First Guaranty Bancshares, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The unaudited consolidated statements cover the Company and its wholly owned bank subsidiary, First Guaranty Bank. The bank operated 21 Louisiana banking facilities and focused primarily on commercial banking in Louisiana.
Financial performance and position
Amounts are in millions except per-share data and percentages. Income comparisons are with the corresponding 2013 period; balance-sheet comparisons are with December 31, 2013.
| Metric | Q3 2014 / September 30, 2014 | Prior comparable |
|---|---|---|
| Total assets | $1,476.8 | $1,436.4 at December 31, 2013 |
| Loans, net of unearned income | $743.1 | $703.2 at December 31, 2013 |
| Deposits | $1,320.4 | $1,303.1 at December 31, 2013 |
| Net income | Q3: $3.0; nine months: $8.4 | Q3: $2.3; nine months: $6.5 |
| Income available to common shareholders | Q3: $2.9; nine months: $8.1 | Q3: $2.1; nine months: $5.9 |
| Diluted/common earnings per share as reported | Q3: $0.45; nine months: $1.29 | Q3: $0.34; nine months: $0.93 |
| Net interest income | Q3: $10.9; nine months: $32.4 | Q3: $10.0; nine months: $29.3 |
| Net interest margin | Q3: 3.01%; nine months: 3.06% | Q3: 2.92%; nine months: 2.89% |
| Provision for loan losses | Q3: $0.4; nine months: $1.1 | Q3: $0.3; nine months: $2.0 |
| Cash and cash equivalents | $27.5 | $61.5 at December 31, 2013 |
| Shareholders’ equity | $136.4 | $123.4 at December 31, 2013 |
- Revenue and margins: Nine-month interest income rose 4.1% to $39.4 million, primarily as loan balances grew; interest expense fell 18.5% to $7.0 million as deposit costs declined. Net interest income increased 10.7%. Nine-month noninterest income decreased to $4.7 million from $6.0 million, mainly because securities gains fell to $0.3 million from $1.6 million.
- Profit and expenses: Nine-month net income increased 30.1%. Noninterest expense was nearly unchanged at $23.4 million; lower legal, data-processing and regulatory-assessment expenses were partly offset by higher salaries and benefits, including employee health-insurance costs. Quarterly net income increased 31.6%.
- Credit quality: Nonperforming assets were $16.9 million, or 1.15% of assets, versus $18.3 million, or 1.27%, at year-end. Nonaccrual loans were $13.9 million; impaired loans were $25.2 million versus $29.9 million at year-end. The allowance was $8.6 million, 1.16% of loans and 57.8% of nonperforming loans. Nine-month charge-offs were $3.1 million, compared with $2.6 million in 2013.
- Cash flow and funding: For the first nine months, operating cash flow was $14.7 million, investing cash outflow was $70.3 million, and financing cash inflow was $21.6 million; cash and equivalents decreased $33.9 million. Deposits increased $17.3 million. Short-term borrowings were $12.3 million and long-term borrowings $1.6 million at September 30.
- Liquidity and capital: Management stated liquidity was sufficient for current needs. Reported borrowing capacity included $201.3 million at the FHLB, a $41.3 million Federal Reserve discount-window line, and $70.5 million in correspondent-bank federal-funds lines. The Company and bank were reported as well capitalized; consolidated ratios were 9.13% Tier 1 leverage, 13.45% Tier 1 risk-based capital and 14.31% total risk-based capital.
Material changes and management commentary
- Loans grew 5.7% from year-end, with increases in commercial and industrial, agricultural and residential lending. The loan mix remained concentrated in real estate: 70% of loans were real-estate secured, and non-farm non-residential loans represented 44.8% of the portfolio. Syndicated loans totaled $117.2 million.
- Available-for-sale securities increased to $518.6 million, while held-to-maturity securities decreased to $143.4 million. Management attributed portfolio growth mainly to municipal and short-term agency securities, including securities used to collateralize public deposits. The securities portfolio totaled $662.0 million.
- Equity increased partly because accumulated other comprehensive loss narrowed to $1.2 million from $9.1 million, reflecting improved unrealized marks on available-for-sale securities, as well as retained earnings growth. Common dividends remained $0.16 per share per quarter.
- Public funds were $539.8 million, or 40.9% of deposits; three relationships represented 40% of public-funds deposits. Time deposits of at least $100,000 totaled approximately $464.3 million. Management emphasized attracting core, noninterest-bearing deposits.
- Management attributed improved nine-month earnings to loan growth, lower funding costs and a lower loan-loss provision. It said improved credit quality supported the reduced provision. The filing gives no specific earnings or revenue guidance.
Outlook, risks, contingencies and unusual items
- Interest-rate exposure: The company described itself as liability-sensitive, with a negative cumulative one-year gap. Its modeled instantaneous +400-basis-point rate shock reduced projected 12-month net interest income by 18.76%; the gradual +400-basis-point scenario indicated a 3.79% decline. Management cautioned that actual results could differ from model assumptions.
- Credit and geographic concentration: Louisiana concentration, commercial real estate, commercial and industrial collateral, syndicated lending and borrower balloon maturities pose credit risks. Nonperforming assets declined overall, but two government-guaranteed agricultural loans totaling $0.7 million entered nonaccrual in Q3. A $0.7 million commercial real-estate loan that was 90 days past due and accruing was brought current after quarter-end.
- Funding and capital: Reliance on public funds creates deposit-retention and funding-cost exposure. New Basel III capital requirements were scheduled to take effect January 1, 2015. Series C SBLF preferred stock carried a 1% dividend rate; the rate was scheduled to rise to 9% beginning March 22, 2016 if any shares remained outstanding.
- Offering: On October 24, 2014, the Company filed an S-1 to sell an unspecified number of shares for aggregate proceeds of up to $75 million. The filing does not specify the final offering size or terms.
- Other items: Management reported no other-than-temporary impairment of securities and no material adverse effect expected from ordinary-course litigation. It stated disclosure controls were effective and no material quarterly change in internal control over financial reporting occurred.
Key facts for investors to verify
- Whether the proposed offering was completed, its final size and terms, and the resulting dilution and capital impact.
- Subsequent trends in nonperforming loans, charge-offs, recoveries, allowance coverage and the large commercial-real-estate credits discussed in the filing.
- Retention and pricing of public-funds deposits and large certificates of deposit, and changes in borrowing needs and liquidity.
- Actual net interest margin and earnings sensitivity as rates move, compared with the filing’s modeled scenarios.
- Capital ratios under Basel III and the Company’s plans for Series C preferred stock before the scheduled 9% dividend step-up.
- The filing contains an apparent MD&A wording error describing the Q3 2014 provision comparison as “2013”; the financial statements report $397,000 for Q3 2014 and $307,000 for Q3 2013.