First Guaranty Bancshares, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020 unless noted. Unaudited consolidated results include First Guaranty Bancshares and its wholly owned bank subsidiary. Amounts below are in millions except per-share data and ratios.
Business context and financial performance
First Guaranty is a Louisiana-based commercial bank serving customers primarily in Louisiana and Texas through 34 banking facilities. The company reported strong loan, deposit and asset growth, alongside higher earnings year over year. Growth included commercial equipment leases, multifamily lending and new PPP lending.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $21.4 | $18.8 | $41.0 | $36.8 |
| Provision for loan losses | $0.9 | $1.8 | $1.5 | $3.1 |
| Noninterest income | $3.6 | $3.3 | $5.9 | $5.8 |
| Noninterest expense | $16.0 | $13.8 | $31.0 | $28.1 |
| Net income | $6.4 | $5.2 | $11.5 | $9.0 |
| Net income available to common shareholders | $6.2 | $5.2 | $11.2 | $9.0 |
| EPS | $0.64 | $0.53 | $1.15 | $0.92 |
| Net interest margin | 3.33% | 3.38% | 3.29% | 3.47% |
Financial position, liquidity and capital
- Scale and funding: Total assets were $2.745 billion, up 11.0%; loans net of unearned income were $2.066 billion, up 12.1%; and deposits were $2.421 billion, up 11.7%. Public funds were $821.9 million, or 34.0% of deposits.
- Cash and securities: Cash and cash equivalents were $130.6 million, down from $299.6 million. Investment securities totaled $446.3 million, including $293.2 million available for sale and $153.1 million held to maturity. The company reported $202.1 million of securities pledged to secure public deposits and borrowings.
- Cash flow: For the six months, operating cash flow was negative $2.4 million, investing cash flow negative $434.6 million, and financing cash flow positive $268.0 million. Investing outflows included $222.4 million of net loan growth and substantial net securities purchases; deposit growth and preferred-stock proceeds supported financing.
- Debt and funding: Senior long-term debt was $26.8 million, down from $42.4 million; short-term borrowings were $49.4 million, primarily a Federal Reserve PPP Liquidity Facility advance at 0.35%, secured by PPP loans. Junior subordinated debentures were $14.8 million.
- Equity and regulatory capital: Shareholders’ equity was $214.3 million versus $178.6 million. The Bank reported a 3.78% capital conservation buffer and was well capitalized. Its June 30 Tier 1 leverage, Tier 1 risk-based, total risk-based and common equity Tier 1 ratios were 9.09%, 10.64%, 11.78% and 10.64%, respectively.
- Dividends: Common dividends were $0.16 per share for the quarter; the company reported 112 consecutive quarterly common dividends through June 30, 2021.
Material changes versus comparable periods
- Q2 net income rose 24.1%; first-half net income rose 27.2%. Higher loan interest income, lower interest expense and lower loan-loss provisions supported earnings, partly offset by lower securities income and higher operating expenses.
- Net interest margin fell 5 basis points in Q2 and 18 basis points for the first half. Asset yields declined with market rates, while lower funding costs and larger earning-asset balances lifted net interest income.
- Noninterest expense increased 16.1% in Q2 and 10.4% for the first half. Management cited personnel, legal and professional fees, software, marketing and regulatory assessments among the drivers.
- Nonperforming assets declined to $25.3 million from $30.9 million, and nonperforming assets to total assets fell to 0.92% from 1.25%. Nonaccrual loans were $15.1 million; loans 90 days past due and still accruing were $8.2 million.
- The allowance for loan losses was $25.5 million, or 1.23% of loans, versus $24.5 million, or 1.33%, at year-end. The first-half provision declined to $1.5 million from $3.1 million.
- On April 27, the company issued $34.5 million of 6.75% non-cumulative perpetual Series A preferred stock, receiving approximately $33.1 million net. Proceeds supported repayment of $13.3 million of senior debt and a $20.0 million capital contribution to the Bank.
Outlook, risks and unusual items
- No quantified earnings or financial guidance was provided. Management described continued Texas growth opportunities and expected most of approximately $99.2 million of non-public-funds time deposits maturing in the second half of 2021 to renew at lower market rates.
- Management said the allowance was adequate but warned that continuing COVID-19 uncertainty could require higher future provisions. Approximately $8.8 million of loans remained on COVID-related deferral at June 30, down from $18.3 million at year-end.
- Credit and concentration exposures include a hotel and motel portfolio of $146.4 million, oil-and-gas support/service exposure, real-estate-secured lending and expanding commercial leases. The allowance includes qualitative factors for COVID-related and hotel-loan risk.
- Interest-rate risk is notable: management reported a negative cumulative one-year gap. Its model estimated net interest income declines of 7.29% under an instantaneous +400-basis-point shock and 5.73% under a gradual +400-basis-point increase. The securities portfolio had an estimated effective duration of 6.1 years and a forecast weighted-average life of 7.85 years.
- In Q1 2021, $160.0 million amortized cost of agency securities was transferred from available-for-sale to held-to-maturity classification. The filing reported a $5.7 million after-tax unrealized loss at transfer remaining in accumulated other comprehensive income; first-half accumulated other comprehensive income declined $5.4 million.
- The company had $56.3 million of loans priced off LIBOR and was reviewing replacement reference rates; it did not anticipate a significant financial-statement impact. It had elected the CARES Act TDR relief and delayed adoption of CECL until the applicable future effective date for smaller reporting companies.
- Two lawsuits were disclosed: one with a possible loss range of $0–$0.5 million, for which a $0.1 million liability was accrued while the company appeals a judgment; and another with a possible loss range of $0–$1.5 million, with no accrual recorded. Management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan and lease growth, particularly commercial leases, is producing sustainable yields and remains supported by underwriting quality.
- Subsequent trends in delinquency, nonaccruals, criticized loans, COVID-related deferrals and allowance adequacy, including hotel and other commercial real-estate exposure.
- Whether deposit growth and public-funds concentration remain stable, and how deposit repricing affects funding costs and net interest margin.
- The effect of interest-rate movements on net interest income, securities fair values and accumulated other comprehensive income; also review the held-to-maturity portfolio and collateral pledges.
- Capital and liquidity after preferred dividends, debt repayments, loan growth and the use of the PPPLF; confirm regulatory ratios and borrowing availability in later filings.
- Developments in the disclosed lawsuits and the company’s LIBOR transition, as well as performance against management’s stated growth and deposit-renewal expectations.