First Guaranty Bancshares, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The unaudited consolidated results include First Guaranty Bancshares and its wholly owned bank subsidiary. The company is a Louisiana bank holding company with 21 banking facilities.
Financial performance and condition
Amounts below are in millions except per-share data and percentages.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Interest income | $12.5 | $14.2 | $25.0 | $28.6 |
| Net interest income | $9.6 | $10.8 | $19.2 | $21.7 |
| Provision for loan losses | $0.8 | $0.9 | $1.7 | $2.1 |
| Noninterest income | $2.3 | $2.4 | $4.5 | $4.7 |
| Noninterest expense | $7.8 | $7.9 | $15.6 | $15.1 |
| Net income | $2.1 | $3.0 | $4.2 | $6.0 |
| Income available to common shareholders | $1.9 | $2.5 | $3.7 | $5.0 |
| EPS | $0.31 | $0.39 | $0.59 | $0.80 |
- Margins and returns: Six-month net interest margin was 2.83%, versus 3.30% a year earlier; net interest rate spread was 2.59%, versus 3.04%. Six-month return on average assets was 0.61% versus 0.89%; return on average common equity was 7.91% versus 11.25%.
- Balance sheet at June 30, 2013: Total assets were $1.423 billion, up 1.1% from year-end 2012. Net loans were $675.7 million, up $56.5 million; deposits were $1.263 billion, up $10.2 million. Securities totaled $647.0 million, down $14.2 million. Cash and cash equivalents were $54.3 million, down from $86.2 million at December 31, 2012.
- Credit quality: Allowance for loan losses was $10.2 million, 1.5% of loans and 54.1% of nonperforming loans. Nonperforming assets were $23.0 million, or 1.61% of assets, versus $23.5 million and 1.67% at year-end. Nonaccrual loans declined to $18.2 million from $20.7 million; other real estate owned rose to $4.1 million from $2.4 million. Impaired loans fell to $39.4 million from $48.6 million, and troubled debt restructurings fell to $9.3 million from $16.6 million.
- Cash flow, six months: Operating activities provided $10.6 million, investing activities used $64.6 million, and financing activities provided $22.1 million. Cash decreased $31.9 million to $54.3 million.
- Debt and liquidity: Short-term borrowings were $29.4 million, up $14.6 million from year-end; long-term borrowings were $0.8 million. The company reported $77.8 million of net FHLB borrowing capacity, $70.5 million of correspondent-bank federal funds lines, and $0.7 million available on a revolving credit line. Management said liquidity was sufficient for current operating needs.
- Capital: Stockholders’ equity declined to $124.1 million from $134.2 million, mainly because of the $11.8 million six-month other comprehensive loss on available-for-sale securities. The company and bank met regulatory requirements and were classified as well capitalized; consolidated total risk-based capital was 14.64% and Tier 1 leverage was 9.09%.
Material changes versus comparable periods
- Net income declined 28% in Q2 and 30% for the first six months; six-month EPS fell from $0.80 to $0.59. Management attributed lower earnings primarily to reduced securities interest income, partly offset by lower interest expense.
- Six-month securities interest income fell to $6.6 million from $10.9 million. Average yield on interest-earning assets declined to 3.68% from 4.36%, while the average cost of interest-bearing liabilities declined to 1.09% from 1.32%.
- Loan growth shifted the balance sheet mix: average loans were 47.6% of average interest-earning assets versus 43.8% a year earlier, while average securities were 46.8% versus 50.9%.
- Available-for-sale securities recorded a $10.8 million after-tax unrealized loss during the first half, moving accumulated other comprehensive income from $6.0 million at year-end to a $5.8 million loss. Book value per common share was $13.45, down from $15.06 at year-end 2012.
- The company added $66 million of agency mortgage-backed securities to held-to-maturity during Q2. Held-to-maturity securities rose to $155.5 million from $58.9 million; available-for-sale securities fell to $491.6 million from $602.3 million.
- Six-month common dividends remained $0.32 per share. Preferred dividends declined to $0.5 million from $1.0 million.
Outlook, commentary, and risks
- Management expected loans to continue increasing during 2013 and expected the SBLF preferred dividend to decline further, forecasting $0.1 million for Q3 2013. The filing provides no earnings or revenue guidance.
- Management said the allowance was adequate under current conditions and that it had not identified additional loans indicating possible repayment problems beyond those already disclosed. Loan-loss provision declined year over year, which management attributed to improved portfolio credit quality and no further declines in estimated fair values of impaired loans.
- Credit exposure is concentrated in real estate: 72.8% of loans were secured primarily or secondarily by real estate, including 48.4% in non-farm non-residential real estate. Three relationships accounted for 50.4% of nonaccrual loans. Public funds were 37.8% of deposits, and $512.5 million of securities were pledged to secure public deposits.
- The company reported a negative cumulative one-year interest-rate gap of $351.0 million, or 25.8% of earning assets. It noted that the analysis excludes prepayments and principal payments and treats floating-rate loans at their floors as floating-rate assets. Management also forecast securities portfolio weighted-average life of about 5.5 years in the prevailing rate environment and 6.2 years under a parallel 400-basis-point rate shock.
- Management identified risks including economic and competitive conditions, interest-rate and securities-market changes, regulatory and capital changes, borrower performance, and the ability to grow or enter new markets. It reported no material change to the risk factors in its latest Form 10-K. Routine legal proceedings were not expected to materially affect financial position; the filing gives no clear quantified contingency reserve.
- Other notable items: $2.2 million of loan charge-offs in the first half, with $1.4 million concentrated in three relationships; OREO additions contributed to the rise in foreclosed assets. Management stated securities unrealized losses were temporary and reported no securities with other-than-temporary impairment.
Key facts for investors to verify
- Whether loan growth and the shift from securities to loans can offset continued pressure on net interest income and margin.
- Subsequent performance, collateral values, charge-offs, and recoveries for nonaccrual, impaired, and restructured loans—especially the three relationships representing half of nonaccrual loans.
- Whether increased OREO is sold without further material write-downs and whether the allowance remains adequate as the portfolio grows.
- The sensitivity of earnings, securities values, and liquidity to rate changes, including the large negative one-year cumulative gap and securities unrealized losses.
- Stability and pricing of deposits, particularly public funds and large certificates of deposit, and continued access to borrowing facilities.
- Whether regulatory capital remains strong after market-value changes, dividends, and continued loan growth.