First Guaranty Bancshares, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. First Guaranty Bancshares is a Louisiana bank holding company whose subsidiary operates 21 banking locations in Louisiana. This unaudited report covers the quarter and nine months ended September 30, 2015; balance-sheet changes are measured from December 31, 2014. Amounts below are in millions except per-share data and ratios.
Financial performance and position
| Metric | Q3 / September 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net income | $3.9; diluted/common EPS reported as $0.60 | Q3 2014: $3.0; $0.45 per share |
| Income available to common shareholders | $3.8 | Q3 2014: $2.9 |
| Net interest income | $11.8 for Q3; $35.4 for nine months | Q3 2014: $10.9; nine months 2014: $32.4 |
| Net interest margin | 3.28% Q3; 3.21% nine months | 3.01% and 3.05%, respectively |
| Provision for loan losses | $1.9 Q3; $2.9 nine months | $0.4 Q3 2014; $1.1 nine months 2014 |
| Assets / deposits | $1,428.8 / $1,272.1 | December 31, 2014: $1,518.9 / $1,371.8 |
| Net loans / allowance | $846.9 / $9.8 | December 31, 2014: $781.2 / $9.1 |
| Cash and cash equivalents | $17.6 | December 31, 2014: $44.6 |
| Borrowings | $2.8 total: $1.8 short-term and $1.0 long-term | December 31, 2014: $3.3 |
| Shareholders’ equity | $148.3 | December 31, 2014: $139.6 |
- Profitability and drivers: Nine-month net income was $11.1, up 32.2% from $8.4; common EPS was $1.72 versus $1.29. Management attributed improvement to higher loan interest income, increased noninterest income and lower interest expense. Net interest income rose 9.5% for the nine-month period.
- Unusual earnings item: Securities gains were $2.2 in Q3 and $3.2 for nine months, including $2.7 from liquidation of an equity security. This materially lifted noninterest income and earnings; it is not presented as recurring operating revenue.
- Cash flow: Nine-month operating cash flow was $12.8, versus $14.7 in 2014. Investing activities provided $63.7, primarily reflecting securities maturities and sales, while financing used $103.5, chiefly from a $99.7 decline in deposits. Cash fell $26.9 during the period.
- Margins and costs: Q3 net interest margin improved 27 basis points year over year; the nine-month margin increased 16 basis points. Noninterest expense was broadly flat year over year for nine months at $23.4. Q3 income included the large securities gain, while provision expense increased substantially.
Material changes, risks and management commentary
- Growth and balance-sheet mix: Loans rose 8.4% from year-end, supported by commercial and industrial, residential, consumer and agricultural lending. Securities declined $123.8 to $517.8 as the company shifted assets toward loans, sold securities and experienced seasonal public-fund deposit declines. Total assets fell 5.9%.
- Credit quality weakened: Nonperforming assets rose to $22.9 from $15.0, or 1.60% of assets versus 0.99%. Nonaccrual loans increased to $20.5 from $12.2. Two multifamily loans totaling approximately $8.3 were placed on nonaccrual in Q3; one had a $0.5 charge-off following a collateral-value decline. The allowance was 1.15% of loans and 47.7% of nonperforming loans. Management stated it believed the allowance adequate.
- Other credit indicators: Impaired loans decreased to $22.2 from $29.5, but total past-due loans increased to $24.4 from $21.9. One new $0.6 TDR was recorded during the nine months; a $1.7 TDR relationship subsequently defaulted. OREO was $2.3.
- Funding and liquidity: Deposits declined 7.3% from year-end. Public funds were $543.5, or 42.7% of deposits, and three public-fund relationships represented 39% of public deposits. Management cited seasonal deposit fluctuations and stated it believed liquidity sufficient. Available borrowing capacity included $107.7 at the FHLB, $70.5 in correspondent-bank federal funds lines and $0.7 available on a $2.5 revolving line. Time deposits of at least $250,000 totaled $318.8.
- Interest-rate risk: The company reported a negative cumulative one-year repricing gap of $347.8, or 25.1% of earning assets. Its modeled instantaneous +400-basis-point shock reduced estimated 12-month net interest income by 14.11%; the gradual +400-basis-point scenario reduced it by 2.10%. Management cautioned that results depend on assumptions and actual asset and liability behavior may differ.
- Capital and financing plans: At September 30, the consolidated Tier 1 leverage, Tier 1 risk-based, total risk-based and common equity Tier 1 ratios were 9.96%, 13.31%, 14.21% and 9.68%, respectively; the bank was reported well capitalized. The company intended, subject to Federal Reserve approval, to repay $39.4 of Treasury SBLF preferred capital by December 31, 2015. It was considering subordinated debt of $10–$15 and a secured term loan of up to $25 to help fund repayment. The preferred dividend rate was scheduled to rise to 9% beginning March 22, 2016 if shares remained outstanding.
- Subsequent offering: On November 12, 2015, the company sold 600,000 common shares at $18.50, for $11.1 gross proceeds and $10.5 after underwriting discounts, before other expenses. The underwriter could purchase up to 90,000 additional shares. The filing described intended uses including loan growth, potential acquisitions, general corporate purposes and possible preferred-share redemption.
- Other matters: Management reported effective disclosure controls and no material change in internal control over financial reporting. It said ordinary-course litigation was not expected to materially affect financial position or results, and reported no material change to previously disclosed risk factors. No quantified earnings guidance was provided; management cautioned interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether future earnings remain strong after excluding the $2.7 equity-security liquidation gain, and whether reported margin improvement persists.
- Performance, collateral values and potential further losses on the two newly nonaccrual multifamily loans, other criticized credits and defaulted TDRs.
- Deposit retention and concentration, particularly public funds and large certificates of deposit, and the effect of continued deposit runoff on liquidity.
- Completion and terms of the planned SBLF repayment, including Federal Reserve approval, funding sources, and the potential 9% preferred dividend rate if repayment is delayed.
- Actual net proceeds and use of the November share offering, including whether the underwriter exercised its additional-share option and any resulting dilution.
- Actual sensitivity of net interest income to rate changes, given the negative one-year gap and the assumptions underlying management’s models.