ServisFirst Bancshares: Earnings Outlook Comes At A High Market Price (NYSE:SFBS)

Earnings of ServisFirst Bancshares, Inc. (NYSE:SFBS) will most probably continue to grow strongly this year amid a rising interest-rate environment. Further, the loan growth outlook remains rosy on the back of strong economic growth in ServisFirst’s markets. Overall, I’m expecting 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 upward my earnings estimate due to an upward revision in the net interest margin and non-interest income, and a downward revision in operating expenses. The year-end target price is below the current market price. Based on the total expected return and the growth outlook, I’m adopting a hold rating on ServisFirst Bancshares.

Strong Loan Growth Momentum Likely to Continue

The loan portfolio of ServisFirst Bancshares beat my expectations by growing at a remarkable rate of 3.9% in the first quarter of 2022, or 15% annualized. Going forward, the strong loan growth momentum will likely continue because of economic strength in the company’s markets. Management doesn’t see any signs of a recession on the ground despite the high oil prices and a hawkish monetary policy, as inferred from the discussion in the first quarter’s conference call. Management believes that its borrowers are in better shape now than ever. Further, management is especially optimistic about the commercial and industrial (“C&I”) and commercial real estate (“CRE”) segments.

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

Moreover, there is an opportunity for loan growth through better line utilization. Credit line utilization has improved recently but it’s still below the historical average. As mentioned in the conference call, line utilization currently stands at about 41%, up from the pandemic low of 38%. The current level is still much below the historical norm of 47% to 48%.

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

Considering these factors, I’m expecting the loan portfolio to increase by 13.5% by the end of 2022 from the end of 2021. Further, I’m expecting loan growth to outpace deposit growth. The following table shows my balance sheet estimates.

	FY17	FY18	FY19	FY20	FY21	FY22E
Financial Position
Net Loans	5,792	6,465	7,185	8,378	9,416	10,686
Growth of Net Loans	19.2%	11.6%	11.1%	16.6%	12.4%	13.5%
Other Earning 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
Borrowings and Sub-Debt	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 USD million unless otherwise specified)

Asset Sensitivity to Help the Margin Expand as Interest Rates Increase

Non-interest-bearing deposits made up a whopping 39% of total deposits at the end of the last quarter, which makes the average deposit cost upwardly sticky in a rising interest-rate environment. Partly because of the deposit mix, more assets than liabilities will re-price this year. According to details given in the latest 10-K filing, the asset-liability gap totaled $874.9 million at the end of December 2021, which translates to 5.87% of total interest-earning assets.

ServisFirst Bancshares also has a lot of excess cash on its books, which provides the company the opportunity to quickly change its asset mix to benefit from rate hikes. Cash and cash equivalents surged 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 made up a whopping 21% of total assets at the end of the last quarter.

Considering these factors, I’m expecting the margin to increase by 12 basis points in the last three quarters of 2022 from 2.89% in the first quarter of 2022. In my last report on ServisFirst Bancshares, I estimated the margin to be mostly stable in 2022. I have revised upward my margin expectation because of the economic reports released since the issuance of my last report on SFBS, which has turned my stance on the monetary policy more hawkish.

Provision Expense Normalization Ahead

The anticipated loan additions discussed above will require further provisioning for expected loan losses in the year ahead. I’m also expecting some provision reversals as the current reserves for loan losses appear somewhat excessive. Allowances made up 1.21% of total loans, while non-performing loans made up 0.20% of total loans at the end of March 2022, according to details given in the earnings release.

Overall, I’m expecting the provision expense, net of reversals, to return to a normal level this year. Management also mentioned in the conference call that it expected credit performance to return to the pre-pandemic level. Consequently, I’m expecting the net provision expense to make up around 0.35% of total loans in 2022, which is the same as the average provision-expense-to-total-loan ratio from 2017 to 2019.

Revising up the Earnings Estimate 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 upwards my earnings estimate because of the upward revision in the net interest margin. Further, I have decided to decrease my estimate for non-interest expenses as ServisFirst Bancshares showed more cost discipline than I expected in the first quarter. Moreover, I have slightly tweaked upwards the non-interest income estimate as ServisFirst managed to surprise me with strong core non-interest income growth in the first quarter of 2022. It is obvious that I underestimated management’s capabilities before.

Overall, I’m expecting ServisFirst Bancshares to report earnings of $4.27 per share in 2022, up 11.8% year-over-year. Strong loan growth and margin expansion will likely drive the increase in earnings this year. Meanwhile, I’m expecting the efficiency ratio to remain somewhat stable as it is already quite low at just 32.7%, which leaves barely any room for improvement. The following table shows my income statement estimates.

	FY17	FY18	FY19	FY20	FY21	FY22E
Income Statement
Net interest income	227	263	288	338	385	448
Provision for loan losses	23	21	23	42	32	38
Non-interest income	17	19	24	30	33	37
Non-interest expense	84	92	102	112	133	157
Net income – Common Sh.	93	137	149	170	208	233
EPS – Diluted ($)	1.72	2.53	2.76	3.13	3.82	4.27
Source: SEC Filings, Earnings Releases, Author’s Estimates (In USD millions unless otherwise specified)

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

Current Market Price Above the Year-End Target Price

ServisFirst Bancshares is offering a dividend yield of 1.05% at the current quarterly dividend of $0.23 per share. The 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’m not expecting an increase in the dividend level in the remainder of 2022.

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

	FY17	FY18	FY19	FY20	FY21	Average
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 with the forecast tangible book value per share of $23.80 gives a target price of $68.60 for the end of 2022. This price target implies a 21.5% downside from the April 19 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple	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
Upside/(Downside)	(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.

	FY17	FY18	FY19	FY20	FY21	Average
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 P/E	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 forecast earnings per share of $4.27 gives a target price of $67.90 for the end of 2022. This price target implies a 22.2% downside from the April 19 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple	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
Upside/(Downside)	(32.0)%	(27.1)%	(22.2)%	(17.3)%	(12.5)%
Source: Author’s Estimates

Equally weighting the target prices from the two valuation methods gives a combined target price of $68.20, which implies a 21.8% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 20.8%.

Although the total expected return justifies a sell rating, such a rating is inappropriate for ServisFirst given the outlook of a strong balance sheet and net income growth. Therefore, I’m maintaining a hold rating on ServisFirst Bancshares.