First Guaranty Bancshares, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a quarter-only report; comparisons below are primarily with FY 2016. First Guaranty is a Louisiana bank holding company operating through First Guaranty Bank, with 27 banking facilities in Louisiana and Texas.
Financial performance and condition
| Metric | FY 2017 / Dec. 31, 2017 | FY 2016 / Dec. 31, 2016 |
|---|---|---|
| Total assets | $1.750 billion | $1.501 billion |
| Total deposits | $1.549 billion | $1.326 billion |
| Loans, net of unearned income | $1.149 billion | $948.9 million |
| Net interest income | $53.2 million | $48.4 million |
| Net income | $11.8 million | $14.1 million |
| Earnings per common share | $1.37 | $1.68 |
| Net interest margin | 3.33% | 3.39% |
| Return on average assets | 0.71% | 0.97% |
| Return on average common equity | 8.59% | 11.18% |
Amounts are consolidated; per-share figures reflect the 10% stock dividend issued in December 2017.
- Profitability: Net interest income increased 9.8%, but net income fell 16.6%. Noninterest income was $8.3 million, including $1.4 million of securities gains; noninterest expense was $38.5 million. The GAAP efficiency ratio rose to 62.64% from 56.85%.
- Cash flow: Operating activities provided $12.3 million; investing activities used $83.0 million; financing activities provided $90.6 million. Cash and cash equivalents increased $19.9 million to $38.0 million.
- Credit quality: Nonperforming assets declined to $14.7 million, or 0.84% of assets, from $22.2 million, or 1.48%. Nonaccrual loans fell to $12.6 million from $21.7 million. The allowance was $9.2 million, 0.80% of loans; net charge-offs increased to $5.7 million from $2.0 million.
- Funding and liquidity: Public funds were $640.7 million, or 41.4% of deposits; brokered deposits were $115.9 million. Management reported sufficient liquidity, including $40.1 million of net FHLB borrowing capacity, an $8.7 million Federal Reserve discount-window line, and $95.5 million of correspondent-bank federal funds lines. FHLB letters of credit of $294.2 million primarily collateralized public deposits.
- Debt: Year-end borrowings comprised $15.5 million short-term borrowings, $22.8 million senior long-term debt and $14.7 million junior subordinated debentures, approximately $52.9 million in total.
- Capital: Shareholders’ equity was $144.0 million versus $124.3 million. Consolidated Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 8.27%, 10.35% and 12.14%; the Bank’s corresponding ratios were 9.88%, 12.39% and 13.07%. The company and Bank were reported as well-capitalized.
Material changes versus the prior period
- The June 16, 2017 Premier Bancshares/Synergy Bank acquisition added five Texas branches, $158.3 million of assets, $127.2 million of deposits and $128.0 million of loans. Consideration was approximately $21.0 million; preliminary purchase accounting recorded $1.5 million of goodwill and $2.7 million of core deposit intangible. Integration-related expenses were $1.4 million.
- Assets grew 16.6%, deposits 16.8% and loans 21.1%, substantially reflecting the acquisition and continued loan growth. Non-farm non-residential real estate loans were 46.9% of loans; 74.1% of the portfolio was secured primarily or secondarily by real estate.
- Net interest income increased with higher average earning-asset balances and yields, but interest expense rose 41.9% as deposit balances and rates increased. Net interest margin contracted six basis points.
- Net income declined partly because securities gains decreased by $2.4 million, acquisition-related and operating expenses increased, and a $0.9 million one-time tax expense was recorded for remeasurement of deferred taxes after the Tax Cuts and Jobs Act.
- The company paid $0.60 per share in cash dividends and reported 98 consecutive quarters of dividends. A 10% stock dividend was issued in December 2017.
Outlook, commentary, risks and unusual items
- Management’s stated priorities include organic loan and deposit growth, increasing loans as a share of assets, maintaining asset quality and pursuing selected acquisitions. It anticipated opening a Lake Charles, Louisiana loan production office in the second or third quarter of 2018. The filing provides no specific earnings or revenue guidance.
- In November 2017, the company acquired a 50% interest in Centurion Insurance Services and announced an at-the-market offering program for up to $25.0 million of common stock. No shares were sold under the program in the fourth quarter of 2017.
- Interest-rate sensitivity analysis showed a liability-sensitive one-year cumulative gap. A modeled instantaneous +400-basis-point rate shock reduced 12-month net interest income by 11.05%; the gradual +400-basis-point scenario reduced it by 6.47%. These are modeled scenarios, not forecasts.
- Key disclosed risks include concentration in Louisiana and North Central Texas, commercial real estate and commercial lending exposure, dependence on public funds deposits, interest-rate and funding-cost sensitivity, acquisition integration, and hurricanes or other adverse weather. A $4.6 million syndicated oil-and-gas-services loan was nonperforming; the filing also describes substantial 2017 charge-offs and elevated classified and special-mention loans.
- The company recorded no securities impairment charge in 2017, although it disclosed two corporate debt securities with other-than-temporary impairment. The Premier purchase-price allocation remained preliminary at year-end. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- How much of future growth and earnings reflects the acquired Premier business, and whether integration costs or expected benefits differ from management’s plans.
- Current performance, collateral and reserve adequacy for the large nonperforming syndicated loan and other significant classified credits; assess the effect of charge-offs on future credit costs.
- Stability, renewal terms and pricing of public funds and brokered deposits, including the concentration of public funds among major relationships.
- Whether deposit-cost increases continue to outpace asset yields and how actual results compare with the disclosed interest-rate sensitivity scenarios.
- Final Premier acquisition fair values and goodwill/intangible balances, the realized impact of the 2018 tax-rate reduction, and any future ATM share issuance or dilution.