First Guaranty Bancshares, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial statements are unaudited. First Guaranty is a Louisiana-based bank holding company serving Louisiana and Texas. Comparisons below are with Q2 or first-half 2019 for income measures, and December 31, 2019 for balance-sheet measures, unless noted.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $18.8 million | $15.7 million | $36.8 million | $30.3 million |
| Provision for loan losses | $1.8 million | $1.6 million | $3.1 million | $2.4 million |
| Noninterest income | $3.3 million | $1.6 million | $5.8 million | $2.9 million |
| Noninterest expense | $13.8 million | $11.7 million | $28.1 million | $22.8 million |
| Net income | $5.2 million | $3.2 million | $9.0 million | $6.3 million |
| Diluted/basic earnings per share as reported | $0.53 | $0.33 | $0.92 | $0.65 |
Net income rose 61% in Q2 and 42% for the first half. Higher loan interest income, lower interest expense, and stronger securities and loan-sale gains contributed; higher credit provisions and operating costs partly offset growth. Q2 net interest margin was 3.38%, down 8 basis points year over year. First-half margin was 3.47% versus 3.38% in 2019; the detailed MD&A describes this as a 9-basis-point increase, although one summary bullet in the filing incorrectly calls it a decrease.
Q2 return on average assets was 0.89% and return on average common equity was 11.92%, versus 0.68% and 8.22%, respectively, a year earlier. First-half figures were 0.81% and 10.48%, compared with 0.68% and 8.28%.
Financial position, cash flow and capital
- At June 30, total assets were $2.44 billion, up 15.1% from year-end 2019. Net loans were $1.63 billion, up $112.1 million; deposits were $2.12 billion, up $268.0 million. Shareholders’ equity was $179.9 million, compared with $166.0 million.
- Cash and cash equivalents were $237.1 million, versus $67.4 million at year-end. First-half operating cash flow was $7.8 million (2019: $13.6 million); investing cash outflow was $136.4 million (2019: $10.4 million); financing cash inflow was $298.4 million (2019: $39.0 million). Cash increased $169.7 million.
- Total deposits grew 14.5%. Noninterest-bearing demand deposits increased to $434.3 million. Public funds were $676.9 million, or 31.9% of deposits.
- Borrowings included $50.0 million of short-term FHLB advances, $6.6 million in repurchase agreements, $45.5 million of senior long-term debt, and $14.8 million of junior subordinated debentures. The $50.0 million FHLB advance was fixed at 0.72% for 11 months. Management said liquidity was sufficient for current operating needs; available FHLB net borrowing capacity was $112.9 million, with additional correspondent-bank lines.
- The Bank reported a 3.85% capital conservation buffer. At June 30, its Tier 1 leverage, Tier 1 risk-based, total risk-based, and Common Equity Tier 1 ratios were 8.83%, 11.10%, 11.85%, and 11.10%, respectively; it was classified as well capitalized.
Material changes and notable items
- Union Bancshares was acquired in November 2019 for approximately $43.4 million in cash. First-half 2020 included $0.7 million of one-time merger-related costs; system conversion was completed March 27, 2020.
- First Guaranty approved or funded more than 760 SBA Paycheck Protection Program loans totaling approximately $108.4 million by June 30. More than $3.3 million of program fees were generated: $1.0 million recognized in Q2 and $2.3 million deferred at quarter-end. PPP loans carry an SBA guarantee and had no related loan-loss allowance.
- Loan deferrals originally covered more than 1,000 loans totaling approximately $590 million. As of July 31, about $94 million remained on deferral.
- The allowance for loan losses rose to $14.0 million, or 0.85% of loans, from $10.9 million, or 0.72%, at year-end. Nonaccrual loans increased to $21.8 million from $14.4 million; nonperforming assets rose to $34.8 million from $21.9 million. The allowance equaled 45.8% of nonperforming loans.
- All investment securities were classified available for sale at June 30, totaling $450.5 million. The company terminated its held-to-maturity portfolio in Q1 after sales and transfers. Securities gains were $1.4 million in Q2 and $1.8 million for the first half; the first half of 2019 had a $0.4 million loss. First-half other comprehensive income was $8.0 million, principally reflecting unrealized securities gains.
- One $50,000 other-than-temporary impairment charge on a security was recorded in the first half. Management found no goodwill impairment at June 30 despite evaluating COVID-19 disruption and the decline in the company’s share price.
Outlook, risks and contingencies
The filing provides no quantified earnings or financial guidance. Management said economic uncertainty could require further increases in the loan-loss allowance. It cited COVID-19 effects on borrowers, unemployment, collateral values and credit quality; pressure on asset yields and net interest margins from low interest rates; and risks to business activity, liquidity and dividends. The company also highlighted concentration in real-estate lending (69.0% of loans), including non-farm non-residential real estate (40.8%), and exposure to oil-and-gas support businesses (5.2% of funded and 1.6% of unfunded commitments). Interest-rate sensitivity analysis showed a negative cumulative one-year gap of $460.4 million; modeled 12-month net interest income increased 3.72% under an instantaneous +400-basis-point shock and declined 4.82% under a -25-basis-point shock, subject to model assumptions.
First Guaranty elected CARES Act relief that allows qualifying COVID-related loan modifications to avoid certain TDR accounting requirements. It reported no outstanding TDRs at June 30. The filing also notes ordinary-course legal matters: one case alleging interest overpayment, with a possible loss range of $0–$0.5 million and $0.1 million accrued, is under appeal; another alleges responsibility for customer loss of funds, with a possible range of $0–$1.5 million and no accrual. Management stated that other legal proceedings were not expected to have a material adverse effect based on information then available. The company delayed adoption of the current expected credit losses standard until its applicable effective date for smaller reporting companies.
Important facts for investors to verify
- Whether remaining COVID-related deferrals, borrower performance and nonperforming assets changed materially after the July 31 update.
- PPP loan forgiveness, timing of recognition of the $2.3 million deferred fees, and any related repayment or servicing effects.
- Credit trends behind the increases in nonaccrual loans, 90-days-past-due accruing loans and the allowance, particularly in real estate and commercial lending.
- Stability and pricing of public-funds and time deposits, and the company’s funding needs as deposits and the short-term FHLB advance mature.
- The conflicting first-half net interest margin description in the filing; detailed tables indicate 3.47% versus 3.38%, an increase of 9 basis points.
- Updates on the two disclosed lawsuits, the appeal and potential COVID-19 impacts on earnings, capital, liquidity and dividends.