First Guaranty Bancshares, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. First Guaranty is a Louisiana bank holding company whose wholly owned bank operates 21 banking facilities, principally in Hammond, Baton Rouge, Lafayette and Shreveport-Bossier City. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets, year-end | $1,459.8 | $1,518.9 |
| Total loans, net of unearned income, year-end | $841.6 | $790.3 |
| Total deposits, year-end | $1,295.9 | $1,371.8 |
| Net interest income | $47.5 | $44.1 |
| Provision for loan losses | $3.9 | $2.0 |
| Noninterest income | $9.0 | $6.2 |
| Noninterest expense | $31.1 | $31.6 |
| Net income | $14.5 | $11.2 |
| Net income available to common shareholders | $14.1 | $10.8 |
| Earnings per common share | $2.01 | $1.57 |
- Profitability and margins: Return on average assets was 0.97% (0.77% in 2014); return on average common equity was 12.98% (11.40%). Net interest margin improved to 3.26% from 3.11%, and the reported GAAP efficiency ratio improved to 55.11% from 62.85%.
- Cash flow: Operating activities provided $17.2 million; investing activities provided $47.2 million; financing activities used $71.7 million. Cash and cash equivalents fell $7.3 million to $37.3 million at year-end.
- Capital and debt: Shareholders’ equity was $118.2 million, versus $139.6 million; common shareholders’ equity rose to $118.2 million from $100.1 million. Year-end borrowings were $42.2 million, including $25.8 million of senior long-term debt and $14.6 million of subordinated debentures. The bank and holding company were reported as well-capitalized; consolidated total risk-based capital was 13.13% and the leverage ratio was 8.17%.
- Liquidity and funding: The year-end loan-to-deposit ratio was 64.9%. Public funds were $568.7 million, or 43.9% of deposits. Management reported $116.7 million of net FHLB borrowing capacity, an $18.2 million Federal Reserve discount-window line and $70.5 million of correspondent federal funds capacity; there were no FHLB or Federal Reserve borrowings outstanding.
- Asset quality: Nonperforming assets increased to $22.0 million, or 1.51% of assets, from $15.0 million, or 0.99%. Nonaccrual loans rose to $20.0 million from $12.2 million, notably due to multifamily real estate credits. The allowance for loan losses was $9.4 million, 1.12% of loans and approximately 46% of nonperforming loans.
Material changes versus prior year
- Net income increased 29.2%. Management attributed the improvement to higher loan interest income, higher noninterest income and lower interest expense. Net securities gains increased to $3.3 million from $0.3 million, including a $2.7 million gain on liquidation of an equity security; therefore, reported earnings included a material securities-related gain.
- Loans grew 6.5%, while deposits fell 5.5% and assets declined 3.9%. Securities decreased $95.5 million to $546.1 million, reflecting sales, maturities and a transfer of securities from available-for-sale to held-to-maturity.
- Net interest income rose 7.7%; the margin increased 15 basis points as the bank shifted assets toward loans and reduced deposit costs. Average loan yield nevertheless declined 26 basis points to 5.21%.
- The loan-loss provision nearly doubled to $3.9 million. Charge-offs were $4.2 million, up from $3.7 million, and classified assets increased to $58.7 million from $44.8 million.
- In November, the company completed a common-stock offering that generated approximately $9.3 million net and began trading on Nasdaq. It also declared a 10% stock dividend. In December, it redeemed all $39.4 million of Treasury SBLF preferred stock for approximately $39.5 million, funded in part through a $25 million five-year senior secured loan and a $15 million ten-year subordinated note.
Outlook, commentary and principal risks
- No quantified earnings, revenue or margin guidance is provided. Management’s stated priorities include growing loans and core deposits, maintaining public-funds relationships, managing asset quality, and considering disciplined acquisitions. It intends to continue its small-business lending campaign and expand SBA, USDA, agricultural and commercial-leasing lending.
- Management said liquidity was sufficient for current operating needs and the allowance was adequate, while noting that allowance estimates are judgmental and may change as economic conditions, collateral values or borrower cash flows change.
- Interest-rate sensitivity is a notable risk: the filing reports a liability-sensitive one-year cumulative gap. Its model estimates that an instantaneous parallel 400-basis-point rise would reduce 12-month net interest income 18.38%; a gradual 400-basis-point rise would reduce it 5.35%. These are modeled scenarios, not forecasts.
- Major exposures include Louisiana economic and real-estate conditions, concentration in commercial real estate and commercial lending, syndicated/shared-national-credit loans, and dependence on public funds deposits. Public funds were 43.9% of deposits, and three relationships represented 42.5% of contract public-funds deposits.
- Other risks include oil-and-gas-sector weakness, rising rates and securities valuation changes, borrower defaults, short-term loan maturities with balloon payments, competition, regulatory and compliance costs, cybersecurity and third-party operational disruptions, and hurricanes or other severe weather.
- Two corporate debt securities were deemed other-than-temporarily impaired in 2015: $0.2 million of credit-related impairment was charged to earnings and $0.4 million of non-credit impairment was recorded in other comprehensive income. There were no material legal proceedings reported. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether the increase in nonaccrual loans, nonperforming assets and classified credits—particularly multifamily real estate—continued or was resolved after year-end.
- How much of 2015 earnings growth is repeatable after excluding the $2.7 million equity-security gain and other securities transaction gains.
- Public-funds deposit retention and renewal concentrations, associated collateral requirements, and replacement funding costs if balances decline.
- The terms, covenants, collateral and ongoing cost of the new senior and subordinated debt, and the effect of retiring preferred stock on capital and common dividends.
- Actual sensitivity of net interest income and securities values to rate changes, given the filing’s modeled rate risk and the large securities portfolio.
- Subsequent performance of the identified problem loans and whether allowance coverage remains adequate as the loan portfolio grows.
- Dividend capacity and policy: the company reported 90 consecutive quarters of common dividends, but future distributions depend on earnings, liquidity, debt obligations and regulatory restrictions.