First Guaranty Bancshares, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unaudited consolidated results include First Guaranty Bank. Balance-sheet comparisons are with December 31, 2010 unless otherwise noted. The company is a Louisiana bank holding company; it completed the Greensburg Bancshares acquisition on July 1, after quarter-end.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $9.6 million | $9.6 million | $19.1 million | $18.9 million |
| Provision for loan losses | $2.9 million | $0.6 million | $3.4 million | $1.3 million |
| Noninterest income | $3.7 million | $2.6 million | $5.0 million | $4.2 million |
| Noninterest expense | $6.7 million | $6.4 million | $13.3 million | $12.7 million |
| Net income | $2.4 million | $3.4 million | $4.8 million | $6.0 million |
| Income available to common shareholders | $2.1 million | $3.0 million | $4.1 million | $5.3 million |
| Diluted/basic EPS as reported | $0.37 | $0.55 | $0.74 | $0.95 |
Six-month interest income was $26.5 million, compared with $25.0 million a year earlier; interest expense rose to $7.5 million from $6.1 million. Net interest margin fell to 3.40% from 4.18%. Management attributed lower earnings primarily to higher credit-loss provisions, lower loan interest and fee income as loans declined, and higher interest expense. Q2 securities gains were $2.2 million, versus $1.1 million; six-month gains were $2.2 million, versus $1.4 million. The company also recorded a $97,000 securities impairment charge in the first quarter.
Financial position, cash flow and capital
- Total assets were $1.161 billion, up $28.5 million (2.5%). Total deposits increased $38.0 million (3.8%) to $1.045 billion. Noninterest-bearing demand deposits grew $12.0 million; time deposits rose $33.3 million, while interest-bearing demand deposits fell $10.2 million.
- Net loans were $538.4 million, down $29.0 million; loans before unearned income were $546.2 million. Investment securities totaled $544.1 million, up $62.2 million, reflecting growth in held-to-maturity securities and a decline in available-for-sale securities.
- Cash and cash equivalents were $38.7 million, down $6.2 million over the six months. Operating cash flow was negative $0.2 million; investing used $38.0 million and financing provided $32.0 million. Deposit growth and lower short-term borrowings were major financing movements.
- Short-term borrowings were $5.5 million, down from $12.6 million; long-term borrowings were $3.5 million, versus none at year-end. A $2.5 million revolving line was undrawn. Available borrowing capacity included $136.0 million at the FHLB and $41.1 million through correspondent-bank lines.
- Stockholders’ equity was $101.1 million, up from $97.9 million. Consolidated regulatory capital ratios were 8.27% Tier 1 leverage, 12.41% Tier 1 risk-based and 13.40% total risk-based; the filing states the company and bank were well capitalized. Common dividends were $0.16 per share in Q2 and $0.32 for the first half.
Credit quality, changes and risks
- Nonperforming assets were $29.2 million (2.5% of assets), down from $31.0 million. Nonaccrual loans were $25.2 million, down from $28.7 million; other real estate owned rose to $3.5 million from $0.6 million. Impaired loans were $49.1 million, including $15.4 million of restructured loans.
- The allowance for loan losses was $7.8 million, or 1.43% of loans and 30.6% of nonperforming loans. First-half charge-offs were $4.2 million versus $0.7 million a year earlier; recoveries were $0.3 million. Management considered the allowance adequate, but estimates depend on economic conditions, collateral values and borrower performance.
- One commercial-and-industrial relationship accounted for $1.4 million of charge-offs; the filing says collateral accounts receivable were determined to be fraudulent and the company was pursuing recourse against the guarantor. Nine credit relationships represented approximately 78% of nonaccrual loans. These concentrations and the increase in OREO are significant credit risks.
- Public funds were $353.8 million, or 33.8% of deposits, and are a material funding source requiring collateral. Time deposits were $671.0 million; about 76% of certificates of deposit had remaining terms over one year. Securities pledged as collateral totaled $348.3 million.
- The company reported a negative cumulative one-year interest-rate gap of $289.3 million (26.3% of earning assets), indicating liability sensitivity in its gap analysis. Management identifies interest-rate movements, economic and real-estate conditions, competition, regulation and acquisition integration as risks. It reported no material change to previously disclosed risk factors.
- Greensburg acquisition: Completed July 1, 2011. The company acquired $87.4 million of assets, including $63.1 million of net loans, and assumed $77.1 million of deposits. Consideration was $5.3 million ($3.0 million in shares and $2.3 million cash); it also assumed and repaid $3.5 million of shareholder debt. Purchase accounting fair values were still being evaluated. Pro forma first-half net income, assuming acquisition from January 1, was $5.0 million for 2011 and $5.1 million for 2010, before potential cost savings.
- Management gave no specific earnings or financial guidance. It described plans to emphasize core deposits and manage interest-rate, credit and liquidity risks. The company stated disclosure controls were effective and that ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether credit deterioration, charge-offs, OREO and concentrated nonaccrual relationships require further provisions or affect recoveries.
- Actual acquired asset and liability fair values, integration costs, realized synergies and post-merger capital and earnings effects for Greensburg.
- Stability and pricing of time deposits and public-fund balances, collateral requirements, and continued access to borrowing facilities.
- Whether securities gains are repeatable and how the securities portfolio’s duration, unrealized losses and interest-rate sensitivity affect future margins and liquidity.
- The $1.4 million fraud-related charge-off and outcome of recourse efforts against the guarantor.