ServisFirst: Prospects for loan growth come with strong stock price (NYSE: SFBS)

0

panida wijitpanya/iStock via Getty Images

Profits for ServisFirst Bancshares, Inc. (NYSE: SFBS) are likely to rise this year, primarily due to strong loan growth prospects. The team’s recent expansion and the recovery of the economy will likely boost loan growth. Meanwhile, the margin is likely to remain flat as pricing pressure will likely offset the impact of the higher interest rate environment. Furthermore, provisioning is likely to remain virtually unchanged this year. Overall, I expect ServisFirst to report earnings of $3.98 per share in 2022, up 4.4% year-over-year. The current market price is well above the year-end target price. Based on the positive earnings outlook and negative expected return, I adopt a hold rating on ServisFirst Bancshares.

Remarkable loan growth will continue through 2022

ServisFirst’s loan portfolio saw remarkable 8.2% quarter-over-quarter growth in the fourth quarter of 2021. Some of the loan growth came from recent new hires in Florida, as mentioned at the conference telephone. Moreover, the falling returns of winning assets through 2021 show that ServisFirst has resorted to competitive pricing to gain market share.

Despite the jump in loans in the fourth quarter, the pipeline at the end of December 2021 was still 47% higher than the period a year ago, as mentioned in the conference call. The robustness of the pipeline bodes well for the outlook for near-term loan growth. The longer term outlook is also positive due to the economic recovery, particularly in Florida. Management was particularly positive about the growth in construction line runs and commercial and industrial line usage this year, as mentioned on the conference call. Additionally, the team’s recent expansion will continue to pay off well into 2022.

On the other hand, the upcoming cancellation of the remaining Paycheck Protection Program (“PPP”) loans will likely have a slight negative effect on the total size of the loan portfolio. As mentioned in the earnings release, outstanding PPP loans stood at $230.2 million at the end of December 2021, or 2.4% of total loans. Therefore, the discount will likely have a small but significant impact on the total size of the loan portfolio.

Management’s goal is to record $1.2 billion in loan growth for 2022. This goal seems achievable given that loans grew by $720 million in the last quarter. Overall, I expect the loan portfolio to grow by $1.19 billion in 2022, or 12.6% year-over-year. As in normal times, deposits will likely grow at the same rate as loans. 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 10,598
Net loan growth 19.2% 11.6% 11.1% 16.6% 12.4% 12.6%
Other productive assets 935 1,176 1,217 3,017 5,479 5,931
Deposits 6,092 6,916 7,530 9,976 12,453 14,016
Loans and sub-debts 367 353 535 916 1,776 1,923
Common equity 607 715 842 992 1,152 1,317
Book value per share ($) 11.2 13.2 15.6 18.3 21.1 24.2
Tangible BVPS ($) 10.9 12.9 15.3 18.0 20.9 23.9

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Conflicting factors to keep the margin stable

ServisFirst’s net interest margin contracted sharply to 2.71% in the fourth quarter of 2021, from 3.20% in the first quarter of 2021. Some of the pressure on margins was attributable to competitive pricing. Also, excess cash on ServisFirst’s books is a big problem. The company’s cash and cash equivalents jumped to $4.2 billion at the end of December 2021, from $2.2 billion at the end of December 2020. These cash equivalents now represent 27% of total assets.

As I expect deposits to grow in line with lending, excess liquidity will likely remain elevated through 2022. Nonetheless, even if ServisFirst fails to shift its asset mix, it can still benefit the recent movement in the yield curve which was caused by the monetary tightening in the country. The following graph shows the current yield curve in blue as well as historical yield curves.

In addition, the margin can benefit from the rising interest rate environment. Third-party asset-liability modeling shows that a 100 basis point increase in interest rate can increase net interest income by 6.2% year-over-year, provided other factors remain static , as mentioned in the conference call. However, if ServisFirst continues to price competitively, the net interest margin may not benefit much from a rate hike.

Due to the conflicting factors mentioned above, I expect the net interest margin to remain broadly stable through 2022.

High level of existing reserves to allow moderate supply this year

ServisFirst’s provisioning for loan losses remained at a normal level last year. I expect the provisioning percentage of loans to decrease this year compared to 2021, as the provisioning looks excessively high. Provisions were 1.2% of total loans at the end of last quarter, as mentioned in the earnings release. By comparison, non-performing loans represented only 0.13% of total loans at the end of December 2021. Moreover, net write-offs represented only 0.03% of average loans during the last quarter.

Provisioning averaged 0.33% of total loans from 2016 to 2021, excluding 2020. For 2022, I expect a lower provision-to-loan expense ratio of 0.30% .

Expect revenue to increase by 4%

Strong double-digit loan growth is likely to be the main driver of earnings this year. During this time, the effect of changes in margin and provision expense will likely remain negligible. On the other hand, non-interest income is likely to decline in 2022 as higher interest rates dampen mortgage refinance activity. Overall, I expect ServisFirst to report earnings of $3.98 per share in 2022, up 4% year over year. The following table shows my income statement estimates.

Actual earnings may differ materially from estimates due to risks and uncertainties related to the COVID-19 pandemic, particularly the Omicron variant.

EX17 EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 227 263 288 338 385 445
Allowance for loan losses 23 21 23 42 32 32
Non-interest income 17 19 24 30 33 30
Non-interest charges 84 92 102 112 133 168
Net income – Common Sh. 93 137 149 170 208 217
BPA – Diluted ($) 1.72 2.53 2.76 3.13 3.82 3.98

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

(In millions of dollars, unless otherwise indicated)

ServisFirst appears overvalued

Based on the earnings outlook, I expect ServisFirst to continue its tradition of increasing dividends in the last quarter of the year. As a result, I expect the company to increase its dividend by $0.02 per share in Q4 2022, resulting in a full year dividend of $0.94 per share. This dividend estimate suggests a dividend yield of just 1.1%, using the January 27 closing price.

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

EX17 EX18 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 by the expected tangible book value per share of $23.90 yields a target price of $69.10 for the end of 2022. This price target implies a decline of 16.9% compared to the closing price on January 27. 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 ($) 23.9 23.9 23.9 23.9 23.9
Target price ($) 64.3 66.7 69.1 71.4 73.8
Market price ($) 83.1 83.1 83.1 83.1 83.1
Up/(down) (22.7)% (19.8)% (16.9)% (14.0)% (11.2)%
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 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 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 $3.98 yields a target price of $63.40 for the end of 2022. This price target implies a decline of 23.7% from at the closing price on January 27. 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 ($) 3.98 3.98 3.98 3.98 3.98
Target price ($) 55.4 59.4 63.4 67.4 71.4
Market price ($) 83.1 83.1 83.1 83.1 83.1
Up/(down) (33.3)% (28.5)% (23.7)% (18.9)% (14.1)%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods results in a combined target price of $66.20, implying a 20.3% decline from the current market price. Adding the forward dividend yield gives an expected total return of minus 19.2%.

Significant negative performance calls for a sell rating. However, a short position is inappropriate for ServisFirst due to the positive earnings outlook and strong balance sheet growth outlook. Accordingly, I am adopting a Hold rating on the company.

Share.

About Author

Comments are closed.