Elevating Market Position With Critical Operations And Cost Management Amid Financial Challenges

Key Takeaways

• First Bancshares' strategic focus on loan growth and operational efficiency improvements signifies potential for increased future revenues and profitability.
  
• Their disciplined cost management and high credit quality within the loan portfolio indicate a path towards sustained earnings stability and margin enhancement.
  
• First Bancshares faces challenges from increased loan loss provisions, tightening competition, fluctuating deposit levels and costs, indicating potential impacts on profitability and interest margins.

Catalysts

Operates as the bank holding company for The First Bank that provides general commercial and retail banking services.

• First Bancshares' robust loan growth of $111 million, indicating an annualized growth rate of 8.6%, demonstrates the company’s strong market presence and the potential to significantly boost future revenues.
  
• The expansion of the company's margin by 6 basis points, with the core margin increasing by 9 basis points, suggests an improving efficiency in its operations that could positively affect net margins through enhanced profitability.
  
• The low net charge-offs (4 basis points) and migration in NPAs (3 basis points) point towards a high credit quality within the loan portfolio, which could reduce future credit losses and support earnings stability.
  
• The introduction of new products and expansion into new market segments, as evidenced by the migration of legacy branches into a centralized consumer platform and the refinement of the small business platform, indicate operational enhancements that can lead to revenue growth and market share expansion.
  
• The company’s expectation of maintaining a stable deposit cost, despite the runoff of public funds and the use of brokered CDs to manage liquidity, suggests a disciplined approach to cost management that could support margin stability and improve net interest income going forward.

Assumptions

• Analysts are assuming First Bancshares's revenue will decrease by -4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.3% today to 38.8% in 3 years time.
• Analysts expect earnings to reach $92.6 million (and earnings per share of $2.85) by about September 2027, up from $75.7 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 13.8x on those 2027 earnings, up from 13.4x 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 grow by 0.34% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The report mentions a decline in net income primarily due to a $1.7 million provision for loan growth, suggesting vulnerability to increased loan loss provisions impacting net margins.
  
• With the mention of tight competition and potential rate cuts driving some banks to price in early, there could be pressure on loan yields, potentially reducing interest income and affecting earnings.
  
• The company reports an expectation of a decrease in deposits, particularly public funds, throughout the rest of the year. This reduction in deposit levels could impact the company's funding sources and increase reliance on costlier funding options, impacting net interest margin.
  
• Despite a positive outlook on credit quality, there is a slight uptick in non-performing assets and an increase in net charge-offs. If this trend continues or worsens, it could signal rising credit risk that may affect loan loss provisions and overall profitability.
  
• The discussion of deposit cost pressures easing may indicate an ongoing challenge in managing interest expense in a changing rate environment. Fluctuations in deposit costs due to market competition or increased rates could negatively impact the net interest margin.

Valuation

• The analysts have a consensus price target of $34.75 for First Bancshares based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $31.75.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $238.6 million, earnings will come to $92.6 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $32.52, the analyst's price target of $34.75 is 6.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.