Southern States Bank Combination Will Expand Market Opportunities

Key Takeaways

• The planned merger with Southern States Bank could boost revenue and margins through market expansion and stabilization.
  
• Strategic growth in commercial loans and hiring aims to enhance revenue, leverage, and potential EPS through efficient capital use.
  
• Integration risks, economic uncertainty, and competition pressure margins, potentially impacting profitability and operational efficiency.

Catalysts

Operates as a bank holding company for FirstBank that provides a suite of commercial and consumer banking services.

• The planned combination with Southern States Bank is expected to enhance scale and market opportunities, potentially benefiting revenue growth through expanded market presence and improved margin stabilization.
  
• FB Financial's ability to adjust cost structures, such as repricing certificates of deposit at lower rates, indicates management's focus on improving net margins by reducing the cost of funds.
  
• Organic growth, particularly in focus areas like Commercial & Industrial (C&I) and owner-occupied Commercial Real Estate (CRE), demonstrates a strategic push to build loan portfolios, which should positively impact revenue as loan balances increase.
  
• The continued hiring of revenue producers aims to drive loan and deposit growth, which is critical for sustaining revenue growth and improving operating leverage over time.
  
• Strong capital levels and the potential for strategic deployment, including share repurchases and further acquisitions, position the company to enhance earnings per share through opportunistic capital allocation in the future.

FB Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FB Financial's revenue will grow by 27.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.4% today to 34.5% in 3 years time.
• Analysts expect earnings to reach $331.0 million (and earnings per share of $5.62) by about April 2028, up from $127.4 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 9.0x on those 2028 earnings, down from 15.0x today. This future PE is lower than the current PE for the US Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 1.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

FB Financial Future Earnings Per Share Growth

Risks

• The planned combination with Southern States Bank presents integration risks, which could impact earnings and operational efficiency if not executed smoothly.
  
• The economic uncertainty and potential policy changes from Washington create a volatile environment, which could negatively affect revenue and net interest margins.
  
• The company's credit exposure, particularly in the Commercial and Industrial (C&I) portfolio, poses risks as charge-offs have been elevated, potentially impacting net income.
  
• Rising competition for deposits and the need for cost of funds management could pressure the net interest margin, affecting overall profitability.
  
• The economic dependency of the mortgage banking division suggests that adverse changes in mortgage interest rates could impact noninterest income and overall earnings.

Valuation

• The analysts have a consensus price target of $55.2 for FB Financial 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 $958.1 million, earnings will come to $331.0 million, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 6.2%.
• Given the current share price of $41.19, the analyst price target of $55.2 is 25.4% 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.