First Guaranty Bancshares, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. First Guaranty is a Louisiana bank holding company operating in Louisiana and Texas; its results include Union Bancshares only from its November 7, 2019 acquisition date.
Financial performance and condition
| Metric | FY 2019 / Dec. 31, 2019 | Prior comparable |
|---|---|---|
| Total assets | $2.117 billion | $1.817 billion at Dec. 31, 2018; +16.5% |
| Loans, net of unearned income | $1.525 billion | $1.225 billion; +24.5% |
| Deposits | $1.853 billion | $1.630 billion; +13.7% |
| Shareholders’ equity | $166.0 million | $147.3 million |
| Net interest income | $61.7 million | $57.0 million; +8.2% |
| Net income / diluted earnings per share | $14.2 million / $1.47 | $14.2 million / $1.47 |
| Return on average assets / equity | 0.76% / 8.99% | 0.82% / 9.98% |
| Net interest margin | 3.41% | 3.41% |
| Efficiency ratio | 67.48% GAAP; 66.77% excluding intangible amortization and securities transactions | 69.46% GAAP; 66.63% adjusted |
Interest income rose to $91.6 million, while interest expense increased to $30.0 million. The provision for loan losses was $4.9 million versus $1.4 million; noninterest income was $8.3 million versus $5.3 million, and noninterest expense was $47.2 million versus $43.3 million. Pre-tax income was $17.9 million. Cash dividends were $0.60 per share, adjusted for the December 2019 10% stock dividend.
Cash flow: Operating activities provided $29.1 million; investing activities used $131.9 million, including $23.3 million of net cash paid in the Union acquisition; financing activities provided $42.3 million. Cash and cash equivalents declined $60.5 million to $67.4 million.
Debt and liquidity: Total deposits included $610.7 million of public funds, or 33.0%. Period-end loans-to-deposits were 82.3%. Borrowings were about $86.7 million, including $48.6 million of senior long-term debt, $14.7 million of junior subordinated debt and short-term borrowings assumed in the acquisition. The Union acquisition was partly financed with a new $32.5 million term loan. Management reported $170.3 million of net FHLB borrowing capacity and $100.5 million of federal funds lines; it believed liquidity was adequate.
Capital: The Bank was classified as well-capitalized. At year-end, its total risk-based capital ratio was 12.61%, Tier 1 risk-based ratio 11.96%, and leverage ratio 10.44%. Tangible common equity to tangible assets was 6.99%, down from 7.79%.
Material changes and notable items
- Union Bancshares was acquired for $43.4 million in cash, adding approximately $274.8 million in assets, $205.0 million in deposits, $184.2 million in loans and seven branches. Preliminary purchase accounting recorded $9.5 million of goodwill and $4.2 million of core deposit intangible; allocations remained subject to refinement.
- Credit quality weakened year over year: nonperforming assets rose to $21.9 million, or 1.04% of assets, from $10.0 million, or 0.55%; nonaccrual loans increased to $14.4 million from $8.7 million. Net charge-offs were $4.7 million, versus net recoveries of $0.2 million in 2018. The allowance was $10.9 million, or 0.72% of loans, compared with 0.88%.
- Real estate secured 73.6% of loans; non-farm, non-residential real estate loans were 40.3% of the portfolio. The filing reports a commercial real estate concentration measure of 302.81% of total capital, which subjects the Bank to heightened supervisory attention.
- Public funds deposits declined to $610.7 million from $645.5 million and represented a smaller share of total deposits than in 2018. Three public-funds relationships represented 33% of public funds under fiscal agency agreements.
- Available-for-sale securities’ unrealized position improved: accumulated other comprehensive income was $2.2 million versus a $7.1 million loss in 2018. No other-than-temporary impairment losses were recognized in 2019.
Outlook, risks and contingencies
No specific earnings, revenue, margin or loan-growth guidance is provided. Management describes a strategy of growing loans and lower-cost deposits, expanding SBA, USDA and commercial leasing, pursuing selective acquisitions, and investing in technology. One new facility was under construction with a $10.1 million commitment, of which $6.8 million had been incurred. The company completed an Amite branch in the fourth quarter.
- Key exposures include concentrated Louisiana and North Central Texas markets; commercial real estate, construction, and business lending; oil-and-gas-linked borrowers; and reliance on public funds for a significant portion of deposits.
- Interest-rate sensitivity analysis showed a liability-sensitive position on a one-year cumulative gap basis. The model estimated net interest income declines of 0.71% under an instantaneous +400-basis-point shock and 2.45% under a gradual +400-basis-point change; management cautions that model assumptions and actual balance-sheet behavior may differ.
- Two lawsuits were disclosed. In one, a judgment was entered against the company, which is appealing; possible loss was $0–$0.5 million and $0.1 million was accrued. A second matter had a possible loss range of $0–$1.5 million and no accrual.
- The filing identifies LIBOR transition, cybersecurity and operational risk, regulatory and capital requirements, weather events, and the coronavirus outbreak among risks; it does not quantify the outbreak’s financial effect.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. The auditor did not attest to internal control effectiveness. Management concluded controls were effective, but did not assess Union’s internal controls, which represented approximately 15% of consolidated assets at acquisition.
Investor verification priorities
- Track the acquired Union loan portfolio, purchase-accounting marks, integration costs, and whether acquisition-related growth translates into earnings.
- Review trends in nonaccrual, impaired, delinquent and classified loans; charge-offs; reserve adequacy; and collateral values, especially in commercial real estate and agriculture.
- Assess public-funds deposit stability, concentration by depositor, collateral requirements, and replacement-funding costs.
- Monitor loan and deposit pricing, funding costs, net interest margin, rate sensitivity, and the stated LIBOR transition exposure.
- Verify debt repayment terms, capital ratios and dividend capacity, as well as outcomes of the disclosed lawsuits and remaining construction commitments.