SFBS - ServisFirst Bancshares: Strong Top-Line Growth Appears Priced In

• Loan growth will likely remain strong in the remainder of the year thanks to expansion efforts and strong regional job markets.
• The rising interest-rate environment will help lift the margin. Further, the excess cash position provides an opportunity to boost the margin.
• Provisioning will likely remain normal during the second half of 2022 despite higher interest rates.
• The December 2022 target price suggests a sizable downside from the current market price. Further, SFBS is offering a low dividend yield.

Earnings of ServisFirst Bancshares, Inc. (SFBS) will likely continue to surge this year mostly on the back of strong loan growth. Further, a rising interest-rate environment and excess cash position will provide good opportunities to boost the topline. On the other hand, higher provisioning this year relative to last year will constrain earnings growth. Overall, I'm expecting ServisFirst to report earnings of $4.52 per share for 2022, up 19% year-over-year. Compared to my last report on the company, I've tweaked upwards my earnings estimate as I've revised upwards both my loan growth and margin estimates. The year-end target price suggests a sizable downside from the current market price. Based on the total expected return, I'm maintaining a hold rating on ServisFirst Bancshares.

Expansion Efforts, Regional Economies to Drive Loan Growth

ServisFirst Bancshares’ loan portfolio continued to grow strongly through the second quarter of 2022. Loan growth will likely slow down in the remainder of the year due to some scheduled construction paydowns, as mentioned in the conference call . As a result, loan payoffs are likely to accelerate in the third and fourth quarters, which will hamper overall loan growth.

However, the management’s expansion efforts will likely keep loan growth afloat. ServisFirst added 15 new bankers in the second quarter of 2022, as mentioned in the conference call. This is the largest ever hiring in a quarter. Moreover, the company has recently announced plans to expand into western North Carolina, which will further support loan growth.

Moreover, strong job markets in ServisFirst Bancshares’ operating regions will likely help loan growth. The company operates in several southeastern states, including Alabama, Florida, Georgia, North Carolina, South Carolina, and Tennessee. All these states currently have a stronger job market than the national average, which indicates good economic activity. This strength in the labor market should translate into loan growth.

The management mentioned in the conference call that it is expecting net loan growth of $150,000 a month. Considering the factors given above, I'm expecting the loan portfolio to grow by 6% in the second half of 2022, leading to full-year loan growth of 18%. In my last report on ServisFirst, I estimated loan growth of 13.5%. I have increased my loan growth estimate mostly due to the second quarter's remarkable performance.

Meanwhile, other balance sheet items will likely grow more or less in line with loans for the remainder of the year. The following table shows my balance sheet estimates.

In my last report on ServisFirst, I estimated earnings of $4.27 per share for 2022. I have now revised upwards my earnings estimate because I've increased both my loan growth and margin estimates.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, the threat of a recession can increase the provisioning for expected loan losses beyond my expectation. The new Omicron subvariant also bears monitoring.

Current Market Price is Above the Target Price

ServisFirst Bancshares is offering a dividend yield of 1.1% at the current quarterly dividend rate of $0.23 per share. The earnings and dividend estimates suggest a payout ratio of 20.3% for 2022, which is close to the five-year average of 19.6%. Therefore, I’m not expecting an increase in the dividend level for the next two quarters.

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 2.88x in the past, as shown below.

The stock has traded at an average P/E ratio of around 15.9x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $70.4 , which implies a 13.6% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 12.5%. Hence, I’m adopting a hold rating on ServisFirst Bancshares.

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