First Guaranty Bancshares, Inc. — 2018 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017. First Guaranty is a Louisiana-based financial holding company operating through First Guaranty Bank, with 27 banking facilities in Louisiana and North Central Texas. The unaudited statements consolidate the company and its wholly owned bank subsidiary.
Financial results and position
- Earnings: Third-quarter net income was $3.4 million, up 10.9% from $3.1 million; diluted earnings per common share were $0.39 versus $0.35. Nine-month net income was $11.6 million, up 25.4% from $9.2 million; earnings per share were $1.32 versus $1.08.
- Interest income and margin: Third-quarter net interest income rose to $14.5 million from $13.9 million; nine-month net interest income rose to $42.5 million from $39.3 million. Net interest margin was 3.45% for the quarter versus 3.37%, and 3.40% for nine months versus 3.35%. Higher loan balances and yields supported income; funding costs also rose.
- Credit costs: Provision for loan losses was $0.4 million for the quarter versus $1.1 million, and $0.6 million for nine months versus $3.1 million. The nine-month comparison benefited in part from a $1.6 million recovery on a settled commercial and industrial loan.
- Other income and expenses: Noninterest income fell to $1.2 million from $2.0 million for the quarter and to $4.5 million from $6.0 million for nine months, mainly reflecting securities-sale losses in 2018 versus gains in 2017. Noninterest expense increased to $11.2 million from $10.1 million for the quarter and to $32.0 million from $28.2 million for nine months, including higher personnel and occupancy costs. Income-tax expense declined to $0.8 million from $1.6 million for the quarter and $2.9 million from $4.8 million for nine months; management cited the federal corporate tax-rate reduction.
- Assets and lending: Total assets were $1.753 billion, broadly unchanged from year-end 2017. Loans, net of unearned income, increased 3.5% to $1.189 billion; net loans after the allowance were $1.179 billion. Real estate secured 75.8% of the loan portfolio, including 47.6% in non-farm non-residential loans. Investment securities declined $63.3 million to $438.4 million as securities were sold to support loan growth, seasonal deposit movements, and interest-rate-risk management.
- Credit quality: Nonperforming assets declined to $7.5 million, or 0.43% of assets, from $14.7 million, or 0.84%, at year-end. Nonaccrual loans fell to $5.8 million from $12.6 million, primarily following the $3.6 million oil-and-gas-related loan settlement and a $2.6 million paydown on another nonaccrual loan. The allowance was $10.6 million, 0.89% of loans and 167.1% of nonperforming loans. Two TDRs totaling $1.6 million remained, one of which was nonaccrual.
- Funding, debt, and liquidity: Deposits were $1.544 billion, down $4.8 million. Interest-bearing demand deposits fell $102.8 million while time deposits rose $90.2 million. Public funds were $602.5 million, or 39.0% of deposits. Cash and cash equivalents were $63.9 million, up $25.8 million. Short-term borrowings were $24.0 million; senior long-term debt was $20.6 million; junior subordinated debentures were $14.7 million. Management reported $77.2 million of net FHLB borrowing capacity, $100.5 million of correspondent-bank federal funds capacity, and an undrawn $6.5 million revolving line, and said liquidity was sufficient for current needs.
- Cash flow and equity: For nine months, operating cash flow was $20.6 million, investing cash flow was positive $8.0 million, financing cash flow was negative $2.8 million, and cash increased $25.8 million. Shareholders’ equity declined to $142.3 million from $144.0 million, as a $9.3 million increase in accumulated other comprehensive loss, largely from unrealized securities losses amid rising rates, more than offset retained-earnings growth. Book value per share was $16.16.
- Capital: The company and bank reported capital ratios above applicable well-capitalized thresholds. At September 30, the consolidated Tier 1 leverage, Tier 1 risk-based, total risk-based, and common equity Tier 1 ratios were 8.48%, 10.86%, 12.75%, and 10.86%, respectively; bank ratios were 9.83%, 12.61%, 13.39%, and 12.61%.
Material changes, outlook, and risks
- Management attributed improved earnings mainly to stronger loan interest income, lower loan-loss provision, and reduced taxes; rising deposit and borrowing costs and lower securities income were offsets. Loan mix continued shifting toward higher-yielding loans and away from securities.
- Management reported no quantitative earnings or revenue guidance. It emphasized attracting noninterest-bearing and lower-cost deposits and continuing to grow lending. The company had not sold shares under its up-to-$25 million at-the-market offering during the first nine months of 2018.
- Two new facilities were under construction, with total construction commitments of $12.9 million. The filing provides no clear expected completion dates or projected returns.
- Interest-rate exposure is material: the company reported a negative cumulative one-year repricing gap. Its model estimated net interest income would fall 6.12% under an instantaneous +400-basis-point shock and 3.30% under a gradual +400-basis-point increase over 12 months; the estimates depend on assumptions and are not forecasts.
- Unrealized losses on investment securities increased; $334.9 million of securities were pledged, with a market value of $329.7 million. Management stated it intended and was able to hold loss-position securities through anticipated recovery or maturity. It reported no other-than-temporary impairment losses recognized during the nine-month period.
- Off-balance-sheet commitments included $69.6 million to extend credit, $112.7 million of unfunded lines of credit, and $7.0 million of letters of credit. Management said ordinary-course litigation was not expected to have a material adverse effect. No material risk-factor changes from the 2017 Form 10-K were reported.
- The company adopted the accounting option to reclassify $306,000 of stranded tax effects from accumulated other comprehensive income to retained earnings. It was evaluating the expected-credit-loss standard (CECL), effective for it in periods beginning after December 15, 2019, and implementing software to assess its impact.
Important facts for investors to verify
- Whether the improvement in nonperforming loans and lower provision is sustainable, and how the allowance will respond to subsequent portfolio performance.
- Deposit stability and repricing costs, particularly for public funds, large certificates of deposit, and other rate-sensitive funding.
- Whether securities valuation losses, pledged collateral, and the reported negative one-year repricing gap could constrain liquidity, capital, or future net interest income.
- Progress, remaining costs, and expected benefits of the two facility projects, and any future use of the ATM offering.
- The eventual effect of CECL adoption and the company’s continuing ability to maintain capital and pay dividends.