First Guaranty Bancshares, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The company is a Louisiana bank holding company; its wholly owned bank operated 21 banking facilities, primarily in Hammond, Baton Rouge, Lafayette and Shreveport-Bossier City. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and condition
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Total assets | $1,518.9 | $1,436.4 | Up 5.7% |
| Total deposits | $1,371.8 | $1,303.1 | Up 5.3% |
| Loans, net of unearned income | $790.3 | $703.2 | Up 12.4% |
| Net interest income | $44.1 | $39.8 | Up 10.9% |
| Net income | $11.2 | $9.1 | Up 23.1% |
| Net income available to common shareholders | $10.8 | $8.4 | After preferred dividends |
| Diluted/basic earnings per common share as reported | $1.72 | $1.34 | Up 28.4% |
| Net interest margin | 3.11% | 2.92% | Up 19 basis points |
| Efficiency ratio (GAAP) | 62.85% | 65.61% | Improved |
| Cash and cash equivalents, year-end | $44.6 | $61.5 | Down $16.9 |
| Total shareholders’ equity | $139.6 | $123.4 | Up $16.2 |
| Total borrowings, year-end | $3.3 | $6.3 | Short- and long-term borrowings |
Net interest income rose as average earning assets grew and the average cost of interest-bearing liabilities fell. Interest expense declined 17.4% to $9.2 million; loan interest income increased 6.7% to $39.8 million. The average loan yield eased to 5.47% from 5.58%, while the average cost of interest-bearing liabilities fell to 0.83% from 1.04%.
Operating cash flow was $16.8 million; investing activities used $95.0 million, primarily reflecting loan growth and securities activity; financing activities provided $61.3 million, mainly from deposit growth. Cash and cash equivalents declined by $16.9 million over the year. The filing reports net loans after the allowance of $781.2 million, compared with gross loans, net of unearned income, of $790.3 million.
Material changes and credit quality
- Loan growth was led by commercial and industrial loans, up $45.2 million, and consumer and other loans, up $22.1 million. The C&I increase included growth in syndicated lending; purchased commercial leases contributed to consumer and other loan growth.
- Non-farm, non-residential real estate remained the largest loan category at $328.4 million, or 41.5% of loans. Commercial and industrial loans were $196.3 million, or 24.8%. About 66.5% of loans were secured primarily or secondarily by real estate.
- Nonperforming assets declined to $15.0 million, or 0.99% of assets, from $18.3 million, or 1.27%. Nonaccrual loans fell to $12.2 million from $14.5 million. Troubled debt restructurings increased to $5.4 million from $3.2 million.
- The allowance for loan losses was $9.1 million, or 1.15% of loans, versus $10.4 million, or 1.47%, in 2013. The provision declined to $2.0 million from $2.5 million, while net charge-offs rose to $3.2 million from $2.5 million.
- Net securities gains fell to $0.3 million from $1.6 million, contributing to a $1.3 million decrease in noninterest income. Noninterest expense rose $0.6 million to $31.6 million, including higher salaries and benefits.
- Shareholders’ equity increased partly because accumulated other comprehensive income moved from a $9.1 million loss to a $0.2 million gain, reflecting improved marks on available-for-sale securities. No securities were deemed other-than-temporarily impaired.
Liquidity, capital and funding
- Public funds deposits were $601.5 million, or 43.9% of deposits, up from 39.6% a year earlier. They are collateralized and are a significant funding source; management identifies loss or repricing of these deposits as a liquidity and earnings risk.
- Available-for-sale securities totaled $499.8 million and held-to-maturity securities $141.8 million. Management reported $156.4 million of net FHLB borrowing capacity, $70.5 million of federal funds lines and $150.0 million of FHLB letters of credit used to collateralize public deposits.
- The bank was classified as well-capitalized. At year-end, its Tier 1 leverage ratio was 9.26%, Tier 1 risk-based capital ratio 13.08%, and total risk-based capital ratio 13.96%; corresponding well-capitalized thresholds were 5%, 6% and 10%.
- The company had $39.4 million of Series C preferred stock issued under the Small Business Lending Fund. The preferred dividend rate was 1.0% at year-end, reducing preferred dividends to $0.4 million from $0.7 million in 2013. The filing warns the rate may rise to 9% if the preferred stock remains outstanding after the applicable program period.
- Common dividends were $0.64 per share for 2014, continuing the reported history of 86 consecutive quarterly dividends. Dividends remain subject to earnings, capital, liquidity and regulatory restrictions.
Outlook, risks and unusual items
- No quantitative earnings or growth guidance is provided. Management describes continued emphasis on core deposits, loan growth, community banking and managing interest-rate exposure.
- Interest-rate risk is material: the company reported a negative cumulative one-year gap. Its model estimated net interest income would decline 10.55% under an instantaneous 400-basis-point increase and 2.25% under a gradual 400-basis-point increase over 12 months. These are model scenarios, not forecasts, and depend on assumptions about balance-sheet behavior.
- Key exposures include geographic concentration in Louisiana, commercial real estate and C&I credit risk, syndicated loans monitored partly through lead lenders, short-term maturities and balloon payments, and sensitivity to local economic conditions, oil-and-gas activity, severe weather and real-estate values.
- Concentration in public funds creates funding and deposit-retention risk. The filing also identifies securities valuation and interest-rate risk, competition, regulatory and compliance costs, cybersecurity and operational risk, and potential effects of changing capital requirements.
- The company filed an S-1 in October 2014 to facilitate a common stock offering, then deferred the offering on December 18 due to market conditions. Deferred offering costs were $0.8 million at year-end.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective as of December 31, 2014.
- The filing reports no legal proceedings expected to have a material adverse effect and no unresolved SEC staff comments.
Important facts for investors to verify
- Whether the 2014 loan growth—particularly syndicated C&I lending and purchased leases—has maintained underwriting quality, and how classified assets and TDRs subsequently performed.
- The adequacy of the $9.1 million allowance given higher net charge-offs, loan-mix changes and the concentration in commercial real estate.
- Stability and repricing terms of the $601.5 million public-funds deposit base, including the largest depositor relationships and collateral arrangements.
- Potential earnings effects of rising rates, including loan floors, deposit repricing and the reported negative one-year gap.
- Timing and cost of redeeming the $39.4 million SBLF preferred stock, including the conditions for any increase in its dividend rate.
- Actual liquidity available after pledged securities and letters of credit, and the effect of deposit maturities and off-balance-sheet commitments.
- Progress, if any, on the deferred common stock offering and use of the $0.8 million in deferred costs.