First Guaranty Bancshares, Inc. — Q2 2018 Form 10-Q
Business context and period. First Guaranty is a bank holding company operating through First Guaranty Bank in Louisiana and North Central Texas. This unaudited report covers the quarter and six months ended June 30, 2018; balance-sheet comparisons are to December 31, 2017. Amounts below are in U.S. dollars.
Key financial results
- Profitability: Q2 net income was $4.6 million, up 56.8% from $2.9 million; diluted/basic earnings per share as reported were $0.52 versus $0.35. First-half net income was $8.2 million, up 32.6% from $6.2 million; EPS was $0.93 versus $0.74.
- Interest income and margins: Q2 net interest income increased to $14.3 million from $12.8 million; first-half NII rose to $28.0 million from $25.5 million. Net interest margin was 3.44% for Q2, up 11 basis points year over year, and 3.38% for the first half, up 4 basis points. Q2 net interest spread was 3.13%, compared with 3.08%.
- Credit provision: The Q2 provision was a $0.4 million credit, versus a $1.3 million expense in Q2 2017. First-half provision was $0.2 million versus $2.0 million. A $3.6 million settlement of a nonaccrual commercial and industrial loan generated a $1.6 million recovery and materially reduced provision expense.
- Noninterest items and taxes: Q2 noninterest income was $1.8 million, down from $2.0 million, including a $0.2 million securities loss versus a $0.4 million gain. First-half noninterest income was $3.3 million versus $4.0 million. Noninterest expense rose to $10.7 million in Q2 and $20.9 million in the first half, partly reflecting Premier-related staffing and operating costs. Income-tax expense fell to $1.2 million for Q2 and $2.1 million for the first half; management attributed the decrease in part to the federal tax-rate reduction to 21% from 35%.
- Cash flow: First-half operating cash flow was $14.8 million, compared with $4.2 million in 2017. Investing activities provided $3.5 million versus using $62.2 million; financing activities used $28.5 million versus providing $70.7 million. Cash and cash equivalents declined $10.2 million to $27.8 million.
- Assets and lending: Total assets were $1.723 billion, down $27.6 million (1.6%) from year-end. Loans, net of unearned income, increased $25.1 million to $1.174 billion; net loans after allowance rose $23.6 million to $1.163 billion. Real estate represented 75.9% of loans, with non-farm non-residential lending the largest category at 48.4%.
- Credit quality: Nonperforming assets declined to $10.4 million from $14.7 million, or 0.61% of assets versus 0.84%. Nonaccrual loans fell to $9.0 million from $12.6 million. The allowance rose to $10.8 million from $9.2 million, equal to 0.92% of loans and 116.8% of nonperforming loans. The filing also notes increased reserves associated with two substandard non-farm commercial-property credits.
- Funding, liquidity, and debt: Deposits declined $19.6 million to $1.530 billion. Short-term borrowings were $10.9 million; senior long-term debt was $21.3 million; junior subordinated debentures were $14.7 million. The company reported $53.7 million of net FHLB borrowing capacity, $100.5 million of federal funds lines, and an undrawn $6.5 million credit line. Management said liquidity was sufficient for current operating needs.
- Capital and equity: Shareholders’ equity decreased to $141.2 million from $144.0 million, mainly because accumulated other comprehensive loss increased $8.2 million as interest rates rose, partly offset by retained earnings growth. The Bank’s June 30 ratios included a 9.76% Tier 1 leverage ratio, 12.55% Tier 1 risk-based ratio, and 13.35% total risk-based ratio; it was reported well capitalized.
Material changes and management commentary
- Management attributed higher interest income and NII mainly to loan growth, higher loan yields, and the Premier acquisition; it continued shifting assets from securities toward loans. Average loan yield reached 5.50% in Q2 versus 5.10% a year earlier.
- Interest expense increased 48% in Q2 and 51.4% for the first half, as deposit balances and rates increased. The average rate on interest-bearing liabilities rose to 1.51% in Q2 from 1.12% and to 1.44% for the first half from 1.05%.
- Investment securities fell $39.1 million to $462.5 million. Sales helped fund loan growth, seasonal public-fund deposit declines, and reduce interest-rate risk. Unrealized securities losses reduced equity through OCI; first-half other comprehensive loss was $8.2 million.
- Deposits included $632.6 million of public funds, 41.4% of total deposits. Management cited seasonality and concentration: three relationships accounted for 43% of public funds under fiscal agency agreements. Brokered deposits decreased $29.0 million to $86.9 million.
- The company reported a liability-sensitive one-year cumulative interest-rate gap of negative 32.1% of earning assets. Its model estimated that an instantaneous +400-basis-point rate shock would reduce 12-month NII by 12.48%; a gradual +400-basis-point change would reduce it by 5.34%. These are model estimates, not forecasts, and depend on assumptions.
Outlook, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management emphasized attracting lower-cost deposits, growing lending, maintaining liquidity, and managing interest-rate exposure. Forward-looking risks include economic and competitive conditions, rate changes and margin pressure, securities-market movements, regulation, loan and collateral performance, integration of acquisitions, and the ability to pursue growth opportunities. The company identified no material change to the risk factors in its latest Form 10-K.
Unusual items include the $1.6 million recovery from the $3.6 million commercial-loan settlement, which produced the Q2 provision credit, and the adverse mark-to-market impact on available-for-sale securities. Legal proceedings were described as ordinary-course matters and not expected to have a material adverse effect. The company had $79.2 million of commitments to extend credit, $112.6 million of unfunded credit-line commitments, and $8.4 million of standby and commercial letters of credit. It paid no shares under its $25 million at-the-market offering during the first half.
Important facts for investors to verify
- Whether the Q2 provision credit and loan recovery are nonrecurring, and how credit costs evolve after the settlement.
- Loan performance and collateral values, especially in non-farm commercial real estate, oil-and-gas-related lending, and the two substandard property credits.
- Whether deposit outflows, public-fund concentration, and rising deposit costs affect liquidity and net interest margin.
- Interest-rate sensitivity assumptions and the effect of further rate changes on earnings, securities values, and tangible capital.
- The effect of Premier integration, expense growth, and any future use of the ATM offering on per-share earnings and capital.
- Regulatory capital and liquidity headroom; the filing’s capital ratios are reported, but should be reviewed alongside applicable regulatory requirements and subsequent filings.