First Guaranty Bancshares, Inc. quarterly report, Q1 FY2022

First Guaranty Bancshares, Inc. — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021 unless noted. First Guaranty is a Louisiana-based bank holding company operating through First Guaranty Bank, with banking facilities primarily in Louisiana and Texas and newer markets in Kentucky and West Virginia. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.

Financial performance

Metric	Q1 2022	Q1 2021 or prior period
Net interest income	$25.0 million	$19.6 million; up 27.5%
Net interest margin	3.59%	3.25%; up 34 basis points
Provision for loan losses	$0.6 million	$0.6 million
Noninterest income	$2.0 million	$2.3 million
Noninterest expense	$16.8 million	$15.0 million
Net income	$7.6 million	$5.0 million; up 51%
Net income available to common shareholders	$7.0 million	$5.0 million
Earnings per common share	$0.65	$0.47
Operating cash flow	$8.3 million	$5.4 million

Interest income rose 20.3% to $30.5 million, reflecting loan growth and higher average earning assets and yields. Interest expense declined 4.2% to $5.5 million. Management attributed improved margin to a better mix of earning assets and lower funding costs. Average earning-asset yield was 4.38%, while the average rate on interest-bearing liabilities was 1.04%. Returns on average assets and average common equity were 1.05% and 14.99%, respectively, compared with 0.80% and 11.31% a year earlier. The common dividend was $0.16 per share; preferred dividends were $0.6 million.

Financial position, funding and credit

• Total assets were $2.91 billion, up 1.1%; loans net of unearned income were $2.23 billion, up 3.3%; and deposits were $2.62 billion, up 1.1%.
• Cash and cash equivalents declined to $132.7 million from $261.9 million. The quarter used $169.0 million in investing activities, mainly reflecting securities purchases and loan growth, and generated $31.5 million from financing activities.
• Available-for-sale securities were $133.2 million at fair value; held-to-maturity securities were $319.6 million at amortized cost, with disclosed fair value of $292.0 million. The company transferred securities from AFS to HTM during the quarter. Portfolio unrealized losses contributed to a $7.4 million other comprehensive loss and a decline in shareholders’ equity to $221.8 million from $223.9 million.
• Total deposits increased despite a $23.6 million reduction in time deposits. Noninterest-bearing demand deposits rose $23.4 million. Public funds were $979.5 million, or 37.3% of deposits, making their retention and collateralization relevant funding considerations.
• Short-term borrowings and repurchase agreements totaled $16.1 million at quarter-end; senior long-term debt was $24.4 million and junior subordinated debentures were $14.8 million. No FHLB advances remained outstanding. The company reported $451.2 million of net FHLB borrowing capacity and $100.5 million of federal funds lines; $10.0 million was drawn on revolving credit lines, leaving $16.5 million available on those lines.
• The allowance for loan and lease losses was $24.1 million, or 1.08% of loans, versus $24.0 million, or 1.11%, at year-end. Nonperforming assets declined to $17.9 million from $20.0 million; nonaccrual loans fell to $15.1 million from $16.7 million. Special-mention loans decreased to $94.8 million from $138.7 million. There were no outstanding TDRs at March 31.
• Loans were concentrated in real estate (66.6% of the portfolio), including non-farm non-residential real estate (40.0%). Hotel and motel loans totaled $161.1 million, below the company’s stated internal guidance limit of approximately $187.0 million. The company reported that 5.8% of funded and 1.3% of unfunded loan commitments were to businesses supporting oil and gas operations.
• The Bank reported it was well capitalized and met minimum regulatory requirements. Its capital conservation buffer was 3.38%. The Bank’s Tier 1 leverage, Tier 1 risk-based, total risk-based and common equity Tier 1 ratios were 8.80%, 10.40%, 11.38% and 10.40%, respectively.

Material changes and management commentary

• Net income growth reflected higher loan and securities interest income and lower interest expense, partly offset by higher personnel and other operating costs, lower noninterest income and loan-loss provision expense.
• Salaries and benefits rose to $9.0 million from $7.5 million, which management linked primarily to hiring, including in newer markets. Other expense increases included software, legal and professional fees, travel and regulatory assessments.
• The securities portfolio increased $88.6 million overall. AFS securities declined $77.4 million while HTM securities increased $166.0 million, primarily due to the transfer between classifications. The transfer resulted in the associated unrealized loss remaining in accumulated other comprehensive income and being amortized over the securities’ remaining lives.
• Management said the allowance was adequate under its incurred-loss methodology, but noted economic uncertainty could require additional provisions. First Guaranty, a smaller reporting company, had delayed adoption of the expected-credit-loss standard (ASU 2016-13) until the applicable effective date.
• No formal earnings or financial guidance was provided. Management cited continued loan growth opportunities, particularly in Texas, and emphasized attracting lower-cost deposits. The filing notes more than $200 million of time deposits with average rates above 3.00% scheduled to mature during 2022–2024, mostly in 2023 and 2024.

Risks, contingencies and unusual items

• Interest-rate and securities valuation exposure is significant: accumulated other comprehensive loss increased during the quarter, and management reported a liability-sensitive cumulative gap over one year. Its modeled 12-month net-interest-income sensitivity ranged from a 1.71% increase under an instantaneous +100-basis-point shock to a 1.41% decrease under a gradual +400-basis-point increase. These estimates depend on assumptions and are not forecasts.
• Most HTM securities were in unrealized loss positions; the filing reported $27.6 million of gross unrealized losses on HTM securities. Management stated it had the intent and ability to hold the securities until recovery or maturity and recorded no other-than-temporary impairment in the quarter.
• One nonperforming hotel loan of approximately $3.4 million was sold after March 31, 2022. The filing also identifies hotel exposure and real estate concentration as areas requiring monitoring.
• Two lawsuits were disclosed. In one, a judgment was rendered against the company for the full amount of a claimed interest overpayment, with a possible loss range of $0–$0.5 million; the company is appealing and had accrued $0.1 million. A second customer-funds lawsuit had a possible loss range of $0–$1.5 million and no accrued liability. A prior $1.1 million settlement had a $0.9 million insurance-recovery receivable recorded.
• The SEC requested information about the Bank’s employee stock grant program; the company stated no process had been instituted and described the matter as an information request. The program’s historical annual costs were approximately $300,000 for employee awards and $275,000 for management bonuses.
• Other stated risks include COVID-19 and economic conditions, inflation and interest-rate changes, competition, regulatory changes, and the transition of $46.4 million in LIBOR-linked loans to alternative reference rates. Management did not anticipate a significant financial-statement impact from the LIBOR transition.

Important facts for investors to verify

• Whether loan growth, asset yields and the 3.59% net interest margin can be sustained as rates and funding costs change.
• The sensitivity of tangible and regulatory capital to further securities losses, and the implications of the AFS-to-HTM transfers and securities’ long duration.
• Deposit stability and pricing, particularly public funds representing 37.3% of deposits and higher-rate time-deposit maturities during 2022–2024.
• Credit performance in commercial real estate, hotels, oil-and-gas-related lending and the expanding commercial lease portfolio; also monitor nonperforming loans and allowance adequacy.
• Developments in the disclosed lawsuits and SEC information request, including any change in estimated exposure, accruals or regulatory outcome.