First Guaranty Bancshares, Inc. quarterly report, Q3 FY2011

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First Guaranty Bancshares, Inc. — Q3 2011 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2011. Figures are consolidated and, unless stated otherwise, in millions of dollars. The company is a Louisiana bank holding company operating through First Guaranty Bank.

Financial performance and position

  • Q3 earnings: Net income was $2.2 million versus $2.9 million in Q3 2010. Income available to common shareholders was $1.4 million, or $0.24 per share, compared with $2.5 million, or $0.46 per share. The quarter included $0.6 million of deemed preferred dividends related to the CPP preferred-stock redemption.
  • Nine-month earnings: Net income was $7.0 million versus $8.8 million; income available to common shareholders was $5.5 million versus $7.8 million. Earnings per common share were $0.98 versus $1.41.
  • Interest income and margins: Nine-month net interest income increased to $29.1 million from $28.4 million. Net interest margin declined to 3.34% from 4.09%; net interest rate spread declined to 3.04% from 3.79%. Average yield on interest-earning assets fell to 4.64% from 5.46%.
  • Credit costs: Provision for loan losses was $3.5 million in Q3 versus $1.2 million, and $6.9 million for nine months versus $2.5 million. Nine-month charge-offs were $8.1 million, compared with $3.1 million; recoveries were $0.6 million versus $0.2 million.
  • Revenue and expenses: Nine-month noninterest income was $8.9 million versus $6.8 million, including a $1.4 million bargain-purchase gain and $3.1 million of securities gains. Noninterest expense rose to $21.2 million from $19.2 million, with management citing acquisition-related costs and higher costs associated with problem loans and other real estate.
  • Cash flow: Nine-month operating cash flow was $14.9 million; investing activities used $62.9 million and financing activities provided $92.2 million. Cash and cash equivalents increased $44.2 million to $89.0 million.
  • Balance sheet and funding: Total assets were $1.312 billion, up 15.8% from year-end 2010. Deposits were $1.172 billion, up 16.4%; net loans were $598.8 million, up $31.5 million; and securities totaled $578.3 million, up $96.3 million. Stockholders’ equity was $126.3 million, compared with $97.9 million.
  • Debt and liquidity: Short-term borrowings were $4.2 million and long-term borrowings $3.4 million. The company reported $125.5 million of FHLB net borrowing capacity and $41.1 million of correspondent-bank federal funds lines, with no balance drawn on the latter. It stated that liquidity was sufficient for current operating needs.
  • Capital: At September 30, consolidated Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 9.26%, 13.71%, and 14.61%, respectively. The company said it met regulatory requirements and was well capitalized.

Material changes and asset quality

  • On July 1, 2011, the company acquired Greensburg Bancshares and Bank of Greensburg for $5.3 million in consideration, comprising $3.0 million in stock and $2.3 million in cash. It added three new branch locations and increased share in a fourth market; the filing’s highlights describe four branches added. The acquisition brought approximately $78.0 million of deposits and $63.8 million of loans. It generated a $1.4 million bargain-purchase gain. Since acquisition, the bank contributed $1.1 million in revenue and $0.3 million to consolidated net income.
  • Nonperforming assets were $32.4 million, or 2.5% of assets, versus $31.0 million at year-end 2010. They included $24.8 million of nonaccrual loans, $0.6 million of loans 90 days past due and accruing, and $7.0 million of other real estate owned. Excluding assets acquired from Greensburg, management said nonperforming assets were $25.8 million, down $5.2 million from year-end.
  • The allowance for loan losses was $7.7 million, or 1.3% of loans and 30.3% of nonperforming loans. Nonaccrual loans were concentrated in five relationships totaling about $13.9 million. Impaired loans totaled $49.0 million; restructured loans totaled $17.5 million, and none of the reported TDRs had subsequently defaulted.
  • Loans were concentrated in real estate (78% of the portfolio), particularly non-farm non-residential real estate (45.7%). Without the acquisition, loans would have declined $32.3 million from year-end. Management said it was expanding securities holdings as loan demand weakened.

Outlook, commentary, risks, and unusual items

  • The filing provides no specific earnings or financial guidance. Management emphasized building core deposits, managing funding costs and liquidity, and balancing interest-rate, credit, and liquidity risks.
  • The company’s $39.4 million Small Business Lending Fund preferred-stock issuance was used in part to redeem its CPP Series A and B preferred stock. The new Series C preferred shares carry an initial 5% dividend rate that varies with qualifying small-business lending; the rate can rise to 7% under stated lending conditions and to 9% after 4.5 years if not repurchased.
  • Interest-rate sensitivity analysis showed a liability-sensitive position, with a cumulative one-year gap of negative $251.2 million, or negative 19.15% of earning assets. Management noted that changing interest rates could affect margins and securities values.
  • Public funds were $406.5 million, or 34.7% of deposits, and securities pledged as collateral totaled $393.0 million. Time deposits were $700.0 million; $440.7 million of certificates of deposit were at least $100,000. These funding concentrations and maturities merit monitoring.
  • The filing identifies risks including economic and market conditions, competition, interest-rate changes, regulatory changes, credit quality, and ability to integrate acquisitions. Management reported no material changes to previously disclosed risk factors and no material adverse effect expected from ordinary-course legal proceedings.
  • Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Most important facts for investors to verify

  • Whether elevated loan-loss provisions, charge-offs, and concentrated nonaccrual relationships require further reserve increases.
  • Whether reported improvement in nonperforming assets excluding Greensburg is sustained, and how acquired loans and foreclosed properties perform.
  • Whether the lower net interest margin persists, given the liability-sensitive rate position and significant time-deposit and public-fund balances.
  • The terms and future dividend cost of Series C preferred stock, including the lending-based rate adjustments and potential step-ups.
  • The quality, credit ratings, valuation assumptions, and liquidity of the expanded securities portfolio; the filing reports $3.6 million of below-investment-grade securities and $0.3 million of unrealized losses on securities in loss positions for more than 12 months.
  • Reconcile the filing’s descriptions of branches added in the Greensburg transaction and confirm acquisition-related financial contributions and integration costs in subsequent reports.