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Earnings of ServisFirst Bancshares, Inc. (NYSE:SFBS) will likely be flattish to slightly higher next year. The declining margin trend will likely turn around soon, which will help earnings. Further, subdued loan growth will support earnings. Overall, I’m expecting the company to report earnings of $3.97 per share for 2023 and $4.04 per share for 2024. Compared to my last report on the company, I’ve reduced my earnings estimate, as both loan growth and the net interest margin have been lower than my expectations in the first nine months of this year. Next year’s target price is quite close to the current market price. Based on the total expected return, I’m maintaining a hold rating on ServisFirst Bancshares.
Loan Growth to Improve but Stay Below the Historical Average
Loan growth has been really disappointing so far this year. The loan portfolio has declined by 0.5% in the first nine months of the year, which is especially disappointing as ServisFirst has managed to achieve double-digit loan growth in the last five years. In my last report on the company, which was issued before the first quarter’s results, I had anticipated loan growth to fall to high-single digits this year.
The management mentioned in the third quarter’s conference call that it expects loans to increase in the fourth quarter as it has put in an “extra incentive.” Another factor that can help loan growth is the strong labor market. ServisFirst operates in the states of Alabama, Florida, Georgia, North and South Carolina, Tennessee, and Virginia. Although the unemployment rates of these states have risen in recent months, they are still quite low when compared to previous years.
The management mentioned in the conference call that it did not plan to add to its headcount, which is why I’ve decided to keep my expectations of loan growth low. Overall, I’m expecting the company to report loan growth of 1% in the fourth quarter of 2023, taking full-year growth to 0.5%. For 2024, I’m expecting a loan growth of 4%. Moreover, I’m expecting other balance sheet items to grow more or less in line with loans. The following table shows my balance sheet estimates.
| Financial Position | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
| Net Loans | 7,185 | 8,378 | 9,416 | 11,542 | 11,604 | 12,075 |
| Growth of Net Loans | 11.1% | 16.6% | 12.4% | 22.6% | 0.5% | 4.1% |
| Other Earning Assets | 1,217 | 3,017 | 5,479 | 2,396 | 3,887 | 4,045 |
| Deposits | 7,530 | 9,976 | 12,453 | 11,547 | 13,274 | 13,813 |
| Borrowings and Sub-Debt | 535 | 916 | 1,776 | 1,684 | 1,449 | 1,508 |
| Common equity | 842 | 992 | 1,152 | 1,297 | 1,436 | 1,591 |
| Book Value Per Share ($) | 15.6 | 18.3 | 21.1 | 23.8 | 26.3 | 29.2 |
| Tangible BVPS ($) | 15.3 | 18.0 | 20.9 | 23.5 | 26.1 | 28.9 |
| Source: SEC Filings, Earnings Releases, Author’s Estimates (In USD millions unless otherwise specified). | ||||||
Favorable Interest Rate Outlook for the Margin
ServisFirst Bancshares’ net interest margin has plunged by a massive 88 basis points over the first nine months of 2023. Just like loan growth, the net interest margin was much below my previous expectations. A major reason for the margin’s decline was a significant continuous deterioration of the deposit mix. Non-interest-bearing deposits shrank to 19.9% of total deposits by the end of September from a high of 39.8% at the end of June 2022.
SEC Filings
There is a chance that the margin will bottom out soon since the up-interest-rate cycle has ended. What’s more, there’s a good chance that the Fed funds rate will start declining by the mid of next year. As per the results of the management’s rate-sensitivity analysis (shown below and taken from November’s presentation), the margin next year could benefit from this year’s rate hikes. Further, the margin could benefit from next year’s rate cuts.
November Presentation
Moreover, the production of new loans will support the margin in the fourth quarter of this year and first quarter of next year (before any interest rate cuts). This is because ServisFirst was issuing new loans at rates of around 8.35% in September, as mentioned in the conference call. This rate is much higher than the average loan portfolio yield of 6.13% for the third quarter of 2023; therefore, the new rate will bring up the average.
Considering these factors, I’m expecting the net interest margin to be somewhat stable in the last quarter of 2023 and then rise by 10 basis points in 2024.
Expecting Earnings to Trend Slightly Upwards
After the disappointing second and third quarter’s results, I’m expecting earnings to start trending gently upwards in upcoming quarters. Both loan growth and a slight margin expansion will help the earnings. Overall, I’m expecting the company to report earnings of $0.95 per share for the last quarter of 2023, which will take full-year earnings to $3.97 per share. For 2024, I’m expecting earnings of $4.04 per share. The following table shows my income statement estimates.
| Income Statement | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
| Net interest income | 288 | 338 | 385 | 471 | 413 | 434 |
| Provision for loan losses | 23 | 42 | 32 | 38 | 20 | 20 |
| Non-interest income | 24 | 30 | 33 | 33 | 31 | 33 |
| Non-interest expense | 102 | 112 | 133 | 158 | 162 | 179 |
| Net income – Common Sh. | 149 | 170 | 208 | 251 | 216 | 220 |
| EPS – Diluted ($) | 2.76 | 3.13 | 3.82 | 4.61 | 3.97 | 4.04 |
| Source: SEC Filings, Earnings Releases, Author’s Estimates (In USD millions unless otherwise specified). | ||||||
In my last report on the company, which was released before the first quarter’s results, I projected earnings of $4.60 per share for 2023. I have significantly slashed my earnings estimate for 2023 because both the loan growth and the margin have been much below my expectations for the first nine months of the year.
Risks Appear to be Moderate
The major source of risk for ServisFirst Bancshares is the large balance of uninsured deposits. As mentioned in the 10-Q filing, uninsured and uncollateralized deposits amounted to $8.5 billion, representing a massive 65% of the total deposit book.
Other sources of risk are not problematic. Firstly, the geographical risk is quite low as ServisFirst operates across several states in the Southern and Eastern parts of the U.S. Additionally, unrealized losses are manageable. As ServisFirst’s investment securities portfolio is limited in size, the unrealized mark-to-market losses on it are also quite low. As of the end of September 2023, these unrealized losses amounted to $98 million, which is around just 7% of the total equity book.
Maintaining a Hold Rating
ServisFirst Bancshares is offering a dividend yield of 1.8% at the current quarterly dividend rate of $0.30 per share. The earnings and dividend estimates suggest a payout ratio of 30% for 2024, which is above the five-year average of 22% but still easily sustainable. Therefore, I’m not expecting any change in the dividend level.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value ServisFirst Bancshares. The stock has traded at an average P/TB ratio of 2.82x in the past, as shown below.
| FY19 | FY20 | FY21 | FY22 | Average | ||
| T. Book Value per Share ($) | 15.3 | 18.0 | 18.7 | 23.5 | ||
| Average Market Price ($) | 33.9 | 35.7 | 67.4 | 81.9 | ||
| Historical P/TB | 2.21x | 1.98x | 3.61x | 3.48x | 2.82x | |
| Source: Company Financials, Yahoo Finance, Author’s Estimates. | ||||||
Multiplying the average P/TB multiple with the forecast tangible book value per share of $28.9 gives a target price of $81.5 for the end of 2024. This price target implies a 20.6% upside from the December 22 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
| P/TB Multiple | 2.62x | 2.72x | 2.82x | 2.92x | 3.02x |
| TBVPS – Dec 2024 ($) | 28.9 | 28.9 | 28.9 | 28.9 | 28.9 |
| Target Price ($) | 75.7 | 78.6 | 81.5 | 84.4 | 87.3 |
| Market Price ($) | 67.6 | 67.6 | 67.6 | 67.6 | 67.6 |
| Upside/(Downside) | 12.0% | 16.3% | 20.6% | 24.9% | 29.1% |
| Source: Author’s Estimates. |
The stock has traded at an average P/E ratio of around 14.8x in the past, as shown below.
| FY19 | FY20 | FY21 | FY22 | Average | ||
| Earnings per Share ($) | 2.76 | 3.13 | 3.82 | 4.61 | ||
| Average Market Price ($) | 33.9 | 35.7 | 67.4 | 81.9 | ||
| Historical P/E | 12.3x | 11.4x | 17.7x | 17.8x | 14.8x | |
| Source: Company Financials, Yahoo Finance, Author’s Estimates. | ||||||
Multiplying the average P/E multiple with the forecast earnings per share of $4.04 gives a target price of $59.7 for the end of 2024. This price target implies an 11.8% downside from the December 22 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
| P/E Multiple | 12.8x | 13.8x | 14.8x | 15.8x | 16.8x |
| EPS – 2024 ($) | 4.04 | 4.04 | 4.04 | 4.04 | 4.04 |
| Target Price ($) | 51.6 | 55.6 | 59.7 | 63.7 | 67.7 |
| Market Price ($) | 67.6 | 67.6 | 67.6 | 67.6 | 67.6 |
| Upside/(Downside) | (23.7)% | (17.7)% | (11.8)% | (5.8)% | 0.2% |
| Source: Author’s Estimates. |
Equally weighting the target prices from the two valuation methods for ServisFirst Bancshares, Inc. gives a combined target price of $70.6, which implies a 4.4% upside from the current market price. Adding the forward dividend yield gives a total expected return of 6.2%. Hence, I’m maintaining a hold rating on ServisFirst Bancshares.
