First Guaranty Bancshares, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. Unaudited consolidated results include First Guaranty Bank, a Louisiana-based commercial bank operating 21 facilities, primarily in Louisiana. Dollar amounts below are in millions unless noted.
Financial results and position
| Metric | Q1 2016 / Mar. 31, 2016 | Comparable period / Dec. 31, 2015 |
|---|---|---|
| Interest income | $14.42 | $14.10 in Q1 2015 |
| Net interest income | $11.83 | $11.86 in Q1 2015 |
| Net interest margin | 3.30% | 3.20% in Q1 2015 |
| Net income | $3.15 | $3.39 in Q1 2015 |
| Income available to common shareholders | $3.15 | $3.30 in Q1 2015 |
| Diluted/basic earnings per common share as reported | $0.41 | $0.48 in Q1 2015 |
| Operating cash flow | $7.44 | $5.96 in Q1 2015 |
| Total assets | $1,469 | $1,460 |
| Loans, net of unearned income | $854.8 | $841.6 |
| Total deposits | $1,300.7 | $1,295.9 |
| Shareholders’ equity | $123.3 | $118.2 |
| Cash and cash equivalents | $25.8 | $37.3 |
Total noninterest income was $1.83 million and noninterest expense was $8.10 million in Q1 2016. The provision for loan losses was $0.84 million. Cash flows were $7.44 million from operations, negative $19.95 million from investing, and positive $1.07 million from financing; cash and cash equivalents declined $11.45 million during the quarter.
At March 31, short-term borrowings were zero; senior long-term debt was $25.1 million and junior subordinated debentures were $14.6 million. The company reported regulatory capital ratios above well-capitalized minimums: consolidated Tier 1 leverage 8.03%, Tier 1 risk-based 10.83%, total risk-based 13.06%, and CET1 10.83%. Management reported the Bank and holding company were well capitalized.
Changes versus comparable periods
- Year-over-year net income fell 7.2% and EPS fell from $0.48 to $0.41. Management cited higher interest expense, noninterest expense, and loan-loss provision, partly offset by higher interest and noninterest income.
- Net interest income was nearly unchanged, while net interest margin increased 10 basis points to 3.30%. Management attributed the margin improvement to shifting earning assets from lower-yielding securities toward higher-yielding loans.
- Interest expense rose 15.3% to $2.59 million. Management attributed approximately $0.4 million of Q1 2016 expense to borrowings used in connection with the December 2015 redemption of Series C preferred stock from the U.S. Treasury’s Small Business Lending Fund.
- Compared with year-end, loans increased 1.6%; deposits increased 0.4%; and shareholders’ equity rose $5.1 million, including a $3.1 million improvement in accumulated other comprehensive income, principally reflecting securities valuation changes.
- Nonperforming assets increased to $26.0 million from $22.0 million; nonaccrual loans rose to $24.4 million from $20.0 million. The allowance remained $9.4 million, equal to 1.11% of loans and 38.0% of nonperforming loans, as presented by management.
Outlook, risks, contingencies, and notable items
- Outlook: The filing provides no quantified earnings or growth guidance. Management said it expects to emphasize attracting noninterest-bearing deposits and believes available liquidity is sufficient for current operating needs. It cautioned that interim results are not necessarily indicative of full-year results.
- Credit risk: A $7.9 million syndicated commercial and industrial loan serving the oil and gas industry was placed on nonaccrual in Q1, contributing to the increase in nonaccrual loans. Three relationships represented $14.9 million, or 61.1%, of nonaccrual loans. Funded and unfunded exposure to businesses supporting or servicing oil and gas operations was approximately 2.9% and 1.3% of the loan portfolio, respectively.
- Loan quality: Q1 charge-offs were $1.27 million versus $0.42 million in Q1 2015; recoveries were $0.43 million versus $0.12 million. The provision increase was attributed principally to a $0.2 million charged-off overdrawn deposit account and loan growth. Management considered the allowance adequate, but its estimate is inherently judgmental.
- Funding and liquidity: Public funds were $581.0 million, or 44.7% of deposits. Three public-fund relationships accounted for 38% of public funds; deposits are seasonal and generally decline in the second and third quarters. The company reported $115.4 million of net FHLB borrowing capacity and $70.5 million of federal funds lines, in addition to other facilities. Securities worth $438.7 million were pledged to secure public deposits and borrowings.
- Interest-rate exposure: The company reported a negative cumulative one-year gap of $467.6 million, or 32.7% of earning assets. Its model estimated a 23.56% decline in net interest income under an instantaneous +400-basis-point shock and a 6.37% decline under a gradual +400-basis-point change. Management noted these estimates depend on assumptions and actual asset and liability behavior may differ.
- Contingencies and unusual items: The company reported ordinary-course legal proceedings and stated their resolution was not expected to materially adversely affect financial position. Off-balance-sheet commitments included $82.0 million to extend credit, $119.8 million in unfunded lines, and $6.7 million in commercial and standby letters of credit. No new TDRs were reported during the quarter; total TDRs declined to $3.6 million. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the $7.9 million oil-and-gas-related nonaccrual loan and the concentration of nonaccrual balances in three relationships improve, remain stable, or deteriorate.
- Whether the $9.4 million allowance remains adequate as charge-offs, impaired loans, and nonperforming assets change.
- The stability, pricing, collateral requirements, and seasonal movements of public-fund deposits, which represented 44.7% of deposits.
- Whether the modeled interest-rate sensitivity and negative one-year gap translate into actual net interest income and deposit-cost changes.
- How loan growth, securities repositioning, and borrowing costs affect margins and earnings after the preferred-stock redemption financing.
- The sustainability of capital ratios, liquidity facilities, and the common dividend of $0.16 per share; the company reported 91 consecutive quarterly dividends as of March 31, 2016.