First Guaranty Bancshares, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited consolidated results for the company and First Guaranty Bank. Amounts below are in U.S. dollars; financial statement amounts are generally rounded to millions.
Business context and financial performance
First Guaranty is a Louisiana bank holding company operating 21 banking facilities. Its principal business is taking deposits and investing in loans and securities.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Interest income | $14.2m | $13.3m | $28.6m | $26.5m |
| Net interest income | $10.8m | $9.6m | $21.7m | $19.1m |
| Provision for loan losses | $0.9m | $2.9m | $2.1m | $3.4m |
| Noninterest income | $2.4m | $3.7m | $4.7m | $5.0m |
| Noninterest expense | $7.9m | $6.7m | $15.1m | $13.3m |
| Net income | $3.0m | $2.4m | $6.0m | $4.8m |
| Income available to common shareholders | $2.5m | $2.1m | $5.0m | $4.1m |
| Earnings per common share | $0.39 | $0.34 | $0.80 | $0.67 |
For the six months, net income increased 25.6%, principally due to higher interest income and lower interest expense and loan-loss provision, partly offset by higher noninterest expense. Net interest margin was 3.30%, down from 3.40% a year earlier; the net interest rate spread was 3.04%, versus 3.10%. Return on average assets was 0.89% for the six months, compared with 0.82%; return on average common equity was 13.46%, compared with 12.12%.
Financial position, liquidity and capital
- Assets and loans: Total assets were $1.364bn at June 30, up 0.8% from year-end 2011. Net loans were $587.4m, up $23.2m; total loans before unearned income were $596.6m. Investment securities totaled $660.3m.
- Deposits and borrowings: Deposits were $1.206bn, down $1.6m from year-end. Public funds were $452.5m, or 37.5% of deposits. Short-term borrowings were $19.4m, up from $12.2m; long-term debt fell to $1.4m from $3.2m after scheduled and additional repayments.
- Cash flow: Cash and cash equivalents declined $67.7m during the six months to $44.7m. Operating activities provided $9.1m; investing activities used $77.6m, including substantial securities purchases; financing activities provided $0.8m. A $25.0m receivable for called bonds was collected on July 2, 2012.
- Liquidity: Management said liquidity was sufficient for current needs. Available Federal Home Loan Bank borrowing capacity was $106m, and correspondent-bank federal funds lines totaled $45m; the company reported no outstanding balances on those lines. A separate $2.5m revolving credit line was also undrawn.
- Capital: Stockholders’ equity was $131.4m, versus $126.6m at year-end. The company reported well-capitalized regulatory ratios: Tier 1 leverage 8.93%, Tier 1 risk-based capital 13.61%, and total risk-based capital 14.64% consolidated (14.65% at the bank).
Changes, credit quality and other notable items
- Net nonperforming assets were $27.3m, or 2.0% of assets, down from $28.9m at December 31, 2011. Nonperforming loans were $20.4m; nonaccrual loans were $19.7m. Other real estate owned rose to $6.9m from $5.7m, including a foreclosed entertainment complex.
- The allowance for loan losses was $9.1m, or 1.53% of loans, compared with $8.9m, or 1.55%, at year-end. Six-month charge-offs were $2.2m versus $4.2m in 2011; recoveries were $0.3m in both periods. Management considered the allowance adequate, while noting estimates are subjective and may change.
- Impaired loans totaled $45.3m. Troubled debt restructurings totaled $16.7m; none were newly restructured in the first six months. One previously restructured $1.1m residential loan defaulted, and a $0.6m collateral impairment was charged off.
- Management revised its credit-risk rating methodology, placing more weight on cash flow and less on collateral value. It attributed the increase in special-mention credits partly to this change and said it should support earlier identification of problem loans. Special-mention balances rose to $34.7m from $2.4m at year-end; management cautioned that methodology changes contributed to the increase.
- Noninterest expense rose $1.8m year over year for the six months, including higher real-estate-owned and repossession costs. These costs included $0.8m of OREO write-downs and $0.4m of property-maintenance and protection costs, partly offset by $0.2m of prior write-down recoveries.
- Net securities gains were lower: $1.5m for the six months versus $2.2m in 2011. Available-for-sale unrealized gains increased accumulated other comprehensive income by $1.8m during the period. No securities impairment write-down was recorded in the first half of 2012.
- The company’s one-year cumulative interest-sensitivity gap was negative $258.9m, indicating a liability-sensitive position under its stated analysis. It also reported that $255.6m of floating-rate loans were at their interest-rate floors.
- There is no specific earnings or financial guidance in the filing. Management’s outlook statements are forward-looking and subject to economic, competitive, interest-rate, regulatory, credit and securities-market risks. Management reported no material change to previously disclosed risk factors and no expected material adverse effect from ordinary-course legal proceedings.
Most important facts for investors to verify
- Whether loan quality and criticized-credit trends continue to improve, including the outcome of the higher special-mention balance and concentrated nonaccrual exposures.
- Whether OREO additions, write-downs, carrying costs and sales affect future earnings and asset quality.
- Whether the $9.1m allowance remains sufficient as loans grow and credit conditions change.
- How the company manages funding concentration: public funds were 37.5% of deposits, and $446.3m of time deposits were at least $100,000.
- Whether margin pressure persists given the lower net interest margin, liability-sensitive gap and floating-rate loans at floors.
- Whether securities gains, the bond-call receivable collected after quarter-end, and securities portfolio valuations are recurring or timing-related factors.