SFBS - ServisFirst Bancshares: Flattish Earnings Outlook Unattractive Valuation

2023-12-26 14:27:30 ET

Summary

• I’ve reduced my ServisFirst Bancshares, Inc. earnings estimate for 2023, as both loan growth and the net interest margin have missed my previous expectations.
• The anticipated change in interest-rate trend will be beneficial for the net interest margin.
• Loan growth should improve soon because the macroeconomic environment is conducive for it.
• The December 2024 target price suggests a small upside from the current market price. Further, ServisFirst Bancshares, Inc. is offering a low dividend yield.

Earnings of ServisFirst Bancshares, Inc. ( 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.

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.

The stock has traded at an average P/E ratio of around 14.8x in the past, as shown below.

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.

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