First Guaranty Bancshares, Inc. quarterly report, Q1 FY2021

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First Guaranty Bancshares, Inc. — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020 unless noted. Unaudited consolidated results include First Guaranty Bank, a Louisiana-chartered commercial bank serving Louisiana and Texas.

Financial and operating highlights

  • Earnings: Net income was $5.0 million, up 31.3% from $3.8 million in Q1 2020. Diluted/common-share earnings were $0.52 versus $0.39. Return on average assets was 0.80% versus 0.72%; return on average common equity was 11.31% versus 9.00%.
  • Interest income and margins: Net interest income rose to $19.6 million from $17.9 million, while net interest income after provision was $19.0 million versus $16.7 million. Net interest margin narrowed to 3.25% from 3.57%, as asset yields fell faster than funding costs. Interest income was $25.3 million, approximately flat year over year; interest expense declined 23.6% to $5.7 million.
  • Credit costs: Loan-loss provision was $0.6 million, down from $1.2 million. The allowance was $24.8 million, or 1.26% of loans, compared with $24.5 million, or 1.33%, at year-end.
  • Revenue and expenses: Noninterest income was $2.3 million versus $2.4 million; lower securities gains were partly offset by higher ATM and debit-card fees. Noninterest expense increased to $15.0 million from $14.3 million, particularly reflecting higher occupancy and equipment costs.
  • Balance sheet and funding: Assets increased 3.8% to $2.57 billion. Gross loans net of unearned income grew 6.6% to $1.97 billion; deposits rose 6.8% to $2.31 billion. Cash and cash equivalents were $291.1 million, down from $299.6 million. Shareholders’ equity declined to $176.3 million from $178.6 million, mainly due to a $5.8 million reduction in accumulated other comprehensive income, partly offset by earnings.
  • Debt and liquidity: The company repaid a $50.0 million short-term FHLB advance; short-term borrowings were $6.2 million at quarter-end. Long-term debt included $40.8 million of senior debt, $3.3 million of FHLB advances and $14.8 million of junior subordinated debentures. Management said liquidity was sufficient; reported borrowing capacity included $222.6 million at the FHLB and $100.5 million on correspondent-bank federal funds lines.
  • Cash flow: Operating activities provided $3.9 million, investing activities used $107.8 million, and financing activities provided $95.3 million. Cash declined $8.6 million during the quarter. Net loan growth was the principal investing cash use, while deposit growth and repayment of short-term borrowing were significant financing flows.
  • Capital and shareholder returns: The Bank reported a 3.54% capital conservation buffer, above the 2.50% minimum, and was described as well-capitalized. Its Tier 1 leverage, Tier 1 risk-based, total risk-based and CET1 ratios were 8.36%, 10.33%, 11.54% and 10.33%, respectively. The company paid a $0.16-per-share common dividend.

Material changes and notable items

  • Loan growth was driven notably by commercial and equipment leases, which increased to $205.5 million from $104.1 million, and multifamily lending. Management reported loans exceeded $2.0 billion by April 30, 2021.
  • The loan portfolio remained concentrated in real estate: 69.3% was real-estate secured and 41.3% was non-farm non-residential real estate. Hotel and motel loans totaled $126.3 million; oil-and-gas-related business exposures were also disclosed.
  • Nonperforming assets fell to $27.2 million, or 1.06% of assets, from $30.9 million, or 1.25%. Nonperforming loans were $25.2 million; nonaccrual loans increased slightly to $16.1 million. Impaired loans rose to $17.6 million from $15.9 million.
  • The company reclassified $152.9 million of agency securities from available-for-sale to held-to-maturity. Total investment securities were $220.6 million. The quarter included a $5.8 million other comprehensive loss, largely reflecting unrealized securities losses; management reported no credit-related other-than-temporary impairment.
  • COVID-related loan deferrals were approximately $3.1 million at March 31. The company reported $84.2 million of SBA Paycheck Protection Program loans, which carry a government guarantee, and elected CARES Act relief for qualifying COVID-related loan modifications.
  • Subsequent event: On April 27, 2021, First Guaranty issued $34.5 million of 6.75% Series A perpetual preferred stock (approximately $33.1 million net proceeds). The filing says proceeds would support general corporate purposes, including bank investment and potential acquisitions; it also reports that $13.2 million of senior debt was repaid and $20.0 million added to bank subsidiary capital effective April 30.

Outlook, commentary and risks

  • No specific earnings or margin guidance was provided. Management described continued loan-growth opportunities, particularly in Texas, and expected to renew most of approximately $149.6 million of non-public time deposits maturing during the remainder of 2021 at lower market rates.
  • Management said economic uncertainty could lead to further allowance increases. COVID-19 effects, changing interest rates, competition, regulation, securities-market movements, borrower conditions and execution of growth or acquisitions were identified as factors that could cause results to differ from expectations.
  • Interest-rate sensitivity analysis showed a liability-sensitive cumulative gap of approximately $493.0 million through one year. Modeling estimated net interest income would increase 2.02% under an instantaneous +400-basis-point shock, but decrease 0.52% under a gradual +400-basis-point scenario; management cautioned that assumptions and actual asset/liability behavior may differ.
  • Off-balance-sheet commitments included $157.5 million to extend credit, $199.3 million of unfunded lines and $11.7 million of letters of credit. The filing describes ordinary-course litigation; one case had a possible loss range of $0–$0.5 million and a $0.1 million accrual, while another had a possible loss range of $0–$1.5 million and no accrual. Management stated that aggregate legal proceedings were not expected to have a material adverse effect.
  • Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether rapid commercial lease growth and real-estate lending concentrations change credit performance, allowance needs or portfolio risk.
  • Trends in nonaccrual, impaired and past-due loans, including the hotel-related TDR and COVID-related deferrals.
  • Whether deposit repricing and asset yields stabilize or improve net interest margin, and how actual rate sensitivity compares with the filing’s models.
  • The consequences of the held-to-maturity designation and securities valuation changes for liquidity, earnings and equity.
  • Use and impact of preferred-stock proceeds, the reported senior-debt repayment and bank capital contribution, as well as developments in the disclosed lawsuits.