First Guaranty Stock: Attractive with Topline Growth Prospects (NASDAQ:FGBI)

First Guaranty Bancshares, Inc. (NASDAQ: NASDAQ: FGBI) will most likely maintain its strong balance sheet growth this year. The loan book will likely grow by double digits thanks to the economic recovery in Texas and Louisiana. However, loan growth will drive both provision and operating expenses this year, which will limit earnings growth. Meanwhile, rising interest rates are unlikely to have a material impact on earnings as more liabilities than assets will be repriced this year. Overall, I expect First Guaranty Bancshares to post earnings of $2.61 per share in 2022, up 8% year-over-year. The year-end target price suggests a decent upside from the current market price. Based on the expected total return, I adopt a buy rating on First Guaranty Bancshares.

Good loan growth performance likely to be repeated

First Guaranty Bancshares saw strong loan growth in 2022 despite the cancellation of Paycheck Protection Program (“PPP”) loans. The total loan portfolio increased by 17% at the end of December 2021 compared to the end of 2020. I expect similar performance this year. First, the PPP loan portfolio has declined to a low level; therefore, the remaining discount will have a limited impact on the total size of the loan portfolio. According to the details given in the 10-K filing, outstanding PPP loans represented only 1.6% of total loans at the end of December 2021.

Moreover, the economic recovery bodes well for credit demand. First Guaranty Bancshares operates in Texas and Louisiana. Both states currently have worse unemployment rates than the national average, as shown below. Additionally, Louisiana’s economy contracted 2.4% in the third quarter of 2021, according to official sources. Nonetheless, I am optimistic about these markets as they have improved significantly from 2020. Additionally, the population of Texas bodes well for lending growth.

First Guaranty Bancshares has comfortably achieved double-digit loan growth over the past few years. I expect the company to see loan growth of around 17% in 2022. Additionally, I expect other balance sheet items to grow alongside loans. The following table shows my balance sheet estimates.

Monetary tightening has very little impact on the margin

The sharp rise anticipated in interest rates this year will have little impact on the margin because it is not very sensitive to rate variations. Unfortunately, interest-bearing deposits and savings deposits represented 57% of total deposits at the end of December 2021. These deposits are sensitive to rate changes and will be revalued shortly after a rate hike. In fact, due to the mix of assets and liabilities, more liabilities than assets will be revalued this year. The gap between repricing assets and liabilities was negative $734.2 million at the end of 2021, as mentioned in Filing 10-K. To put that number in perspective, the gap represents minus 26.5% of total productive assets.

Management’s interest rate sensitivity analysis presented in File 10-K (see below) shows that a gradual 200 basis point increase in interest rates can increase net interest income only 0.9%. Accordingly, I do not expect rising interest rates to have a material impact on First Guaranty Bancshares earnings.

Normalization of provisions to counter revenue growth

Provisions for loan losses represented approximately 143.76% of outstanding loans at the end of December 2021, as mentioned in the 10-K file. In my opinion, the level of provision seems sufficient for the current credit risk. Any economic downturn from this point will require additional provisioning. As I expect the economy to remain stable, I do not anticipate additional funding from the current portfolio. Instead, I expect loan additions to be primarily responsible for provisioning growth this year.

Overall, I expect provision charges to be around 0.34% of total loans in 2022, which is the same as the average ratio of provision charges to total loans in the past five years.

Expect revenue to increase by 8%

Strong loan growth will likely be the main driver of earnings this year. On the other hand, higher provisioning for loan losses will likely weigh on earnings. In addition, operating expenses will likely increase based on loans. Due to increased inflation, payroll expenses are expected to increase this year. In the meantime, I expect limited benefit from rising interest rates. Overall, I expect First Guaranty Bancshares to post earnings of $2.61 per share in 2022, up 8% year-over-year. The following table shows my income statement estimates.

Actual earnings may differ materially from estimates due to risks and uncertainties related to the COVID-19 pandemic and the timing and magnitude of interest rate increases.

A decent expected total return warrants a buy rating

First Guaranty offers a dividend yield of 2.6% at the current quarterly dividend rate of $0.16 per share. Earnings and dividend estimates suggest a payout ratio of 25% for 2022, which is below the five-year average of 36%. First Guaranty Bancshares has maintained its quarterly dividend at $0.16 per share since the second half of 2007. In my view, the below average payout ratio is not reason enough for First Guaranty Bancshares to break its tradition now . Therefore, I do not expect an increase in the level of dividends.

I use historical price/book tangible (“P/TB”) and price/earnings (“P/E”) multiples to value First Guaranty Banc shares. The stock has traded at an average P/TB ratio of 1.22 in the past, as shown below.

Multiplying the average P/TB multiple by the expected tangible book value per share of $18.0 yields a target price of $22.0 for the end of 2022. This price target implies a decline of 9.5% compared to the closing price on March 18. The following table shows the sensitivity of the target price to the P/TB ratio.

The stock has traded at an average P/E ratio of around 11.6x in the past, as shown below.

Multiplying the average P/E multiple with the expected earnings per share of $2.61 yields a price target of $30.1 for the end of 2022. This price target implies a 23.8% upside from at the closing price on March 18. The following table shows the sensitivity of the target price to the P/E ratio.

An equal weighting of the target prices from the two valuation methods gives a target price of $26.1, implying a 7.2% upside from the current market price. Adding the forward dividend yield gives an expected total return of 9.8%. Therefore, I adopt a buy rating on First Guaranty Bancshares.