New Branches And Private Equity Lending Will Shape Future Success

Key Takeaways

• Strategic loan growth and expansion into new lending sectors enhance future interest income and revenue potential.
  
• Efficient deposit management and branch expansion aim to improve profitability and customer engagement.
  
• Higher loan growth and new OREO asset write-downs strain profitability, while reliance on broker deposits and rising expenses threaten net interest margins and earnings.

Catalysts

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

• Strong loan growth, particularly in strategic areas such as asset-based lending, private equity, and community bank commercial & industrial (C&I) lending, which suggests potential for increased future interest income.
  
• Focus on expanding the non-interest-bearing deposit base and strategically managing out high-cost deposits, which could improve net interest margins and overall profitability.
  
• Newer business units, like small business lending and private equity fund banking, are scaling up and could drive future revenue growth as their portfolios increase.
  
• Anticipated expansion with the opening of new branches and relocation of existing ones could support deposit growth and enhance revenue through increased customer engagement.
  
• Ongoing buyback program could enhance earnings per share (EPS) by reducing the number of shares outstanding, thereby potentially increasing stock valuation.

First Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Bank's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.8% today to 29.3% in 3 years time.
• Analysts expect earnings to reach $45.7 million (and earnings per share of $1.81) by about April 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 11.7x on those 2028 earnings, up from 8.4x today. This future PE is greater than the current PE for the US Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

First Bank Future Earnings Per Share Growth

Risks

• First Bank experienced a larger provision for credit losses due to higher-than-normal loan growth, which could strain future profitability if loan growth doesn't counterbalance potential defaults. This ties to earnings and net margins.
  
• A significant write-down of $815,000 in the value of a New York City OREO asset impacted profitability, and future similar write-downs could further reduce net income. This is directly related to earnings and net margins.
  
• The reliance on broker deposits to support loan growth entails higher funding costs, which could compress net interest margins if deposit growth doesn't keep pace with loan demand. This impacts net interest margin and overall earnings.
  
• First Bank is exposed to the risk of an economic downturn, including potential impacts from tariffs and governmental budget changes, which could affect loan demand and asset quality, potentially harming revenue and earnings.
  
• Growth in operating expenses due to higher payroll taxes, merit increases, and branch openings could reduce net income if not matched by sufficient revenue growth. This affects net margins and earnings.

Valuation

• The analysts have a consensus price target of $17.667 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 $155.9 million, earnings will come to $45.7 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $14.13, the analyst price target of $17.67 is 20.0% 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.