Strong C&I Lending And Digital Initiatives Signal Long-Term Growth Amid Rate Challenges

Key Takeaways

• Robust loan and deposit growth in corporate segments positions the company for stronger earnings and improved revenue outlook.
  
• Balance sheet optimization and digital initiatives enhance stability, profitability, and long-term revenue growth.
  
• Rising deposit costs, rate environment dependency, and increased noninterest expenses threaten net interest margins and earnings amid volatile loan growth and securities sales.

Catalysts

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

• The robust loan and deposit growth in Q3 2024, especially in C&I segments, indicates a healthy outlook for increasing revenue, and the late timing of this growth positions the company for stronger earnings in Q4 and beyond.
  
• The balance sheet optimizations, including the sale of low-yielding securities and restructuring of BOLI policies, are expected to improve the net interest margin and enhance earnings stability.
  
• The strategic focus on relationship-based C&I lending over transactional lending suggests an opportunity to improve net margins and profitability through higher-value, longer-term customer engagements.
  
• Anticipated stabilization or potential decline in deposit costs following interest rate adjustments by the Fed could lead to a stable or improving net interest margin, supporting higher net income.
  
• Ongoing digital banking and branch optimization initiatives are expected to enhance customer acquisition and retention, contributing to sustainable revenue growth and potentially higher earnings over the long term.

First Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Bank's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.5% today to 28.8% in 3 years time.
• Analysts expect earnings to reach $42.7 million (and earnings per share of $1.7) by about November 2027, up from $40.1 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 12.2x on those 2027 earnings, up from 9.4x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.44%, as per the Simply Wall St company report.

First Bank Future Earnings Per Share Growth

Risks

• The late realization of loan growth may affect interest income due to insufficient time to earn on new loans, impacting overall earnings.
  
• Margin compression driven by higher deposit costs outpacing the interest earned on loans can affect net interest margins and earnings.
  
• The Fed rate cut and dependency on rate environment fluctuations can negatively impact interest income and net interest margins if not balanced with deposit rate adjustments.
  
• The sale of low-yielding securities at a loss contributes to short-term earnings volatility, affecting net income figures temporarily.
  
• Noninterest expenses, like the observed increase in OREO expense, could add pressure to net profit margins if costs are not effectively managed or scaled down in future quarters.

Valuation

• The analysts have a consensus price target of $17.33 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 $148.3 million, earnings will come to $42.7 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $14.93, the analyst's price target of $17.33 is 13.9% 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.