First Bancshares Is Aggressively Building Its Footprint, But Organic Loan Growth Is Lacking

It’s been a while since I’ve written about First Bancshares (FBMS), and the shares of this Mississippi-based bank have not performed particularly well in the meantime, with the shares falling about 15% and definitely lagging their community bank peer group. Not only has First Bancshares been pursuing a growth-by-acquisition strategy at a time when acquisitions have generally been frowned upon, the company hasn’t been doing a particularly good job of generating organic loan growth from that expanding footprint, with disappointing results for three straight quarters.

I believe that when investors start shifting more from defense (who will suffer the least during this period of spread headwinds and tough loan growth) to offense, First Bancshares will get more of its due, but I won’t underplay the need for improvement in organic loan generation. Although I think the fair value range extends close to $40, the shares may wait on signs of better internal execution.

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First Bancshares Is Aggressively Building Its Footprint, But Organic Loan Growth Is Lacking

First Bancshares Driving A High-Growth Plan Across The Gulf States

Mississippi’s First Bancshares (FBMS) continues to impress me with its growth strategy, and it would seem that the Street agrees, as the shares are up another 18% from when I last wrote about the bank and up close to 40% from my first article about the company on Seeking Alpha. Both of those figures put First Bancshares well ahead of the typical bank, and the company continues to execute a cogent “buy-and-build” plan that is expanding its footprint across the Gulf Coast.

I believe there are more potential gains from here, though I will say again that this is a high-growth/high-risk story within banking. Although loan growth remains healthy and there’s not nearly the same level of CRE lending competition in the Gulf that there is in areas like New York City, this is still a relatively mature part of the cycle and First Bancshares is likely going to see more competition as it pushes into markets like North Florida.

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First Bancshares Driving A High-Growth Plan Across The Gulf States

First Bancshares Running Its Playbook And Significant Earnings Growth Should Follow

Although very active since my last update on the company in September of 2017, the shares of First Bancshares (FBMS) have been a relatively average performer over that span of time, with a return close to that of regional banks in general and in the middle of a comp group including ServisFirst (SFBS), Renasant (RNST), MidSouth (MSL), and National Commerce (NCOM). While the company has executed on two M&A deals entirely consistent with the growth plan I expected here, operating performance has been a little lumpy.

I continue to believe that First Bancshares offers an above-average level of earnings growth potential, return potential, and risk. Integrating its acquisitions should drive meaningful operating leverage in 2019 and beyond, and loan growth should likewise drive good earnings momentum. With plenty of acquisition opportunities left in its core operating footprint (and/or target footprint), I expect additional M&A in the years to come.

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First Bancshares Running Its Playbook And Significant Earnings Growth Should Follow

First Bancshares An Emerging Growth Story Worth Considering

Bank stocks aren't typically thought of as growth stocks, and that is not unfair, given that quality banks like BB&T (NYSE:BBT) and PNC (NYSE:PNC) probably aren't going to see long-term organic earnings growth much above 5% to 6%. If you're willing to go much smaller, though, and take on meaningfully higher execution risk, you can find some more interesting stories, and I think First Bancshares (NASDAQ:FBMS) is one such story. 

Management has executed on a focused growth plan since 2009, using organic expansion and targeted acquisitions to move into desirable markets in Louisiana, Alabama, and Northern Florida. With the company closing in on $2 billion in assets and meaningful potential operating leverage, not to mention future M&A options, I believe First Bancshares could be looking at high-teens earnings growth over the next three to five years, justifying a fair value in the low-to-mid $30s. Do note, though, that this is a small, off-the-radar bank stock and carries above-average risks.

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First Bancshares An Emerging Growth Story Worth Considering