First Guaranty Bancshares, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results for First Guaranty Bancshares and its wholly owned bank subsidiary. Amounts are in millions of dollars unless otherwise noted.
Business context and financial performance
First Guaranty Bank is a Louisiana commercial bank operating 21 banking facilities, primarily serving customers in Louisiana. Its business focuses on commercial banking and relationship-based service.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $12.1 | $11.8 | $36.2 | $35.4 |
| Provision for loan losses | $1.2 | $1.9 | $3.0 | $2.9 |
| Noninterest income | $2.6 | $3.7 | $8.0 | $7.6 |
| Noninterest expense | $8.3 | $7.8 | $24.7 | $23.4 |
| Net income | $3.4 | $3.9 | $10.9 | $11.1 |
| Earnings per common share | $0.44 | $0.55 | $1.44 | $1.57 |
| Net interest margin | 3.41% | 3.28% | 3.38% | 3.21% |
- Q3 net income fell 13.0%; management attributed the decline mainly to lower securities gains and higher operating expenses, partly offset by higher net interest income. Nine-month net income declined 1.8%, while income available to common shareholders rose slightly because preferred dividends were no longer payable.
- Q3 diluted/common EPS was affected by the larger share count following the November 2015 common stock offering. The Series C preferred stock used in the Small Business Lending Fund was redeemed in December 2015.
- Management attributed higher net interest income and margin to shifting earning assets from lower-yielding securities into loans. Average loan yield was 5.09% in Q3 and 5.19% for the nine-month period; average earning-asset yields were 4.12% and 4.10%, respectively.
Financial position, cash flow and liquidity
- At September 30, total assets were $1.441 billion, down $19.3 million from year-end 2015. Net loans were $900.5 million, up $68.3 million (8.2%); total deposits were $1.257 billion, down $38.9 million (3.0%).
- Investment securities were $475.1 million, down $71.0 million. Management said early payoffs and sales helped fund loan growth. Cash and cash equivalents were $23.8 million, down $13.5 million from year-end.
- For the first nine months, operating cash flow was $17.2 million, investing cash flow was $6.5 million, and financing cash flow was a $37.2 million use of cash. Cash decreased $13.5 million to $23.8 million. Financing outflows mainly reflected deposit reduction and $3.7 million in dividends.
- Borrowings at quarter-end included $9.5 million short-term borrowings, $23.5 million senior long-term debt and $14.6 million junior subordinated debentures. The filing reports $33.0 million total borrowings excluding the separately presented junior subordinated debentures.
- Management reported $41.0 million of net Federal Home Loan Bank borrowing capacity, $70.5 million of federal funds lines and a $2.5 million revolving credit line available. It believed liquidity was sufficient for current operating needs.
- Shareholders’ equity was $129.1 million, up $10.9 million from year-end, primarily from retained earnings and improved unrealized gains on available-for-sale securities. The Bank and holding company were reported as well capitalized; the Bank’s total risk-based capital ratio was 13.68% and the holding company’s was 13.38%.
Material changes, credit quality and risks
- Loan growth was concentrated in non-farm non-residential real estate and construction and land development. Real estate-secured loans represented 67.8% of the portfolio; non-farm non-residential real estate was 40.1%. About 36.1% of loans were floating-rate, and 78.6% were scheduled to mature within five years.
- Nonperforming assets were $22.6 million, or 1.57% of assets, versus $22.0 million, or 1.51%, at year-end. Nonaccrual loans were $21.1 million, including a $7.7 million oil-and-gas-services syndicated loan with a $1.4 million specific reserve. Three relationships made up 66% of nonaccrual loans.
- The allowance for loan losses was $10.3 million, 1.13% of loans and 47.1% of nonperforming loans. Nine-month charge-offs were $2.7 million and recoveries were $0.6 million. Management considered the allowance adequate, but its estimate depends on judgments about borrower condition, collateral and economic conditions.
- Deposits declined, particularly time deposits, while noninterest-bearing demand deposits increased. Public funds were $535.0 million, or 42.6% of deposits; three public-fund relationships represented 40% of those balances. The filing notes seasonal fluctuations in public deposits and collateral requirements.
- Interest-rate exposure is material: the disclosed one-year cumulative gap was negative $390.1 million, or 27.8% of earning assets. Under an instantaneous +400-basis-point scenario, modeled 12-month net interest income declined 19.28%; under a gradual +400-basis-point scenario, it declined 7.44%. These are model estimates subject to assumptions and limitations.
- Q3 included approximately $0.1 million of flood-related expense. Legal proceedings were described as ordinary-course matters, with no material adverse effect expected based on information available. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Outlook and contingencies
The filing provides no quantified earnings, revenue or margin guidance. Management said attracting noninterest-bearing deposits would remain a priority and described continuing to shift assets toward loans to support earnings. Forward-looking results remain subject to economic conditions, competition, interest-rate and securities-market changes, regulation, funding and deposit trends, credit quality, and the ability to execute growth plans. The company was evaluating ASU 2016-13 on expected credit losses, effective for periods beginning after December 15, 2019. Off-balance-sheet commitments included $48.4 million to extend credit, $136.9 million of unfunded credit lines and $6.4 million of commercial and standby letters of credit.
Most important facts for investors to verify
- Whether the $7.7 million oil-and-gas-related syndicated loan and other large nonaccrual relationships improve, require further reserves or result in additional losses.
- Whether loan growth, charge-offs and criticized or classified credit exposures support the $10.3 million allowance as the portfolio expands.
- Deposit stability and concentration, especially public funds and large certificates of deposit, and the cost and availability of replacement funding.
- Whether securities-to-loan repositioning sustains net interest margin without weakening liquidity or increasing rate and credit risk.
- Whether modeled interest-rate sensitivity and capital ratios remain adequate under changing rates and actual balance-sheet behavior.
- That common dividends remain subject to earnings, capital, liquidity and regulatory considerations; the filing reports $0.16 per share declared in Q3.