First Guaranty Bancshares, Inc. quarterly report, Q2 FY2016

First Guaranty Bancshares, Inc. — Q2 2016 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2016; unaudited consolidated results for First Guaranty Bancshares and its bank subsidiary. The company operates 21 banking facilities, primarily in Louisiana. Financial amounts below are in millions unless noted.

Financial performance

MetricQ2 2016Q2 2015Six months 2016Six months 2015
Net interest income$12.2$11.8$24.1$23.7
Provision for loan losses$0.9$0.4$1.7$1.0
Noninterest income$3.6$2.1$5.5$3.9
Noninterest expense$8.3$7.7$16.4$15.6
Net income$4.4$3.9$7.6$7.3
EPS$0.58$0.54$0.99$1.02
Net interest margin3.43%3.16%3.37%3.18%
  • Q2 net income increased 14.0%; first-half net income increased 4.1%. First-half EPS declined 2.9%, despite higher net income.
  • Net securities gains were $2.2 million in Q2 and $2.6 million in the first half, up from $0.6 million and $0.9 million, respectively. Management attributed the earnings increase principally to these gains, including sales to support loan growth and called securities.
  • Management attributed improved net interest margin to shifting earning assets from lower-yielding securities to higher-yielding loans. Loans were 59% of average interest-earning assets at June 30, versus 53% a year earlier.
  • Return on average assets was 1.21% for Q2 and 1.03% for the first half; return on average common equity was 14.14% and 12.33%, respectively.

Financial position, cash flow and liquidity

  • At June 30, total assets were $1.461 billion, essentially unchanged from year-end 2015. Loans net of unearned income were $896.4 million, up 6.5%; net loans after allowance were $886.5 million, up $54.4 million.
  • Total deposits were $1.280 billion, down $15.9 million (1.2%) from December 31, 2015. Time deposits fell $37.2 million while interest-bearing demand deposits rose $14.6 million. Public funds were $578.1 million, or 45.2% of deposits; three relationships represented 42% of public funds.
  • Cash and cash equivalents were $18.5 million, down from $37.3 million at year-end. First-half operating cash flow was $11.0 million; investing cash outflow was $17.1 million and financing cash outflow was $12.7 million, producing an $18.8 million net cash decrease.
  • Investment securities totaled $515.3 million, down $30.9 million. The company cited agency-security payoffs and securities sales to fund loan growth. Securities available for sale were $407.8 million and held to maturity were $107.4 million.
  • At June 30, short-term borrowings were $9.0 million, senior long-term debt $24.3 million and junior subordinated debentures $14.6 million. Shareholders’ equity was $127.4 million, up from $118.2 million, reflecting retained earnings and higher unrealized gains on available-for-sale securities.
  • Management said liquidity was sufficient. Available borrowing sources included $83.3 million of net FHLB capacity, $70.5 million of correspondent-bank federal funds lines, a $2.5 million revolving line and a Federal Reserve discount-window line. The filing does not state a specific available amount for the discount-window facility.
  • The Bank and consolidated company met regulatory capital requirements and were described as well capitalized. At June 30, consolidated Tier 1 leverage was 8.33%, Tier 1 risk-based and common equity Tier 1 were each 10.91%, and total risk-based capital was 13.14%.

Material changes and credit quality

  • Loan growth was concentrated in non-farm non-residential real estate, construction and land development, and residential lending. Real estate-secured loans were 66.4% of the portfolio; non-farm non-residential real estate alone was 39.3%. About 37.7% of loans were floating rate, and 79.3% were scheduled to mature within five years.
  • Nonperforming assets rose to $25.0 million, or 1.71% of assets, from $22.0 million, or 1.51%, at year-end. Nonaccrual loans increased to $23.5 million from $20.0 million; they had declined from $24.4 million at March 31.
  • A $7.8 million commercial and industrial syndicated loan serving the oil and gas industry was placed on nonaccrual in Q1 and carried a $1.4 million specific reserve. Approximately $1.0 million of commercial leases also moved to nonaccrual in Q2. Three relationships accounted for $14.5 million, or 61.8%, of nonaccrual loans.
  • The allowance for loan losses was $9.9 million, or 1.10% of loans and 41.4% of nonperforming loans. First-half provision was $1.7 million; charge-offs were $1.8 million and recoveries $0.5 million. Management considered the allowance adequate, citing portfolio growth and specific credit exposures.
  • Other real estate owned declined to $1.1 million from $1.6 million. Total troubled debt restructurings declined to $3.6 million from $5.7 million; no new TDRs were made in the first half.

Outlook, risks and other items

  • The filing gives no quantified earnings, growth or margin guidance. Management’s stated priorities included attracting more noninterest-bearing deposits and managing funding mix, liquidity and interest-rate exposure.
  • Interest-rate sensitivity analysis showed a liability-sensitive one-year cumulative gap of negative $418.6 million. Model estimates indicated net interest income would decline 21.94% under an instantaneous +400 basis-point shock and 4.61% under a gradual +400-basis-point scenario. Management cautioned that actual results may differ because of assumptions, repricing behavior, prepayments and balance-sheet actions.
  • Oil-and-gas-related support or service businesses represented approximately 2.8% of funded and 0.3% of unfunded loan commitments. Other risks include loan and deposit concentration, dependence on public funds, changes in interest rates and economic conditions, and the valuation of credit exposures and securities.
  • Management reported no material change in the risk factors from the 2015 Form 10-K. Routine legal proceedings were not expected to have a material adverse effect. Disclosure controls were judged effective, with no material quarterly change in internal control over financial reporting.
  • The company redeemed its Series C preferred stock in December 2015, eliminating preferred dividends. It adopted no new accounting pronouncement with a stated material effect; it was evaluating the impact of the new expected-credit-loss standard, effective for periods beginning after December 15, 2019.

Important facts for investors to verify

  • Whether securities gains are repeatable and how earnings perform without those gains.
  • Developments, collateral and recovery prospects for the $7.8 million nonaccrual commercial loan and the concentrated nonaccrual relationships.
  • Whether loan growth, charge-offs and rising provisions change allowance adequacy and nonperforming-asset trends.
  • Deposit retention and pricing, particularly public funds and large time deposits, and the company’s liquidity position as cash balances decline.
  • Actual sensitivity of net interest income and securities values to rate changes compared with the filing’s modeled scenarios.