First Guaranty Bancshares: Balance sheet growth to boost bottom line

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Earnings of First Guaranty Bancshares, Inc. (NASDAQ: FGBI) will likely trend higher this year due to continued loan growth. Strong regional markets will likely boost the loan portfolio. On the other hand, the higher than normal provisioning spending will likely dampen earnings growth. Meanwhile, the margin will likely remain somewhat stable for the rest of the year. Overall, I expect First Guaranty Bancshares to report earnings of $2.58 per share for 2022. Compared to my last report on the company, I barely changed my earnings estimate. The year-end target price suggests a decent upside from the current market price. Based on expected total return, I maintain a buy rating on First Guaranty Bancshares.

Loan growth will start to slow 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 labor markets will ensure loan growth remains at a decent level through mid-2022. First Guaranty Bancshares is based in Texas and Louisiana. Although both states have unemployment rates above the national average, their unemployment rates have improved significantly and are almost back to 2018 levels.

Chart
Data by YCharts

First Guaranty Bancshares’ loan portfolio is heavy on commercial real estate (“CRE”) and commercial and industrial (“C&I”) loans. Therefore, the PMI index is also a good indicator of credit demand. As shown below, the indices are still above 50, which bodes well for loan growth.

Chart
Data by YCharts

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

Given these factors, I expect the loan portfolio to grow by 12.4% by the end of 2022 compared to the end of 2021. In my latest report on First Guaranty Bancshares, I have estimated loan growth at 17% for the year. I have reduced my loan growth estimate because I now have a more hawkish stance on interest rates than before. Additionally, the odds of a recession have increased lately due to the recent inversion of the yield curve (see the middle part of the blue line below).

Treasury Yield Curve Inversion

The US Treasury Department

I expect other balance sheet items to grow primarily in line with lending for the last three quarters of 2022. The following table shows my balance sheet estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
Financial situation
Net loans 1,140 1,214 1,515 1,820 2,135 2,400
Net loan growth 21.5% 6.6% 24.7% 20.1% 17.4% 12.4%
Other productive assets 506 406 428 239 364 494
Deposits 1,549 1,630 1,853 2,166 2,596 2,853
Loans and sub-debts 53 35 87 117 50 60
Common equity 144 147 166 179 191 204
Book value per share ($) 14.9 15.2 15.6 16.7 17.8 19.0
Tangible BVPS ($) 14.0 14.5 13.7 14.8 16.1 17.3

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Increase in interest rates to barely affect the margin

Much of the deposit book is quickly revalued. Current accounts and interest-bearing savings accounts accounted for 57% of total deposits at the end of March 2022, according to details provided in the 10-Q filing. On the other hand, the mortgage portfolio will be revalued with a lag. Most home loans, especially residential mortgages, carry fixed rates. As mentioned in the 10-Q file, home loans represented 66.6% of total loans at the end of March 2022.

Overall, more liabilities than assets are expected to be reassessed this year. This asset-liability gap was negative 28.7% of total assets at the end of March 2022, according to the details given in the 10-Q file. Although the difference is negative, it does not mean that the balance sheet is sensitive to liabilities. It should be kept in mind that the magnitude of the price revision is different for assets and liabilities as they depend on pricing power. Due to the high liquidity in the sector, banks will have the power to control deposit costs, despite rising rates. In the case of First Guaranty Bancshares, the effect of repricing on both sides of the balance sheet will almost balance out, leaving net interest income barely sensitive to rate increases.

Management’s interest rate sensitivity analysis presented in File 10-Q shows that a 200 basis point increase in interest rates can increase net interest income by only 0.03% over twelve months.

Interest Rate Sensitivity First Guaranty Bancshares

Filing 1Q 2022 10-Q

Given these factors, I expect the margin to remain virtually unchanged in the last three quarters of 2022, compared to 3.59% in the first quarter of the year.

Economic headwinds will lead to higher than normal supply

First Guaranty Bancshares’ provision-to-non-performing loan ratios stood at 150.1% at the end of March 2022. In my view, this provision coverage will be a little tight given the looming recession. In addition, higher interest rates can harm the asset quality of the loan portfolio by pushing more and more borrowers into default. As a result, I believe First Guaranty Bancshares will attempt to bolster its reserves in mid-2022 to prepare for the economic headwinds expected in the second half of the year.

Overall, I expect the net provision charge to be higher than normal this year. I expect First Guaranty Bancshares to report a net provision charge of 0.30% of total loans in 2022. By comparison, the net provision charge averaged 0.26% from 2017 to 2019.

Expect revenue to increase by 6%

Strong loan growth is likely to be the main driver of higher earnings this year. On the other hand, higher provision charges will likely limit earnings growth. Meanwhile, the margin will likely remain somewhat stable for the rest of the year. Overall, I expect First Guaranty Bancshares to report earnings of $2.58 per share for 2022, up 6% year-over-year. The following table shows my income statement estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 53 57 62 75 90 106
Allowance for loan losses 4 1 5 15 2 seven
Non-interest income 8 5 8 24 11 8
Non-interest charges 39 43 47 58 64 69
Net income – Common Sh. 12 14 14 20 26 28
BPA – Diluted ($) 1.21 1.47 1.34 1.90 2.42 2.58

Source: SEC filings, earnings releases, author’s estimates

(In millions of dollars, unless otherwise indicated)

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 to the loan balance estimate negates proportional downward revisions to provisions and estimates of operating expenses.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, the threat of a recession may increase the provisioning of expected loan losses beyond my expectations. The new Omicron sub-variant should also be watched.

Maintain a purchase note

First Guaranty Bancshares offers a dividend yield of 2.7% 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%. Although there is room for a higher dividend, I do not expect any change in the level of the dividend as FGBI has maintained its dividend at $0.16 per share since the end of 2007. In my opinion , a payout ratio 10 to 11 percentage points lower than the historical average is not reason enough to break with tradition now.

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 1.22x in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Medium
T. Book value per share ($) 14.0 14.5 13.7 14.8 16.1
Average market price ($) 19.5 20.9 17.5 13.6 17.5
Historical P/TB 1.39x 1.44x 1.28x 0.91x 1.09x 1.22x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $17.3 yields a target price of $21.2 for the end of 2022. This price target implies a decline of 9.6% compared to the closing price on July 14. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 1.02x 1.12x 1.22x 1.32x 1.42x
TBVPS – Dec 2022 ($) 17.3 17.3 17.3 17.3 17.3
Target price ($) 17.7 19.5 21.2 22.9 24.7
Market price ($) 23.5 23.5 23.5 23.5 23.5
Up/(down) (24.4)% (17.0)% (9.6)% (2.2)% 5.2%
Source: Author’s estimates

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

EX17 EX18 FY19 FY20 FY21 Medium
Earnings per share ($) 1.21 1.47 1.34 1.90 2.42
Average market price ($) 19.5 20.9 17.5 13.6 17.5
Historical PER 16.1x 14.2x 13.1x 7.2x 7.2x 11.6x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple with the expected earnings per share of $2.58 yields a price target of $29.8 for the end of 2022. This price target implies a 27.0% upside from at the July 14 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 9.6x 10.6x 11.6x 12.6x 13.6x
EPS 2022 ($) 2.58 2.58 2.58 2.58 2.58
Target price ($) 24.6 27.2 29.8 32.4 34.9
Market price ($) 23.5 23.5 23.5 23.5 23.5
Up/(down) 5.1% 16.1% 27.0% 38.0% 49.0%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $25.5, which implies an increase of 8.7% compared to the current market price. Adding the forward dividend yield gives an expected total return of 11.5%. Therefore, I maintain a buy rating on First Guaranty Bancshares.

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