First Guaranty Bancshares, Inc. quarterly report, Q1 FY2015

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First Guaranty Bancshares, Inc. — Q1 2015 Form 10-Q

Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014 unless otherwise noted. Unaudited consolidated results include First Guaranty Bank, which operates 21 banking facilities primarily in Louisiana.

Financial performance and condition

  • Earnings: Net income was $3.4 million, up 21.9% from $2.8 million in Q1 2014. Income available to common shareholders was $3.3 million; diluted share data is not separately presented, and reported earnings per common share were $0.52 versus $0.43. The common dividend remained $0.16 per share.
  • Income and margins: Interest income was $14.1 million, up 9.5%; interest expense declined 4.8% to $2.2 million. Net interest income increased to $11.9 million from $10.5 million. Net interest margin rose 17 basis points to 3.20% (from 3.03%); net interest rate spread was 3.03% (from 2.86%). Noninterest income increased to $1.7 million from $1.6 million, while noninterest expense rose to $7.9 million from $7.6 million. The filing does not provide a single total-revenue figure.
  • Credit costs: The provision for loan losses doubled to $0.6 million from $0.3 million. The allowance was $9.4 million, or 1.18% of loans and 60.2% of nonperforming loans. Charge-offs were $0.4 million versus $1.1 million in Q1 2014.
  • Cash flow: Operating activities provided $6.0 million; investing activities used $27.3 million, principally reflecting securities purchases; financing activities provided $22.0 million, mainly from deposit growth. Cash and cash equivalents ended at $45.2 million, up $0.6 million during the quarter.
  • Balance sheet and funding: Assets totaled $1.55 billion, up 2.1%; loans net of unearned income were $796.2 million, up 0.7%, and net loans after allowance were $786.8 million. Deposits were $1.395 billion, up $23.2 million (1.7%). Securities totaled $670.5 million. Borrowings were modest at $3.1 million ($1.8 million short-term and $1.3 million long-term). Shareholders’ equity was $146.1 million, up from $139.6 million.
  • Liquidity and capital: Management said liquidity was sufficient for current operating needs. Available borrowing capacity included $130.6 million at the Federal Home Loan Bank and $70.5 million through correspondent-bank federal funds lines. The company and bank exceeded stated “well-capitalized” minimums: consolidated total risk-based capital was 14.01% and Tier 1 leverage was 9.06% at March 31, 2015.
  • Returns: Return on average assets was 0.89% versus 0.78%; return on average common equity was 12.82% versus 12.27%. Book value per common share was $16.96, up from $15.92 at year-end.

Material changes and operating trends

  • Year-over-year earnings growth reflected higher loan interest income, higher noninterest income, and lower interest expense. Average interest-earning assets increased $95.9 million, and their average yield rose 9 basis points to 3.80%; the average cost of interest-bearing liabilities fell 8 basis points to 0.77%.
  • Quarter-end loan growth was concentrated in non-farm, non-residential real estate, one-to-four-family residential, and construction and land development lending; commercial and industrial loans declined. Real estate secured 68.8% of loans, with non-farm non-residential real estate representing 42.5% of the portfolio. Approximately 44% of loans were floating-rate, and 83% were scheduled to mature within five years.
  • Nonperforming assets increased to $18.0 million, or 1.16% of assets, from $15.0 million, or 0.99%. Nonperforming loans rose to $15.6 million from $12.8 million. The increase was mainly associated with a $3.0 million multifamily commercial-real-estate loan that was 90 days past due but still accruing; management said it was adequately secured and expected full collection. Nonaccrual loans were $12.4 million, compared with $12.2 million.
  • Total impaired loans declined to $26.2 million from $29.5 million. Total securities increased $28.9 million: available-for-sale securities fell $16.4 million while held-to-maturity securities rose $45.3 million, principally reflecting transfers of agency securities used to collateralize public funds.
  • Deposits increased $23.2 million. Public funds were $619.8 million, or 44.4% of deposits; three public-fund relationships represented 38% of public funds. The company also reported $27.5 million in brokered deposits and $336.4 million in time deposits of at least $250,000.

Outlook, risks, and unusual items

  • The filing gives no formal earnings or revenue guidance. Management expected to pay the contractual minimum 1.0% dividend rate on its Series C SBLF preferred capital through December 31, 2015; the rate is scheduled to increase to 9.0% on March 22, 2016 if preferred shares remain outstanding.
  • Management attributed improved margins to a gradual shift in earning assets from securities to loans and continued lower funding costs. It said the allowance was adequate, while noting estimates are subjective and sensitive to economic conditions, collateral values, portfolio composition, and credit performance.
  • Interest-rate risk is material: the company reported a negative cumulative one-year repricing gap. Its instantaneous +400-basis-point scenario estimated an 18.25% decline in net interest income over 12 months; a gradual +400-basis-point scenario estimated a 4.03% decline. These are model estimates subject to assumptions and limitations.
  • Available-for-sale securities included a preferred-security conversion into common stock, producing an approximately $2.6 million pretax unrealized gain; the company planned to sell the common stock during 2015 and recognize gains upon sale. The securities portfolio’s market-value increase also drove most of the quarter’s $4.3 million increase in accumulated other comprehensive income.
  • At March 31, $537.6 million of securities were pledged to secure public deposits and borrowings. Off-balance-sheet commitments included $70.2 million to extend credit, $116.0 million in unfunded credit lines, and $7.1 million in letters of credit.
  • The company described litigation as arising in the normal course of business and did not expect the proceedings to materially adversely affect its financial position. It reported no material additions to risk factors and said disclosure controls were effective, with no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

  • Whether the $3.0 million past-due accruing multifamily loan and the other large nonaccrual relationships remain collectible, and how subsequent delinquency, impaired-loan, and charge-off trends affect the allowance.
  • The sustainability of earnings and margin improvement, including the contribution from securities gains and the planned sale of the converted common-stock investment.
  • Reliance on public-fund deposits, including their renewal terms, concentration among large relationships, collateral requirements, and seasonal variability; also monitor large certificates of deposit and brokered funding.
  • Whether pledged securities and the disclosed borrowing facilities provide adequate flexibility under stressed liquidity conditions, and the effect of interest-rate changes on net interest income and securities values.
  • The continued availability and cost of SBLF preferred capital, including the scheduled 9.0% rate if shares remain outstanding after March 22, 2016.