First Guaranty Bancshares, Inc. — Q3 2019 Form 10-Q
Business context and period. First Guaranty is a Louisiana bank holding company operating through First Guaranty Bank, with 26 banking facilities in Louisiana and North Central Texas. This unaudited report covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Unless stated otherwise, amounts below are in millions.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $22.1 | $20.1 | $67.5 | $57.7 |
| Net interest income | $14.7 | $14.5 | $45.0 | $42.5 |
| Provision for loan losses | $1.7 | $0.4 | $4.1 | $0.6 |
| Noninterest income | $3.2 | $1.2 | $6.1 | $4.5 |
| Noninterest expense | $11.3 | $11.2 | $34.1 | $32.0 |
| Net income | $3.8 | $3.4 | $10.2 | $11.6 |
| Diluted/basic EPS as reported | $0.44 | $0.39 | $1.16 | $1.32 |
| Net interest margin | 3.35% | 3.45% | 3.37% | 3.40% |
- Balance sheet at September 30: assets $1,805.2; loans, net of allowance, $1,280.7; deposits $1,600.4; cash and cash equivalents $179.0; shareholders’ equity $162.0.
- Credit quality: allowance for loan losses was $12.2, or 0.95% of loans, versus $10.8, or 0.88%, at year-end. Nonaccrual loans were $10.9 versus $8.7; total nonperforming assets were $14.6 versus $10.0. Impaired loans increased to $15.1 from $8.8.
- Debt and liquidity: senior long-term debt was $17.6 and junior subordinated debentures $14.7; no short-term borrowings were outstanding. The company reported $134.4 of unused FHLB borrowing capacity and $100.5 of correspondent-bank federal funds lines. Time deposits due within one year totaled $314.6.
- Cash flows, nine months: operating activities provided $21.4; investing activities provided $65.3; financing activities used $35.6. Cash increased $51.0 to $179.0. Investing cash flow included securities maturities and sales, partly offset by $73.0 of net loan growth; financing cash flow reflected $29.2 of deposit decline, debt repayment and dividends.
- Capital: the Bank reported a 9.66% Tier 1 leverage ratio, 11.91% Tier 1 risk-based ratio and 12.75% total risk-based ratio at September 30, and was described as well capitalized. The capital conservation buffer was 4.75%.
Material changes and management commentary
- Q3 net income increased 13.2% year over year, while nine-month net income fell 12.1%. Nine-month 2018 results benefited from a $1.6 million loan recovery; 2019 results included a $4.1 million loan-loss provision versus $0.6 million in 2018.
- Net interest income rose, supported by loan growth and higher loan yields, but deposit pricing and interest expense increased faster. Nine-month interest expense rose 48.4% to $22.5 million. Management attributed the margin decline to higher deposit costs, partly offset by shifting assets from securities into loans.
- Loans grew 5.5% from year-end to $1.3 billion, while deposits declined 1.8% to $1.6 billion and securities fell $136.0 million to $269.3 million. Management said securities sales helped fund loan growth and reduce interest-rate risk. Public funds were 34.8% of deposits, down from 39.6% at year-end.
- Q3 noninterest income included a $1.3 million gain on loan sales, primarily from selling guaranteed portions of SBA and USDA loans. For the nine months, the company also recorded $0.6 million of interest income from settlement of a purchased impaired loan.
- Credit costs and problem assets merit attention: nonperforming assets rose to 0.81% of assets from 0.55%. The allowance included a $1.9 million allocation for a $4.1 million impaired hotel loan and a $1.1 million allocation for an impaired commercial lease. OREO increased to $3.4 million, chiefly after a commercial property was charged down and transferred to OREO. There were no outstanding TDRs at quarter-end.
- Other balance-sheet changes included an $8.8 million improvement in accumulated other comprehensive income, principally reflecting reduced unrealized securities losses. Dividends remained $0.16 per share for the quarter; $4.2 million was paid in the first nine months.
Outlook, risks and subsequent events
- The filing provides no quantified earnings or revenue guidance. Management said it expects to focus on attracting noninterest-bearing and other lower-cost deposits and describes loan growth, deposit pricing, liquidity and interest-rate management as ongoing priorities.
- Interest-rate risk is material: the reported cumulative one-year repricing gap was negative 15.5% of earning assets. Modeling estimated net interest income would rise 6.02% under an instantaneous +400 basis-point shock and fall 3.19% under a -100 basis-point shock; results depend on assumptions and actual balance-sheet behavior may differ.
- Credit risks include concentrations in real estate lending (74.8% of loans), public-funds deposit reliance, and exposure to businesses supporting oil and gas operations (4.2% of funded and 1.5% of unfunded commitments). Management cited economic, competition, regulatory, interest-rate, credit and acquisition-integration risks. It considered the allowance adequate, but its estimates are judgmental.
- Off-balance-sheet commitments at quarter-end included $98.5 million to extend credit, $164.2 million of unfunded credit lines and $11.0 million of letters of credit. The company said pending litigation was not expected to have a material adverse effect.
- Subsequent acquisition: on November 7, 2019, First Guaranty completed its acquisition of Union Bancshares for $43.4 million in cash, partly financed by a $32.5 million term loan, and separately raised $1.0 million in a private placement of 49,213 shares. The acquired company reported loans of $183.8 million and deposits of $205.2 million in the note disclosure.
- Two facilities were under construction, with $12.9 million of total commitments and $7.6 million incurred by September 30. The company adopted lease accounting in Q1, recording a $0.9 million right-of-use asset and lease liability. It expected the credit-loss accounting standard adoption date to shift to 2023 following the FASB’s proposed delay.
Important facts for investors to verify
- How subsequent credit performance, charge-offs and impaired-loan provisions develop, particularly for the hotel, commercial lease, agricultural and consumer exposures; whether OREO is sold near carrying value.
- Whether deposits stabilize and funding costs moderate, including the effects of public-funds seasonality and the large time-deposit base.
- The post-acquisition capital, leverage, funding cost, integration expenses and earnings contribution from Union; the filing gives inconsistent acquired-asset figures—approximately $258.5 million in Note 11 versus $261.4 million in MD&A—and this should be reconciled.
- Whether loan growth and the shift out of securities support earnings without increasing credit or interest-rate risk beyond management’s assumptions.
- Actual liquidity and regulatory capital after acquisition financing, and progress and remaining costs for the two facilities under construction.