Dynamic Growth And Critical Moves Propel Future Earnings And Market Position

Key Takeaways

• Robust loan and deposit growth, combined with balance sheet optimization, is expected to enhance interest income and strengthen earnings growth.
  
• Focus on specialized, higher-margin lending and digital banking initiatives may improve net interest margins and operational efficiency.
  
• Declining net interest margin and increased expenses could pressure earnings, with late loan growth and rate cuts potentially affecting revenue and net income.

Catalysts

Provides various banking products and services to small to mid-sized businesses and individuals.

• First Bank experienced robust loan and deposit growth in Q3 2024, with loans growing by nearly $90 million and deposits by $82 million. This momentum is expected to enhance interest income and strengthen the bank's earnings growth trajectory as these balances mature and contribute more significantly in the upcoming quarters.
  
• The company is optimizing its balance sheet by selling low-yielding investment securities and restructuring BOLI assets, leading to a yield improvement. These actions are strategized to potentially stabilize and enrich the net interest margin, thereby supporting future earnings growth.
  
• First Bank's specialized lending areas, particularly commercial and industrial (C&I) loans and owner-occupied segments, showed strong growth. This focus is likely to improve the profit mix and yield better net margins due to the higher-margin nature of these loans.
  
• Deposit growth was especially strong in noninterest-bearing accounts, contributing positively to the bank's net interest margin. The ability to manage deposit pricing prudently even in a competitive environment suggests potential margin improvements as lower-rate deposits are repriced, impacting future profitability positively.
  
• The completion of online account opening as part of its digital banking initiative could boost deposit growth and reduce operating costs, enhancing revenue while potentially improving net margins through improved operational efficiency.

First Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Bank's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.5% today to 27.8% in 3 years time.
• Analysts expect earnings to reach $40.3 million (and earnings per share of $1.63) by about October 2027, up from $40.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2027 earnings, up from 8.9x today. This future PE is greater than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to decline by 0.57% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.33%, as per the Simply Wall St company report.

First Bank Future Earnings Per Share Growth

Risks

• The late timing of loan growth in the third quarter may not contribute significantly to interest income for the period, potentially affecting revenue recognition and net income.
  
• The net interest margin declined during the quarter due to increased deposit costs, higher average borrowings, and lower loan yields, suggesting pressure on earnings.
  
• A significant portion of growth is attributed to late-quarter activity, leading to credit loss expenses outpacing interest income, which could negatively affect net margins.
  
• Interest income could be adversely impacted by the Federal Reserve's recent rate cut, reducing potential earnings on existing loans while deposit repricing might lag.
  
• Noninterest expenses increased due to a write-down of an OREO asset, contributing to potentially higher operating costs and affecting net income.

Valuation

• The analysts have a consensus price target of $17.67 for First Bank 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 $144.9 million, earnings will come to $40.3 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $14.2, the analyst's price target of $17.67 is 19.6% 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.