Navigating Loan Headwinds Amid Growth Prospects In Memphis And Auburn

Key Takeaways

• Loan demand might be impacted by overbuilding in commercial real estate and uncertainties over future Federal Reserve rate actions.
  
• Expected higher loan losses and potential fluctuations in municipal deposits could challenge consistent revenue and earnings growth.
  
• Strong loan growth, higher rates, stable credit quality, disciplined deposit pricing, and market expansion signal promising potential for future revenue and earnings growth.

Catalysts

Operates as the bank holding company for ServisFirst Bank that provides various banking services to individual and corporate customers.

• Loan demand may face headwinds from overbuilding in commercial real estate and uncertainty around Federal Reserve rate cuts, which could affect future revenue growth.
  
• The bank anticipates higher loan losses in the future, which could negatively impact net margins and earnings.
  
• Repricing of fixed rate loans and securities is currently enhancing net interest margins, but as rates decrease, this benefit could diminish over time, potentially impacting earnings.
  
• Increased loan pricing discipline may limit revenue growth if competitors maintain stricter pricing strategies.
  
• Potential fluctuations in municipal deposits and constraints around hospitality sector loans may create challenges for maintaining consistent revenue and earnings growth.

ServisFirst Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ServisFirst Bancshares's revenue will grow by 20.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 47.8% today to 51.9% in 3 years time.
• Analysts expect earnings to reach $383.2 million (and earnings per share of $6.98) by about November 2027, up from $204.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $287 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2027 earnings, down from 25.6x today. This future PE is greater than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

ServisFirst Bancshares Future Earnings Per Share Growth

Risks

• Strong loan growth in the second quarter, coupled with a robust loan pipeline, suggests potential for future revenue increases, as indicated by anticipated fourth-quarter growth.
  
• Continued repricing of loans and securities at higher rates is expected to enhance their net interest margin, positively impacting net margins and earnings in the coming years.
  
• The bank's credit quality has been strong with minimal charge-offs and increased loan loss reserves, implying stable future earnings through controlled credit risk.
  
• Disciplined deposit pricing and a shift away from broker deposits or federal home loan advances could help manage funding costs and sustain profit margins.
  
• Market expansions in new areas such as Memphis and Auburn, with the hiring of additional bankers, are likely to support long-term revenue growth.

Valuation

• The analysts have a consensus price target of $85.0 for ServisFirst Bancshares based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $738.4 million, earnings will come to $383.2 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $95.9, the analyst's price target of $85.0 is 12.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.