Non-interest income 17 19 24 30 33 37
Non-interest charges 84 92 102 112 133 161
Net income – Common Sh. 93 137 149 170 208 247
BPA – Diluted ($) 1.72 2.53 2.76 3.13 3.82 4.52

Source: SEC filings, earnings releases, author’s estimates

(In millions of dollars, unless otherwise indicated)

In my last report on ServisFirst, I estimated earnings of $4.27 per share for 2022. I have now revised my earnings estimate upwards as I have increased both my loan growth and my estimates of margin.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, the threat of a recession may increase the provisioning of expected loan losses beyond my expectations. The new Omicron sub-variant should also be watched.

The current market price is above the target price

ServisFirst Bancshares offers a dividend yield of 1.1% at the current quarterly dividend rate of $0.23 per share. Earnings and dividend estimates suggest a payout ratio of 20.3% for 2022, which is close to the five-year average of 19.6%. Therefore, I do not expect an increase in the level of dividends for the next two quarters.

I use historical price/accounting tangible (“P/TB”) and price/earnings (“P/E”) multiples to value ServisFirst Banc shares. The stock has traded at an average P/TB ratio of 2.88x in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Medium
T. Book value per share ($) 10.9 12.9 15.3 18.0 18.7
Average market price ($) 38.0 40.8 33.9 35.7 67.4
Historical P/TB 3.47x 3.16x 2.21x 1.98x 3.61x 2.88x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $23.8 yields a target price of $68.7 for the end of 2022. This price target implies a decline of 15.6% compared to the closing price on July 21. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 2.68x 2.78x 2.88x 2.98x 3.08x
TBVPS – Dec 2022 ($) 23.8 23.8 23.8 23.8 23.8
Target price ($) 64.0 66.3 68.7 71.1 73.5
Market price ($) 81.4 81.4 81.4 81.4 81.4
Up/(down) (21.4)% (18.5)% (15.6)% (12.7)% (9.7)%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 15.9x in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Medium
Earnings per share ($) 1.72 2.53 2.76 3.13 3.82
Average market price ($) 38.0 40.8 33.9 35.7 67.4
Historical PER 22.1x 16.1x 12.3x 11.4x 17.7x 15.9x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple with the expected earnings per share of $4.52 yields a target price of $72.0 for the end of 2022. This price target implies an 11.6% decline from at the closing price on July 21. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 13.9x 14.9x 15.9x 16.9x 17.9x
EPS – 2022 ($) 4.52 4.52 4.52 4.52 4.52
Target price ($) 62.9 67.5 72.0 76.5 81.0
Market price ($) 81.4 81.4 81.4 81.4 81.4
Up/(down) (22.7)% (17.1)% (11.6)% (6.0)% (0.5)%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $70.4, implying a 13.6% decline from the current market price. Adding the forward dividend yield gives an expected total return of minus 12.5%. Therefore, I adopt a holding rating on ServisFirst Bancshares.

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