2023-07-21 09:09:09 ET
Summary
- ServisFirst Bancshares has demonstrated robust financial performance, surpassing earnings per share and revenue expectations, and showing strategic adaptability to economic shifts.
- Despite economic uncertainties, the bank has a strong balance sheet, an impressive loan-to-deposit ratio, and no broker deposits or Federal Home Loan Bank advances.
- While the bank's financial health is strong, a potential slowdown in loan demand and margin compression warrant cautious observation; the stock is currently undervalued according to its price-to-earnings ratio.
Thesis
In this article, I dive into an analysis of ServisFirst Bancshares, Inc. ( SFBS ), a prominent banking institution that continues to show resilience and growth despite prevailing economic uncertainties. With its Q2 2023 Earnings Per Share ((EPS)) of $0.98 surpassing expectations by $0.09 and revenue of $109.83 million, beating the forecast by $3.90 million, ServisFirst exhibits a robust financial performance. I argue that the bank's ability to adapt strategically to the shifting economic landscape, as evidenced by its loan-to-deposit ratio, absence of broker deposits, and emphasis on loan repricing, places it in a favorable position.
Company Overview
ServisFirst Bancshares, Inc., headquartered in Birmingham, Alabama, operates as the parent company for ServisFirst Bank and offers an extensive suite of banking services for both individual and corporate clients.
They offer commercial lending products such as seasonal, bridge, and term loans for business capital expansion and property acquisition beyond its Alabama base, extending from branches across Florida, Georgia, and Tennessee. Additionally, the commercial real estate loan segment of ServisFirst, coupled with its residential real estate loans and development-centric construction loans, underscores the bank's significant concentration on the real estate market.
ServisFirst Bancshares' Q2 2023 Earnings Highlights
In the wake of their recent earnings call , ServisFirst Bancshares finds itself in a position of enviable strength. Their robust balance sheet stands tall, fortified by an impressive surge in core deposits and an admirable loan-to-deposit ratio standing at 85% with no broker deposits or Federal Home Loan Bank advances on their books.
Another impressive indication of their financial health is their cache of cash and short-term treasuries that has scaled the $1 billion mark, which underscores the bank's strategic prudence in handling their affairs. They have also set their sights on an innovative focus on loan repricing, a tactic poised to boost their margins in the coming quarters.
Furthermore, the bank's Correspondent Division unfurled a banner of growth and stability over the quarter. Their network of active correspondent relationships expanded to a notable 360 banks, with an accompanying surge in total fundings to a commendable $1.84 billion. Further enhancing their geographic footprint, the bank has been forging inroads into markets such as Texas and Kentucky. They've also boosted their credit card revenue by bringing six new correspondent agent banks into their fold.
The bank's credit quality, too, stands on a solid ground. They have successfully inflated their Allowance for Loan and Lease Losses (ALLL) to 1.31% of total loans, a beacon of solvency in an uncertain economic climate. The bank appears to be managing the slowdown in loan demand, and the declining past due to total loans - now standing at a mere 15 basis points - bears testimony to their credit management acumen.
Rounding off their performance, they've managed to strike a delicate balance between controlling headcount and operating expenses, and fostering 20% year-over-year growth in new accounts. As a result, they expect an uptick in non-interest income, powered by burgeoning credit card and mortgage sectors.
Expectations
ServisFirst Bancshares is covered by four Wall Street analysts who have a unanimous " Hold " rating on the company coupled with flat expectations for its stock price performance.
Performance
Looking at the numbers, it's clear that ServisFirst Bancshares has demonstrated a strong performance over the medium-term (past seven-plus years). The increase in share price from USD 23.77 to USD 48.44 represents a growth story that most investors, I assume, would be pleased with.
Regarding its dividend performance, an average growth rate of 37.28% over seven years is nothing to scoff at either and a clear indication that the company is both able and willing to consistently return capital to shareholders. This is reinforced by the compound growth rate of 34.59% for the same period.
But here's where I have some reservations: The annualized rate of return (ROR) without dividends for SFBS, at 9.89%, is lower than the benchmark S&P Index's 11.13%. This suggests that, although SFBS has shown solid growth, it may not be the best choice for investors solely seeking capital appreciation.
Valuation
The key takeaway here is that the blended price-to-earnings (P/E) ratio stands at 11.5x (see chart below). Compare this to the average (or normal) P/E ratio of 17.7x, and it suggests that ServisFirst Bancshares is being undervalued by the market.
Moreover, the fact that the bank has a substantial EPS yield of 8.7% indicates a strong profitability rate, which is something that I find encouraging, and this high EPS yield, coupled with an adjusted operating earnings growth rate of 13.66%, is indicative of solid earnings growth potential.
Risks & Headwinds
Firstly, we're seeing a concerning slowdown in loan demand. The trend has been noticeable over the last few months, and it is a dynamic that, should it persist, could take a toll on the bank's revenue and growth potential. Why? Simply put, the main profit engine for a bank is its lending activity - when that decreases, so too does the revenue. This could be a reflection of broader economic concerns, or perhaps specific factors pertaining to ServisFirst's loan portfolio and marketing strategy. If this trend continues, it may necessitate a pivot in the bank's strategic approach to drive up loan demand.
Secondly, the bank is grappling with margin compression - a classic conundrum for the banking sector. Even though they're forecasting margin stability and potential improvement in the upcoming quarters, it's clear the current compression is placing stress on their profitability. Their net interest margin, the difference between the interest income generated by the bank and the amount of interest paid out to their lenders, is shrinking. This squeeze could signal competitive pressures, changes in their loan mix, or broader interest rate dynamics.
Next, let's consider the bank's loan growth, which currently lies flat despite the strength of their balance sheet and their deposit growth. This disconnect is concerning. The bank's ability to transform deposits into loans, thereby generating income, is a critical competency in banking. Without a resurgence in loan demand, we could witness a damper on the bank's revenue growth prospects.
Finally, another specter looming over ServisFirst is the potential FDIC special assessment. They're anticipating an impact on their 2023 results, albeit modestly. However, the very uncertainty of this assessment could introduce an element of short-term volatility in the stock. This type of unforeseen financial obligation can affect investor sentiment, triggering fluctuation in the stock price.
Final Takeaway
Based on the strong financial health demonstrated by ServisFirst Bancshares, including their impressive loan-to-deposit ratio, balance sheet, and proactive credit management, I'd rate the stock a "buy." However, the potential slowdown in loan demand and the issue of margin compression warrant cautious observation. Coupling these factors with a seemingly undervalued price-to-earnings ratio, it suggests an opportunity for investors to capitalize on a potentially undervalued stock that holds strong fundamentals, despite the noted risks and headwinds.
For further details see:
ServisFirst Bancshares Q2 Earnings: Surpassing Expectations And Positioning For Growth