Market price

ServisFirst Bancshares: earnings outlook is priced high in the market (NYSE: SFBS)

relif/iStock via Getty Images

Result of ServisFirst Bancshares, Inc. (NYSE: SFBS) will most likely continue to grow strongly this year in a rising interest rate environment. In addition, loan growth prospects remain favorable thanks to strong economic growth in ServisFirst’s markets. Overall I’m expects the company to report earnings of $4.27 per share, up 11.8% year-over-year. Compared to my last report on ServisFirst, I have revised my earnings estimate upwards due to an upward revision to net interest margin and non-interest income, and a revision lower operating expenses. The year-end target price is below the current market price. Based on the expected total return and growth prospects, I adopt a hold rating on ServisFirst Banc shares.

Strong loan growth momentum set to continue

ServisFirst Bancshares’ loan portfolio exceeded my expectations by growing at a remarkable pace of 3.9% in the first quarter of 2022, or 15% on an annualized basis. Going forward, the strong loan growth momentum will likely continue due to the economic strength in the company’s markets. Management sees no sign of recession on the ground despite high oil prices and hawkish monetary policy, as inferred from discussions on the first quarter conference call. Management believes that its borrowers are in better shape than ever. In addition, management is particularly bullish on the commercial and industrial (“C&I”) and commercial real estate (“CRE”) segments.

ServisFirst Bancshares operates in several southeastern states, including Alabama, Georgia, Tennessee and Florida. This region experienced strong GDP growth in the last quarter of 2021, according to official sources. Additionally, the unemployment rate in these states fared better than the national average. The strength of the regional economy bodes well for loan growth in the coming year.

Additionally, there is potential for loan growth through better utilization of margins. The use of lines of credit has recently improved, but remains below the historical average. As mentioned on the conference call, line utilization is currently around 41%, up from the pandemic low of 38%. The current level is still well below the historical norm of 47% to 48%.

The upcoming cancellation of Paycheck Protection Program (“PPP”) loans may put some pressure on loan growth. PPP loans outstanding were $107.6 million at the end of March 2022, or 1.1% of total loans, according to details given in the first quarter earnings release.

Given these factors, I expect the loan portfolio to grow by 13.5% by the end of 2022 compared to the end of 2021. Additionally, I expect growth loans outpaces deposit growth. 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 10,686
Net loan growth 19.2% 11.6% 11.1% 16.6% 12.4% 13.5%
Other productive assets 935 1,176 1,217 3,017 5,479 5,270
Deposits 6,092 6,916 7,530 9,976 12,453 13,559
Loans and sub-debts 367 353 535 916 1,776 1,808
Common Equity 607 715 842 992 1,152 1,310
Book value per share ($) 11.2 13.2 15.6 18.3 21.1 24.0
Tangible BVPS ($) 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)

Sensitivity of assets to help margin increase as interest rates rise

Non-interest bearing deposits represented 39% of total deposits at the end of the last quarter, making the average cost of deposits stable on the rise in a rising interest rate environment. Partly because of the composition of deposits, more assets than liabilities will be revalued this year. According to the details given in the latest 10-K filing, the asset-liability gap stood at $874.9 million at the end of December 2021, which is 5.87% of total interest-earning assets.

ServisFirst Bancshares also has plenty of excess cash on its books, giving the company the ability to quickly shift its asset mix to benefit from rate hikes. Cash and cash equivalents jumped to $3.4 billion at the end of March 2022, from $2.8 billion at the end of March 2021. These cash and cash equivalents represented 21% of total assets at the end of the last quarter .

Given these factors, I expect the margin to increase by 12 basis points in the last three quarters of 2022, compared to 2.89% in the first quarter of 2022. In my latest report on ServisFirst Bancshares, I estimated the margin to be generally stable in 2022. I have revised my margin expectation upwards due to economic reports since my last SFBS report was published, which have made my stance on monetary policy more hawkish .

Standardization of future provision expenses

The planned loan additions discussed above will require additional provision for expected loan losses in the coming year. I also expect provision reversals as the current loan loss reserves look somewhat excessive. Provisions represented 1.21% of total loans, while non-performing loans represented 0.20% of total loans at the end of March 2022, according to details given in the earnings release.

Overall, I expect provisions, net of reversals, to return to normal levels this year. Management also mentioned on the conference call that it expects credit performance to return to pre-pandemic levels. Therefore, I expect net provision charges to be approximately 0.35% of total loans in 2022, which is the same as the average ratio of provision charges to total loans from 2017 to 2019 .

Earnings estimate revised up to $4.27 per share

In my last report on ServisFirst Bancshares, I estimated earnings of $3.98 per share for 2022. I have now decided to revise my earnings estimate upwards due to the upward revision to the net margin of ‘interest. Additionally, I have decided to lower my estimate of non-interest expense as ServisFirst Bancshares showed greater cost discipline than expected in the first quarter. Additionally, I have slightly revised the non-interest revenue estimate upwards as ServisFirst managed to surprise me with strong core non-interest revenue growth in the first quarter of 2022. It is evident that I have underestimated the abilities of management before.

Overall, I expect ServisFirst Bancshares to post earnings of $4.27 per share in 2022, up 11.8% year-over-year. Strong loan growth and expanding margins are likely to drive earnings growth this year. In the meantime, I expect the efficiency rate to remain somewhat stable as it is already quite low at just 32.7%, which leaves little room for improvement. The following table shows my income statement estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 227 263 288 338 385 448
Allowance for loan losses 23 21 23 42 32 38
Non-interest income 17 19 24 30 33 37
Non-interest charges 84 92 102 112 133 157
Net income – Common Sh. 93 137 149 170 208 233
BPA – Diluted ($) 1.72 2.53 2.76 3.13 3.82 4.27

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

(In millions of dollars, unless otherwise indicated)

Actual earnings may differ materially from estimates due to risks and uncertainties related to the COVID-19 pandemic and the timing and magnitude of interest rate increases.

Current market price above year-end target price

ServisFirst Bancshares offers a dividend yield of 1.05% at the current quarterly dividend of $0.23 per share. Earnings and dividend estimates suggest a payout ratio of 21.6% 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 remainder of 2022.

I use historical price/tangible accounting (“P/TB”) and price/earnings (“P/E”) multiples to evaluate ServisFirst. 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 $23.80 yields a target price of $68.60 for the end of 2022. This price target implies a decline of 21.5% compared to the April 19 closing price. 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 ($) 23.8 23.8 23.8 23.8 23.8
Target price ($) 63.8 66.2 68.6 70.9 73.3
Market price ($) 87.3 87.3 87.3 87.3 87.3
Up/(down) (26.9)% (24.2)% (21.5)% (18.7)% (16.0)%
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 by the expected earnings per share of $4.27 yields a target price of $67.90 for the end of 2022. This price target implies a decline of 22.2% from at the April 19 closing price. 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 ($) 4.27 4.27 4.27 4.27 4.27
Target price ($) 59.4 63.6 67.9 72.2 76.4
Market price ($) 87.3 87.3 87.3 87.3 87.3
Up/(down) (32.0)% (27.1)% (22.2)% (17.3)% (12.5)%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $68.20, implying a 21.8% drop from the current market price. Adding the forward dividend yield gives an expected total return of minus 20.8%.

While the expected total return warrants a sell rating, such a rating is inappropriate for ServisFirst given the prospects of a strong balance sheet and bottom line growth. Therefore, I maintain a holding rating on ServisFirst Bancshares.