Business context and reporting period
First Guaranty Bancshares, Inc. is a Louisiana bank holding company operating through First Guaranty Bank, with 27 banking facilities in Louisiana and North Central Texas. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are against December 31, 2016.
On June 16, 2017, First Guaranty acquired Premier Bancshares and Synergy Bank, adding a North Central Texas presence. The preliminary acquisition consideration was approximately $21.0 million: $10.3 million in cash and 397,988 First Guaranty shares. Acquired assets were estimated at $158.3 million, including $127.6 million of loans; assumed liabilities were $137.4 million, including $127.2 million of deposits. Purchase accounting valuations remain preliminary.
Financial performance and condition
Unless otherwise noted, amounts below are in millions of dollars.
| Metric | Q3 2017 / September 30, 2017 | Comparable period / prior balance |
|---|---|---|
| Net interest income | $13.9 for quarter; $39.3 for nine months | $12.1 and $36.2, respectively, in 2016 |
| Net income | $3.1 for quarter; $9.2 for nine months | $3.4 and $10.9, respectively, in 2016 |
| Earnings per common share | $0.38 for quarter; $1.19 for nine months | $0.44 and $1.44, respectively, in 2016 |
| Net interest margin | 3.37% for quarter; 3.35% for nine months | 3.41% and 3.38%, respectively, in 2016 |
| Total assets | $1,691.5 | $1,500.9 at December 31, 2016 |
| Loans, net of allowance | $1,101.5 | $937.8 at December 31, 2016 |
| Total deposits | $1,497.1 | $1,326.2 at December 31, 2016 |
| Shareholders’ equity | $142.8 | $124.3 at December 31, 2016 |
For the nine months, interest income rose to $49.6 million from $43.8 million, while interest expense increased to $10.3 million from $7.6 million. Net interest income after loan-loss provision was $36.3 million, versus $33.2 million. Noninterest income fell to $6.0 million from $8.0 million, and noninterest expense increased to $28.2 million from $24.7 million. Return on average assets was 0.76% and return on average common equity was 9.27% for the nine-month period.
Cash and cash equivalents were $23.9 million at quarter-end. For the nine months, operating cash flow was $8.9 million, investing activities used $35.8 million, and financing activities provided $32.6 million; cash increased $5.8 million. Short-term borrowings were $7.5 million, senior long-term debt $23.5 million, and junior subordinated debentures $14.7 million. Liquidity sources included $47.8 million of net FHLB borrowing capacity, $95.5 million of correspondent-bank federal funds capacity and an available $2.5 million revolving line. Management stated liquidity was sufficient for current operating needs.
At September 30, the Bank’s regulatory capital ratios included a 9.71% Tier 1 leverage ratio, 12.47% Tier 1 risk-based ratio and 13.26% total risk-based ratio; the company’s corresponding ratios were 8.05%, 10.33% and 12.25%. Both were reported as well capitalized. The Bank’s capital conservation buffer was 5.26% and the company’s was 4.25%.
Material changes versus prior periods
- Quarterly net income declined 9.4%; nine-month net income declined 15.4%. Management cited lower securities-sale gains and higher expenses, partly offset by higher net interest income. Securities gains were $0.1 million versus $1.2 million for Q3, and $1.0 million versus $3.8 million for the nine months.
- Net interest income grew with higher average earning-asset balances and yields, including acquired and originated loans. Deposit pricing costs rose: the average rate on interest-bearing liabilities increased to 1.22% for Q3 from 0.92% and to 1.11% for nine months from 0.91%.
- Net interest margin narrowed by four basis points for the quarter and three basis points for nine months. The acquisition increased the share count; management attributed lower EPS both to lower earnings and additional shares.
- Loans grew $163.7 million from year-end, with $114.6 million attributed to Premier and $49.1 million to legacy portfolio growth. Deposits increased $170.9 million, including approximately $127.1 million acquired.
- Nonperforming assets declined to $12.0 million, or 0.71% of assets, from $22.2 million, or 1.48%, at year-end. Nonaccrual loans fell to $10.3 million from $21.7 million; other real estate owned increased to $1.3 million from $0.4 million.
Outlook, management commentary and risks
The filing provides no specific earnings or revenue guidance. Management said it is transitioning assets from lower-yielding securities to loans to increase interest income and emphasized attracting noninterest-bearing deposits to support margins. Management considered the allowance adequate; it was $10.3 million, 0.93% of loans and 96.3% of nonperforming loans. Nine-month charge-offs were $4.3 million, including a $2.2 million charge-off on a commercial and industrial relationship that retained a $5.6 million balance.
Interest-rate exposure is a notable risk: the filing describes a liability-sensitive position with a negative cumulative one-year gap of $498.4 million, or 30.7% of earning assets. Its model estimated that an instantaneous 400-basis-point rate increase would reduce 12-month net interest income by 11.32%; a gradual 400-basis-point increase would reduce it by 6.08%. Management cautioned that modeled outcomes depend on assumptions and actual asset and liability behavior may differ.
Credit and funding risks include a loan portfolio that is 73.8% real-estate secured, with 45.6% in non-farm non-residential real estate; public funds were 39.6% of deposits. Three relationships represented approximately 40% of public-fund deposits under fiscal-agency agreements. The largest nonaccrual exposure included a $5.6 million shared national credit related to oil-and-gas support and service activity. Off-balance-sheet commitments included $59.5 million to extend credit, $106.6 million in unfunded lines and $8.6 million of letters of credit.
Merger-related nonrecurring expenses were approximately $0.3 million pre-tax in Q3 and $0.9 million for nine months. The Premier acquisition’s loan, premises, intangible and liability valuations were still preliminary. The company reported no material change to its previously disclosed risk factors; it said ordinary-course legal proceedings were not expected to materially adversely affect financial position or results. In the fourth quarter of 2017, after the reporting period, the company elected to become a financial holding company; the Federal Reserve Bank of Atlanta did not object.
Most important facts for investors to verify
- Track post-acquisition integration, realized cost savings, final purchase accounting values and the effect of acquired shares on per-share earnings.
- Monitor deposit pricing, public-fund concentration and retention, time-deposit maturities, and whether higher funding costs continue to pressure net interest margin.
- Review credit quality and reserve adequacy, especially the remaining $5.6 million shared national credit, charge-offs, acquired-credit marks and subsequent nonperforming-asset trends.
- Assess the sensitivity of earnings to interest-rate changes alongside the company’s modeling assumptions and actual repricing behavior.
- Compare subsequent cash generation, loan growth and capital ratios with this quarter’s liquidity sources and reported well-capitalized status.