First Guaranty Bancshares, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results include First Guaranty Bancshares and its wholly owned bank subsidiary. The company is a Louisiana-based financial holding company serving customers primarily in Louisiana and Texas, with newer markets in Kentucky and West Virginia.
Financial performance and position
| Metric | Q2 / June 30, 2022 | Comparison |
|---|---|---|
| Net income | $8.1 million for Q2; $15.7 million for six months | Q2 increased 26.3% and six-month income increased 37.1% year over year |
| Common EPS | $0.70 for Q2; $1.36 for six months | $0.58 and $1.05, respectively, in 2021 |
| Net interest income | $26.3 million for Q2; $51.3 million for six months | Up from $21.4 million and $41.0 million, respectively |
| Net interest margin | 3.72% for Q2; 3.66% for six months | Up 39 and 37 basis points year over year |
| Loans, net of unearned income | $2.30 billion | Up $136.4 million, or 6.3%, from December 31, 2021 |
| Deposits | $2.66 billion | Up $63.6 million, or 2.4%, from year-end; public funds were 37.7% of deposits |
| Cash and cash equivalents | $120.4 million | Down $141.5 million from year-end |
| Shareholders’ equity | $226.5 million | Up from $223.9 million at year-end; AOCI was a $15.1 million loss |
For the first six months, operating cash flow was $20.4 million, investing cash use was $236.7 million, and financing cash flow was $74.7 million. Cash declined by $141.5 million. Investing outflows included $137.9 million of net loan growth and securities purchases. The filing reports no full-year earnings or margin guidance.
Q2 return on average assets was 1.11% and return on average common equity was 15.73%; six-month figures were 1.08% and 15.37%, respectively. Common dividends were $0.16 per share in Q2. The allowance for loan and lease losses was $23.6 million, or 1.03% of loans, versus $24.0 million, or 1.11%, at year-end.
Changes and management commentary
- Earnings growth reflected higher loan and securities interest income and a lower loan-loss provision, partly offset by higher interest expense, lower noninterest income, and higher operating expenses. Six-month noninterest expense rose to $34.6 million from $31.0 million, including higher personnel and software costs.
- Asset growth was led by loans and securities. Real estate secured 68.7% of loans; non-farm, non-residential real estate loans were 41.8% of the portfolio. Management cited new originations, especially in Texas, as a driver of loan growth and said it anticipates further Texas growth opportunities.
- Nonperforming assets fell to $12.6 million, or 0.43% of assets, from $20.0 million, or 0.70%, at year-end. Nonaccrual loans declined to $10.2 million from $16.7 million; impaired loans fell to $5.0 million from $15.0 million. Improvements included the sale of a $3.4 million nonaccrual loan and loans returned to performing status.
- Six-month charge-offs were $3.3 million, including $1.4 million of Hurricane Ida consumer relief loans. Management said the allowance was adequate but noted economic uncertainty could lead to higher future provisions.
- Available-for-sale securities were $131.1 million and held-to-maturity securities were $319.7 million at June 30. In Q1 the company transferred approximately $165.8 million of securities from AFS to HTM. HTM securities had estimated fair value of $264.3 million, $55.4 million below amortized cost; AFS securities had $2.8 million of gross unrealized losses. Management reported no other-than-temporary impairment and stated it intended and was able to hold the securities through recovery or maturity.
- Interest-rate sensitivity modeling showed a liability-sensitive cumulative one-year gap. A modeled instantaneous +400-basis-point rate shock reduced 12-month net interest income by 3.59%; the gradual +400-basis-point scenario reduced it by 4.16%. These are model estimates, not forecasts.
Liquidity, debt, capital, and exposures
Deposits were the primary funding source. Short-term borrowings were $26.4 million, including a $20.0 million parent-company credit-line balance; $6.5 million of that $26.5 million line capacity remained available. Senior long-term debt was $23.5 million and junior subordinated debentures were $15.0 million; no FHLB advances were outstanding. Management stated liquidity was sufficient for current operating needs. Available facilities included $384.5 million of net FHLB borrowing capacity, $100.5 million in correspondent-bank federal funds lines, and a $16.9 million Federal Reserve discount-window line, none drawn.
The Bank reported it was well capitalized and met minimum regulatory capital requirements. At June 30, its Tier 1 leverage ratio was 9.38%, Tier 1 risk-based capital ratio 10.81%, total risk-based capital ratio 11.74%, and common equity Tier 1 ratio 10.81%. Its capital conservation buffer was 3.74%, above the 2.50% minimum.
Off-balance-sheet exposures included $195.8 million of commitments to extend credit, $250.9 million of unfunded commitments under lines of credit, and $13.9 million of commercial and standby letters of credit. Public funds were approximately $1.0 billion, or 37.7% of deposits, creating funding and collateral-management exposure. The hotel and motel loan portfolio was $155.5 million, below the company’s stated internal guidance limit of approximately $187 million.
Outlook, contingencies, and unusual items
- Management emphasized attracting noninterest-bearing and lower-cost deposits to support margins. More than $200 million of time deposits with average rates above 3.00% were scheduled to mature in 2022–2024, mostly in 2023 and 2024.
- The company planned to adopt the current expected credit loss standard (ASU 2016-13) on January 1, 2023 and was assessing its impact. It had continued using the incurred-loss model at the reporting date.
- Two lawsuits were disclosed: one alleging overpayment of loan interest, with a possible loss range of $0–$0.5 million, a judgment against the company being appealed, and a $0.1 million accrued liability; another alleging responsibility for a customer’s loss of funds, with a possible loss range of $0–$1.5 million and no accrual recorded. A separate 2021 settlement was $1.1 million, with a $0.9 million insurance recovery receivable recorded.
- The SEC requested information about the company’s employee stock grant practice. The filing says no process had been instituted; it describes only a request for information. The program historically involved quarterly employee awards and annual management stock bonuses.
- Forward-looking risks identified include economic deterioration, inflation and interest-rate changes, securities-market losses, credit quality, competition, regulation, COVID-19 effects, and execution of growth or integration plans. The company reported no material changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- Whether loan growth and improved credit metrics persist, particularly in commercial real estate, hotels, oil-and-gas-related lending, and newer markets.
- How deposit pricing, public-funds concentration, and scheduled higher-rate time-deposit maturities affect funding costs and net interest margin.
- The effect of securities fair-value losses, the AFS-to-HTM transfer, and any future liquidity needs on capital and asset flexibility.
- Whether modeled interest-rate sensitivity, actual repricing behavior, and loan floors produce results consistent with management’s assumptions.
- Developments in the disclosed lawsuits, the SEC information request, and the expected 2023 CECL adoption impact.
- That Q2 and six-month results are interim results and the filing states they are not necessarily indicative of full-year performance.