New Markets And Asset Repricing Will Drive US Banking Progress

Key Takeaways

• Strong loan growth and asset repricing opportunities suggest potential future revenue expansion and improved net interest margins.
  
• Strategic market expansion and effective deposit management could drive future revenue growth and sustain earnings despite economic uncertainties.
  
• Rising nonperforming assets and increased charge-offs pose risks to asset quality and earnings, amid high deposit costs potentially compressing net interest margins.

Catalysts

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

• ServisFirst Bancshares has shown strong loan growth with a 9% annualized increase and a 10% rise in the loan pipeline, suggesting potential future revenue expansion and increased net interest income.
  
• The company is actively expanding into new markets by adding 4 new producers and planning discussions for further market entries, which could drive future revenue growth.
  
• The bank anticipates significant asset repricing over the next 12 months, with $1.9 billion in asset repricing opportunities, potentially improving net interest margins and boosting earnings.
  
• ServisFirst is managing deposit growth effectively, with strong first-quarter performance and strategies to maintain liquidity levels, which could favorably impact net interest income and margins as the balance sheet normalizes.
  
• The bank maintains strong credit quality with a focus on high-performing businesses, indicating sustainable earnings growth and potential for higher net margins despite current economic uncertainties.

ServisFirst Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ServisFirst Bancshares's revenue will grow by 18.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 50.4% today to 48.9% in 3 years time.
• Analysts expect earnings to reach $385.5 million (and earnings per share of $7.03) by about April 2028, up from $240.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, down from 16.4x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

ServisFirst Bancshares Future Earnings Per Share Growth

Risks

• The allowance for loan and lease losses (ALLL) decreased slightly from 1.30% to 1.28% despite loan growth, which could impact the bank’s ability to cover potential loan defaults, potentially affecting net margins and overall earnings.
  
• Nonperforming assets (NPAs) increased, with 70% of the increase related to two specific relationships, which may pose a risk to asset quality and future earnings if these NPAs are not resolved efficiently.
  
• High deposit growth, particularly in municipal and correspondent deposits, is expected to normalize, potentially affecting the bank's liquidity and future margin stability.
  
• The cost of interest-bearing deposits is relatively high at 3.42%, influenced by higher-cost municipal and correspondent deposits, which could compress net interest margins if not managed effectively.
  
• Increased charge-offs at an annualized rate of 19 basis points, higher than previous quarters, could negatively impact earnings if this trend continues or worsens.

Valuation

• The analysts have a consensus price target of $82.0 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 2028, revenues will be $788.9 million, earnings will come to $385.5 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 6.2%.
• Given the current share price of $72.2, the analyst price target of $82.0 is 12.0% higher.
• 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.