Headquartered in Birmingham, Alabama, ServisFirst Bancshares, Inc. (NASDAQ:SFBS) is a $11 billion asset holding company and parent to ServisFirst Bank. While technically headquartered in one of the slowest-growing Southeastern cities, SFBS is one of the fastest-growing banks in the country. The bank only has 21 branch locations located throughout Alabama, Florida, Georgia, South Carolina and Tennessee, and it has a very bright future.
While having been founded in 2005, I believe SFBS is setting the course for how the future of regional banking will look. It has a very branch-lite footprint and focuses on commercial relationships in faster-growing Southeastern cities. It has a very clean credit profile and strong net interest margins (NIM).
In my mind, there is little left to wonder on why this bank has already regained its entire COVID-related share price loss earlier in the year. When modeling out the future, I believe the NIM is likely to be stronger than second-quarter levels and future credit problems to be a relative non-event. Driven by these two things, even though it is trading at a significant premium to peers, I find SFBS to be undervalued by about 0.7x turns on price to tangible book value. Putting this into a dollar perspective, I think the current price of $38 clearly undervalues the bank, and its fair value should be closer to $50 per share (or roughly a 30% upside).
The second-quarter net interest income came in at $83.2 million, which marked a $5.6 million increase from the first-quarter levels. While strong by itself, what is more remarkable is that SFBS managed to increase its spread revenue even while the NIM fell from 3.58% in the first quarter to 3.32% in the second quarter (a 26 basis point drop). The bank also closed out the second quarter with $8.3 billion in loans, up from $7.4 billion in the first quarter.
Operating similar to most every other bank, total loan growth was aided significantly by PPP loans being added to the balance sheet. Over the course of the second quarter, SFBS funded over 4,000 PPP loans, which amounted to just over $1 billion in total funds. While this massive growth did help the overall dollars generated from spread revenue, it did cause a 12 basis point headwind on the NIM. Also, similar to other banks, the excess liquidity afforded to SFBS via the PPP loans propped up interest-bearing deposits costs. While not overly detrimental to the bank, the second quarter did see some high levels of liquidity, which is likely to be put to work throughout the third quarter.
While not a very large portion of total revenue, SFBS did see a sizable increase in total noninterest revenue in the second quarter with respect to the first quarter. The second quarter posted $7 million in total fees, up more than $1.2 million from the first-quarter levels. Like many other community and regional banks, mortgage banking fees drove a lot of the linked-quarter upside.
Source: SEC Filings and Author’s Estimates
In my mind, SFBS is a very powerful lender and will likely put its excess liquidity to work rather quickly. Driven by its historically strong loan growth, I am modeling continued growth for the foreseeable future. I would be remiss to not clarify; I believe total loan growth will outpace peers but not historical SFBS trends. Over the near term, the bank has to work through its PPP loan forgiveness headwinds, and it’s rather difficult to find new clients that check all the credit boxes in the middle of a recession.
After reviewing the chart below, SFBS should give investors confidence about being able to weather the economic storm. As on can see, the typical bank experienced about 200 basis points of net charge-offs (NCOs) at the peak of the last recession, while SFBS only felt about 75 basis points worth of pain. While the bank was materially smaller and very selective with clients at that time, the most recent credit trends should provide a bit of solace as to how credit can be incredibly consistent even when growth doubles the pace of peer banks.
Source: SEC Filings
In the second quarter, SFBS had a little more than a $10 million provision expense, which compares to a $13.6 million expense in the first quarter. Remember the provision expense is caused by two things: the amount of total loan growth in the quarter and the change of credit within the loan portfolio. CECL plays a little bit of a factor when determining the credit of the loan portfolio, but the aforementioned two are the only drivers in determining the provision expense.
While peer banks will typically have limited loan growth in a recession, their provision will almost entirely be predicated on credit changes within their respective portfolios.
SFBS on the other hand will likely continue to experience positive loan growth which itself justifies a provision. In my mind, while SFBS is unlikely to see $0 in provision expense for any given quarter (because of loan growth), the linked-quarter decrease from the first quarter into the second quarter provision expense is a positive.
Source: SEC Filings
When reviewing the chart above, one can see that criticized loans (orange bars) have been pretty muted with respect to the past couple years. In my mind, the most important thing to analyze is the black line from the chart above. The black line represents Criticized Loans to Reserves. This ratio represents the total amount of any potentially bad loan relative to the size of the equity cushion via the loan loss reserve.
As many of my readers can recall, my typical bogey for this metric is 2.0x. While not necessary a disqualification in credit soundness, anything above 2.0x warrants a deeper second look, in my mind. Since SFBS has had a very solid credit history and its “black line” is currently at 1.5x, I feel very comfortable with its credit soundness going forward.
It’s pretty rare to find a bank that has everything investors could ask for: limited NCO history, a NIM that is likely to increase, strong tangible book value per share growth, and near-decade-low valuation levels.
In my mind, I think of SFBS as being similar to First Financial Bankshares (NASDAQ:FFIN), but with a more commercial focus. While SFBS’s stock price might not outpace the average bank performance every year, I have a strong sense of confidence in the bank’s long-term future. The bottom line, if you are a potential bank investor looking for a solid, long-term, buy-and-hold bank stock, I would look no further than SFBS.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.