First Guaranty Stock: Attractive With Topline Growth Outlook (NASDAQ:FGBI)

First Guaranty Bancshares, Inc. (NASDAQ: NASDAQ:FGBI) will most probably maintain its strong balance sheet growth this year. The loan portfolio will likely increase by double digits on the back of the economic recovery in Texas and Louisiana. However, the loan growth will drive both provision expense and operating expenses this year, which will restrict earnings growth. Meanwhile, the rising interest-rate environment is unlikely to have a significant impact on earnings because more liabilities than assets will re-price this year. Overall, I’m expecting First Guaranty Bancshares to report 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 total expected return, I’m adopting a buy rating on First Guaranty Bancshares.

Good Loan Growth Performance Likely to be Repeated

First Guaranty Bancshares achieved strong loan growth in 2022 despite Paycheck Protection Program (“PPP”) loan forgiveness. The total loan portfolio increased by 17% by the end of December 2021 from the end of 2020. I’m expecting similarly good performance this year. Firstly, the PPP loan portfolio has declined to a small level; therefore, the remaining forgiveness will have a limited impact on the total loan portfolio size. According to details given in the 10-K filing, PPP loans outstanding made up just 1.6% of total loans at the end of December 2021.

Further, economic recovery bodes well for credit demand. First Guaranty Bancshares operates in Texas and Louisiana. Both states currently have a worse unemployment rate than the national average, as shown below. Moreover, Louisiana’s economy contracted by 2.4% in the third quarter of 2021, according to official sources. Nevertheless, I’m optimistic about these markets because they have improved tremendously from 2020. Further, Texas’ population bodes well for loan growth.

First Guaranty Bancshares has comfortably achieved double-digit loan growth in the last few years. I’m expecting the company to report loan growth of around 17% in 2022. Further, I’m expecting other balance sheet items to grow in tandem with loans. The following table shows my balance sheet estimates.

Monetary Tightening to Barely Affect the Margin

The anticipated steep rise in interest rates this year will barely have any impact on the margin as it is not very sensitive to rate changes. Unfortunately, interest-bearing deposits and saving deposits made up a sizable 57% of total deposits at the end of December 2021. These deposits are sensitive to rate changes and will re-price soon after a rate hike. In fact, due to the asset and liability mixes, more liabilities than assets will re-price this year. The gap between assets and liability repricing was negative $734.2 million at the end of 2021, as mentioned in the 10-K filing. To put this number in perspective, the gap makes up a negative 26.5% of total earning assets.

The management’s interest-rate sensitivity analysis given in the 10-K filing (see below) shows that a 200-basis points gradual increase in interest rates can increase the net interest income by only 0.9%. As a result, I’m not expecting the rising interest-rate environment to have much of an impact on First Guaranty Bancshares’ earnings.

Provision Normalization to Counter Topline Growth

Allowances for loan losses were around 143.76% of nonaccrual loans at the end of December 2021, as mentioned in the 10-K filing. In my opinion, the allowance level appears enough for the current credit risk. Any economic downturn from this point will require additional provisioning. As I’m expecting the economy to remain stable, I don’t foresee additional provisioning from the current portfolio. Instead, I’m expecting loan additions to be primarily responsible for provisioning growth this year.

Overall, I’m expecting provision expense to make up around 0.34% of total loans in 2022, which is the same as the average provision-expense-to-total-loan ratio for the last five years.

Expecting Earnings to Increase by 8%

The strong loan growth will likely be the chief driver of earnings this year. On the other hand, higher provisioning for loan losses will likely drag earnings. Further, the operating expenses will likely rise in line with loans. Due to heightened inflation, salary expenses are likely to surge this year. Meanwhile, I’m expecting limited benefit from the rising interest-rate environment. Overall, I’m expecting First Guaranty Bancshares to report 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 because of the risks and uncertainties related to the COVID-19 pandemic and the timing and magnitude of interest rate hikes.

Decent Total Expected Return Justifies a Buy Rating

First Guaranty is offering a dividend yield of 2.6% at the current quarterly dividend rate of $0.16 per share. The 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 opinion, the below-average payout ratio is not reason enough for First Guaranty Bancshares to break its tradition now. Therefore, I’m not expecting an increase in the dividend level.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value First Guaranty Bancshares. 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 with the forecast tangible book value per share of $18.0 gives a target price of $22.0 for the end of 2022. This price target implies a 9.5% downside from the March 18 closing price. 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 forecast earnings per share of $2.61 gives a target price of $30.1 for the end of 2022. This price target implies a 23.8% upside from the March 18 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

Equally weighting the target prices from the two valuation methods gives a combined target price of $26.1which implies a 7.2% upside from the current market price. Adding the forward dividend yield gives a total expected return of 9.8%. Hence, I’m adopting a buy rating on First Guaranty Bancshares.