First Guaranty Bancshares, Inc. — Q3 2012 Form 10-Q
Period: Quarter and nine months ended September 30, 2012; unaudited consolidated results for First Guaranty Bancshares and its wholly owned bank subsidiary. Amounts below are in millions unless stated otherwise. The company operates 21 banking facilities in Louisiana.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $9.9 | $10.1 | $31.6 | $29.1 |
| Provision for loan losses | $0.9 | $3.5 | $3.0 | $6.9 |
| Noninterest income | $3.3 | $4.0 | $8.0 | $8.9 |
| Noninterest expense | $7.8 | $7.9 | $22.9 | $21.2 |
| Net income | $3.0 | $2.2 | $9.0 | $7.0 |
| Income available to common shareholders | $2.5 | $1.4 | $7.6 | $5.5 |
| EPS | $0.40 | $0.22 | $1.20 | $0.89 |
For the nine months, net income rose 30.1%. Management attributed the improvement mainly to lower loan-loss provisions and interest expense, along with growth in investments. The 2011 comparison included a $1.4 million acquisition gain; there was no such gain in 2012. Securities gains were $3.2 million for nine months in 2012, versus $3.1 million in 2011, and $1.7 million in Q3 2012 versus $0.9 million in Q3 2011.
- Nine-month net interest margin was 3.23%, down from 3.34%; net interest rate spread was 2.98%, versus 3.04%. Average earning-asset yield declined to 4.26% from 4.64%, while the average cost of interest-bearing liabilities fell to 1.28% from 1.60%.
- Return on average assets was 0.89% for both the nine-month period and Q3 2012; comparable 2011 figures were 0.77% and 0.67%. Nine-month return on average common equity was 11.07%, versus 9.16%.
- Cash from operating activities was $14.6 million for nine months. Investing activities used $42.1 million and financing activities used $8.1 million; cash and cash equivalents declined $35.5 million to $76.9 million.
Financial position and liquidity
- Total assets were $1.361 billion at September 30, 2012, up $7.4 million from year-end 2011. Deposits were $1.206 billion, down $1.1 million. Noninterest-bearing demand deposits increased $24.4 million, while time deposits declined $36.3 million.
- Loans net of the allowance were $596.7 million, up $32.4 million since year-end; gross loans net of unearned income were $606.2 million. The allowance for loan losses was $9.5 million, or 1.57% of loans.
- Investment securities totaled $644.7 million. Management shortened the portfolio’s contractual maturity to reduce interest-rate exposure: securities due after ten years declined to $113.3 million from $279.5 million at year-end. Weighted-average contractual maturity was 7.7 years. Securities pledged totaled $440.8 million.
- Total borrowings were approximately $13.0 million: $11.8 million short-term and $1.3 million long-term. Long-term debt was reduced from $3.2 million at year-end and carried a 4.00% rate, with contractual maturity in April 2017. Available stated borrowing capacity included $125.8 million at the FHLB, $55.5 million in correspondent-bank lines, and an unused $2.5 million revolving facility.
- Public funds were $433.2 million, or 35.9% of deposits, and are collateralized. The filing reports liquidity was sufficient for current needs. Capital ratios exceeded the stated “well capitalized” thresholds: consolidated total risk-based capital was 15.26% and Tier 1 leverage was 9.15%.
- Stockholders’ equity rose to $134.5 million from $126.6 million. It includes $39.4 million of Series C preferred stock issued under the U.S. Treasury’s Small Business Lending Fund program.
Credit quality, changes, and risks
- Nonperforming assets were $29.1 million, or 2.1% of assets, versus $28.9 million at year-end. Nonperforming loans were $24.6 million; nonaccrual loans were $23.6 million, up $1.1 million. The allowance covered 40.3% of nonperforming loans.
- Impaired loans totaled $46.7 million. Troubled debt restructurings totaled $16.7 million; no new TDRs were made in the first nine months of 2012. Three previously restructured 1–4 family loans totaling $1.3 million subsequently defaulted.
- Real estate secured 77.2% of the loan portfolio; non-farm, non-residential real estate was the largest category at 49.1%. Nonaccrual exposure was concentrated: six relationships represented approximately $13.8 million, or 58.4% of nonaccrual loans.
- Management revised its credit-rating methodology in 2012, contributing to a reported increase in special-mention loans. The company recorded $3.0 million of charge-offs and $0.6 million of recoveries in the nine-month period. OREO declined to $4.4 million; OREO write-downs and losses were a notable expense, including $1.3 million of write-downs during the period.
- The company reported a negative cumulative one-year interest-sensitivity gap of $253.7 million, or 20.17% of earning assets, and characterized its position as liability-sensitive. Rate movements could affect funding costs and net interest income. Management also identified economic conditions, competition, securities markets, regulation, borrower performance, and the financial condition of securities issuers as risks.
- Unfunded credit lines and commitments to extend credit totaled $99.2 million; letters of credit totaled $6.5 million. Management believed pending legal matters would not materially affect financial position, and reported no material changes to previously disclosed risk factors.
Outlook and unusual items
The filing provides no specific earnings or revenue guidance. Management expected the SBLF preferred-stock dividend rate to decline following growth in qualified small-business loans: the filing anticipated recognition in Q1 2013 of a 1% rate on the amount corresponding to qualified-loan growth and 5% on the residual. Results for the interim periods are not necessarily indicative of full-year results. The company paid a 10% stock dividend in February 2012; prior-period per-share figures were retroactively adjusted.
Key facts for investors to verify
- Whether nonaccrual loans, impaired credits, TDR defaults, and concentrated real-estate exposures stabilize, and whether the allowance remains adequate.
- How much future earnings depend on securities gains and lower credit-loss provisions, given Q3 net interest income declined year over year.
- Whether the shortened securities portfolio, unrealized valuation changes, and securities pledged against public deposits alter interest-rate or liquidity risk.
- The persistence and pricing of public-fund deposits, which represented 35.9% of deposits, and the company’s ability to fund maturities and loan demand.
- Whether the anticipated SBLF dividend-rate reduction takes effect as described in Q1 2013 and how it affects preferred dividends and income available to common shareholders.