First Guaranty Bancshares, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; unaudited. First Guaranty Bancshares is a Louisiana bank holding company operating through First Guaranty Bank, primarily in Louisiana and Texas. Results include the Union Bancshares acquisition completed November 7, 2019, so year-over-year comparisons reflect a larger business.
Financial performance and position
| Metric | Q3 / September 30, 2020 | Comparable period / prior date |
|---|---|---|
| Net income | $5.2 million; diluted earnings per share $0.53 | Q3 2019: $3.8 million; $0.40 per share |
| Nine-month net income | $14.2 million; earnings per share $1.46 | Nine months 2019: $10.2 million; $1.05 per share |
| Net interest income | Q3: $19.0 million; nine months: $55.8 million | Q3 2019: $14.7 million; nine months 2019: $45.0 million |
| Net interest margin | Q3: 3.24%; nine months: 3.39% | Q3 2019: 3.35%; nine months 2019: 3.37% |
| Assets / loans / deposits | $2.51 billion / $1.79 billion gross loans / $2.19 billion | December 31, 2019: $2.12 billion / $1.53 billion gross loans / $1.85 billion |
| Cash and cash equivalents | $192.3 million | December 31, 2019: $67.4 million |
| Shareholders’ equity | $184.8 million | December 31, 2019: $166.0 million |
| Allowance for loan losses | $14.6 million, or 0.82% of loans | December 31, 2019: $10.9 million, or 0.72% |
Q3 and nine-month net income increased 34.7% and 39.2%, respectively. Higher loan balances, lower funding costs, and securities gains supported results; higher noninterest expense and, for the nine-month period, a larger loan-loss provision partly offset the gains. Q3 return on average assets was 0.84% (unchanged year over year); nine-month return on average assets was 0.82% versus 0.74%. Return on average common equity was 11.14% versus 9.43% for Q3 and 10.71% versus 8.71% for the nine-month periods.
For the first nine months, operating cash flow was $14.3 million, investing cash flow was negative $257.1 million, and financing cash flow was positive $367.7 million. Cash and cash equivalents increased by $124.9 million. Deposits rose $340.2 million from year-end; short-term FHLB advances were $50.0 million and repurchase agreements were $6.9 million. Other reported debt included $3.4 million of long-term FHLB advances, $43.9 million of senior long-term debt, and $14.8 million of junior subordinated debentures.
The Bank reported regulatory capital ratios above well-capitalized minimums at September 30: Tier 1 leverage 8.59%, Tier 1 risk-based 10.36%, total risk-based 11.09%, and common equity Tier 1 10.36%. Its capital conservation buffer was 3.09%.
Material changes versus prior periods
- Assets increased 18.7% and deposits 18.4% from year-end 2019. Loan growth included Union-acquired balances, new originations, and $111.1 million of SBA-guaranteed PPP loans.
- Interest expense fell 16.9% in Q3 and 10.5% year to date as market and deposit rates declined. Average earning-asset yields also fell, and Q3 net interest margin narrowed 11 basis points year over year; the nine-month margin improved 2 basis points.
- Noninterest income rose to $3.6 million for Q3 and $9.3 million year to date, mainly reflecting securities gains. Nine-month securities gains were $2.6 million versus a $0.4 million loss in 2019.
- Noninterest expense increased to $14.5 million for Q3 and $42.6 million year to date, reflecting Union-related staffing and operating costs, among other items. The company reported $0.7 million of one-time Union merger costs for the first nine months.
- Nonperforming assets increased to $34.4 million, or 1.37% of assets, from $21.9 million, or 1.04%, at year-end. Nonaccrual loans rose to $25.3 million from $14.4 million; loans at least 90 days past due but still accruing were $5.7 million versus $2.6 million.
- Available-for-sale securities totaled $416.3 million. The company sold securities previously designated held to maturity and transferred $52.6 million to available for sale, terminating its held-to-maturity portfolio. Unrealized gains contributed to a $9.3 million increase in accumulated other comprehensive income.
Outlook, management commentary, risks, and unusual items
- Management cited continued COVID-19 uncertainty and said future economic conditions could require additional loan-loss provisions. It considered the allowance adequate at the filing date but warned that uncertainty may lead to increases.
- As of October 31, about $31.0 million of loans remained on COVID-related deferral after more than 1,000 loans totaling about $590 million had initially received deferrals. The company elected to use CARES Act relief for eligible COVID-related loan modifications.
- The company funded more than 900 PPP loans totaling about $111.1 million. PPP fees exceeded $3.4 million; $0.6 million was recognized in Q3 and $1.8 million remained deferred at September 30. These loans carry SBA guarantees and had no related allowance under the company’s stated treatment.
- Subsequent to quarter-end, the company sold approximately $140 million of mortgage-backed securities and $150 million of corporate securities, estimating pre-tax realized gains of $11 million to $12 million. It said proceeds would be reinvested in securities and loans and used to reduce borrowings; settlement was ongoing in Q4.
- Liquidity actions included a $50 million FHLB advance, fixed at 0.72% for 11 months and maturing February 2021, and increased brokered money-market funding. Management stated it believed liquidity was sufficient for current needs. The company had $113.1 million of net FHLB borrowing capacity and $100.5 million of correspondent-bank federal funds capacity at September 30.
- Credit exposures include a loan portfolio concentrated in real estate (70.1%, including 42.4% in non-farm non-residential real estate), oil-and-gas support/service borrowers, and public-funds deposits. Public funds were $675.1 million, or 30.8% of deposits. Management also disclosed interest-rate sensitivity: the cumulative one-year gap was negative $576.2 million, or 24.1% of earning assets.
- Two lawsuits were disclosed: one with a possible loss range of $0 to $0.5 million, for which $0.1 million was accrued and a judgment was being appealed; and another with a possible loss range of $0 to $1.5 million, with no accrual recorded. Management said ordinary-course legal proceedings were not expected to have a material adverse effect based on information then available.
- The company identified COVID-19-related risks including weaker borrower repayment, declining collateral values, margin pressure, higher credit costs, operational and cybersecurity risks, and possible effects on dividends. No specific earnings guidance was provided. It reported that the Board declared a $0.16 per-share Q3 dividend and that it had paid 109 consecutive quarterly dividends.
Important facts for investors to verify
- Whether the rise in nonaccrual loans, past-due loans, and nonperforming assets continues, and whether the allowance adequately reflects pandemic-related credit risk and real-estate exposures.
- How much of the $31.0 million of deferred loans returned to regular payment, and the subsequent performance of PPP and other COVID-affected borrowers.
- Whether the estimated $11 million to $12 million Q4 securities gain was realized as expected, and how reinvestment and debt reduction affect recurring earnings, liquidity, and interest-rate risk.
- The durability of deposit growth, including public-funds and brokered funding, and the company’s funding costs as deposits and borrowings mature or reprice.
- The outcomes and potential financial impact of the disclosed lawsuits, and any further OREO valuation charges or loan losses.
- The effect of Union integration and continuing expense growth on operating efficiency; the filing does not provide a specific forward earnings target.