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
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six 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 margin | 3.43% | 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.