Expansion Into Fintech Partnerships And New Business Lines Expected To Improve Future Profitability

Key Takeaways

• Diversification into new business lines and fintech partnerships is set to enhance revenue and attract low-cost deposits.
  
• Technology investments and balanced loan strategies aim to improve cost efficiencies and sustain earnings growth.
  
• New business ventures and regulatory challenges, along with external factors and rising costs, could pressure First Bank's future revenue and net margins.

Catalysts

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

• First Bank's expansion into new business lines such as private equity sponsor banking, asset-based lending, and small business loans is expected to drive future revenue growth with minimal additional expenses, which should improve net margins.
  
• The anticipated launch of the Banking as a Service unit and fintech partnerships is poised to increase fee income and attract low-cost deposits, enhancing overall earnings potential.
  
• Strategic focus on lowering CRE (commercial real estate) concentrations and shifting towards higher-margin C&I (commercial and industrial) lending could positively impact net interest margins and return on assets.
  
• Technology investments and branch optimization may lead to improved operating efficiencies, potentially increasing net margins by reducing structural costs.
  
• Continued credit quality improvements and strong NIM (net interest margin) due to prudent balance sheet management and deposit cost optimization are expected to sustain or enhance net earnings growth.

First Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Bank's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.8% today to 29.6% in 3 years time.
• Analysts expect earnings to reach $46.4 million (and earnings per share of $1.84) by about January 2028, up from $42.2 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 11.5x on those 2028 earnings, up from 9.1x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.5%, as per the Simply Wall St company report.

First Bank Future Earnings Per Share Growth

Risks

• The company is entering new business segments, such as Banking as a Service, which carries significant execution risks and regulatory challenges. These could impact net margins and future earnings negatively if not managed well.
  
• Despite strong results, the bank notes that future growth and performance are contingent upon external factors like interest rate environment and yield curve steepening, which are uncertain and could affect revenue and net interest margins.
  
• A significant portion of the bank's investor commercial real estate loans could be problematic if the real estate market declines, potentially impacting credit quality and net income.
  
• Noninterest income showed a decline in the fourth quarter, and there is a lack of expectation for significant increases in 2025, which could impact overall revenue generation.
  
• Increasing noninterest expenses, such as salaries, benefits, professional fees, and occupancy costs, are rising, which could pressure net margins if growth strategies do not deliver expected returns.

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 2028, revenues will be $156.8 million, earnings will come to $46.4 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $15.28, the analyst's price target of $17.67 is 13.5% 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.