First Guaranty Bancshares, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial statements are unaudited. The company is a bank holding company operating through First Guaranty Bank, with banking facilities in Louisiana and North Central Texas.
Business context and material changes
On June 16, 2017, First Guaranty completed its acquisition of Premier Bancshares and Synergy Bank, expanding into North Central Texas. Consideration was approximately $21.0 million: $10.3 million in cash and 397,988 First Guaranty shares. The acquired business contributed an estimated $158.3 million of assets and $137.4 million of liabilities; purchase accounting remains preliminary. The transaction added five branches.
Total assets grew 14.9% from year-end to $1.725 billion, primarily reflecting the acquisition and loan growth. The acquired loans and deposits contributed approximately $125.4 million and $127.2 million, respectively; legacy loans grew approximately $40.0 million.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $12.8 million | $12.2 million | $25.5 million | $24.1 million |
| Provision for loan losses | $1.3 million | $0.9 million | $2.0 million | $1.7 million |
| Noninterest income | $2.0 million | $3.6 million | $4.0 million | $5.5 million |
| Noninterest expense | $9.0 million | $8.3 million | $18.0 million | $16.4 million |
| Net income | $2.9 million | $4.4 million | $6.2 million | $7.6 million |
| Diluted/basic EPS as reported | $0.38 | $0.58 | $0.81 | $0.99 |
Net interest margin was 3.33% in Q2, down 10 basis points year over year, and 3.34% for the first half, down 3 basis points. Management attributed the compression chiefly to higher deposit costs. Interest income grew with higher average earning assets and yields, while interest expense increased 34.1% in Q2 and 23.5% for the first half. Lower securities-sale gains—$0.4 million versus $2.2 million in Q2 and $0.9 million versus $2.6 million year to date—were the principal factor in lower earnings. Merger-related expense was approximately $0.3 million pre-tax in Q2 and $0.6 million for the first half.
Financial position, liquidity and credit
- At June 30, 2017, loans net of unearned income were $1.115 billion, deposits $1.541 billion, cash and cash equivalents $30.8 million, and shareholders’ equity $140.3 million. The allowance for loan losses was $11.6 million, or 1.04% of loans.
- Six-month operating cash flow was $4.2 million, versus $11.0 million in 2016. Investing used $62.2 million; financing provided $70.7 million. Cash increased $12.7 million to $30.8 million.
- Short-term borrowings were zero, versus $6.5 million at year-end. Senior long-term debt was $24.2 million and junior subordinated debentures were $14.6 million. Senior debt was modified during Q2, with $3.8 million of net new proceeds; existing amortization terms and rates were unchanged.
- Management reported liquidity capacity including $41.2 million of net FHLB borrowing capacity, $95.5 million of correspondent-bank federal funds lines, and a fully available $2.5 million revolving line. The company said liquidity was sufficient for current operating needs.
- Nonperforming assets were $20.9 million, or 1.21% of assets, down from $22.2 million, or 1.48%, at year-end. Nonaccrual loans declined to $19.1 million from $21.7 million; impaired loans were $26.6 million. Three relationships represented 71.1% of nonaccrual loans. One $7.7 million commercial and industrial shared national credit had a $3.6 million specific reserve.
- The Bank and consolidated company were reported as well capitalized. At June 30, the consolidated and Bank total risk-based capital ratios were 11.99% and 13.05%; leverage ratios were 8.51% and 10.35%, respectively. These ratios declined from year-end levels.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management stated it would emphasize attracting noninterest-bearing deposits and continue shifting assets toward higher-yielding loans. It identified acquisition integration, deposit pricing and funding, loan and securities credit quality, interest-rate changes, economic conditions, competition, and regulatory or accounting changes as factors that could affect results.
Interest-rate models indicated that a parallel instantaneous +100 basis-point shock could reduce 12-month net interest income by 3.17%, while +400 basis points could reduce it by 15.42%; gradual increases produced smaller modeled declines. These are scenario estimates, not forecasts. The filing also describes a liability-sensitive one-year cumulative gap.
Off-balance-sheet exposure included $65.0 million of commitments to extend credit, $116.8 million of unfunded lines, and $7.8 million of commercial and standby letters of credit. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. No material risk-factor changes were reported. The company sold acquired government-guaranteed student loans in Q3 2017; this occurred after the reporting date.
Important facts for investors to verify
- Final Premier acquisition valuations, integration costs, and realized operating contribution; purchase accounting was preliminary and pro forma figures exclude potential cost savings.
- Whether net interest margin stabilizes as deposit costs rise, and how deposit mix, brokered deposits, public-fund concentration, and maturities affect funding costs and liquidity.
- Credit performance and reserve adequacy, particularly the large criticized/nonaccrual relationships, acquired impaired loans, and commercial real estate and oil-and-gas-related exposures.
- Whether the modeled adverse sensitivity to rising rates and the decline in regulatory capital ratios remain manageable as the balance sheet grows.
- Subsequent-period effects of the student-loan sale and any changes in commitments, contingencies, or acquisition-related expenses.