FGBI - First Guaranty Bancshares: Balance Sheet Growth To Drive The Bottom Line

• Strong job markets will keep loan growth at decent levels this year. However, higher interest rates will dampen credit demand.
• Threats of a recession and high interest rates will likely push up the provisioning expenses.
• The topline is barely sensitive to interest rate hikes.
• The December 2022 target price suggests a decent upset from the current market price. Further, FGBI is offering a modest dividend yield.

Earnings of First Guaranty Bancshares, Inc. ( FGBI ) will likely trend upwards this year on the back of continued loan growth. Strength in regional markets will likely drive the loan portfolio. On the other hand, the above-normal provisioning expense will likely restrain earnings growth. Meanwhile, the margin will likely remain somewhat stable for the remainder of the year. Overall, I'm expecting First Guaranty Bancshares to report earnings of $2.58 per share for 2022. Compared to my last report on the company, I have barely changed my earnings estimate. The year-end target price suggests a decent upside from the current market price. Based on the total expected return, I'm maintaining a buy rating on First Guaranty Bancshares.

Loan Growth to Start Slowing Down by the End of the Year

First Guaranty Bancshares reported robust loan growth of 3.4% in the first quarter of 2022, or 13.4% annualized. Strong job markets will ensure that loan growth remains at a decent level through the mid of 2022. First Guaranty Bancshares is based in Texas and Louisiana. Although both states have greater unemployment than the national average, their unemployment rates have improved significantly and are almost back to the 2018 level.

First Guaranty Bancshares' loan book is heavy on commercial real estate ("CRE") and commercial and industrial loans ("C&I"). Therefore, the PMI index is also a good gauge of loan demand. As shown below, the indexes are still above 50, which bodes well for loan growth.

However, high interest rates will dampen credit demand, especially for residential mortgages. As of March 2022, residential loans (1-4 family) made up 13% of total loans, according to details given in the 10-Q filing .

Considering these factors, I'm expecting the loan portfolio to increase by 12.4% by the end of 2022 from the end of 2021. In my last report on First Guaranty Bancshares, I estimated loan growth of 17% for the year. I have reduced my loan growth estimate because I now have a more hawkish stance on interest rates than before. Further, the chances of a recession have increased lately due to the recent inversion of the yield curve (see the middle part of the blue line below).

I'm expecting other balance sheet items to grow mostly in line with loans for the last three quarters of 2022. The following table shows my balance sheet estimates.

In my last report on First Guaranty Bancshares, I estimated earnings of $2.61 per share for 2022. My updated earnings estimate is barely changed as the downward revision in the loan balance estimate cancels out the commensurate downward revisions in provisions and operating expense estimates.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, the threat of a recession can increase the provisioning for expected loan losses beyond my expectation. The new Omicron subvariant also bears monitoring.

Maintaining a Buy Rating

First Guaranty Bancshares is offering a dividend yield of 2.7% 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%. Although there is room for a dividend hike, I'm not expecting any change in the dividend level because FGBI has maintained its dividend at $0.16 per share since late 2007. In my opinion, a payout ratio that's 10-11 percentage points below the historical average is not reason enough to break with tradition now.

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 1.22x in the past, as shown below.

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

Equally weighting the target prices from the two valuation methods gives a combined target price of $25.5 , which implies an 8.7% upside from the current market price. Adding the forward dividend yield gives a total expected return of 11.5%. Hence, I'm maintaining a buy rating on First Guaranty Bancshares.

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