First Guaranty Bancshares, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results include First Guaranty Bancshares and its wholly owned bank subsidiary. Balance-sheet comparisons are with December 31, 2012 unless noted.
Financial performance and position
| Metric | Q3 2013 / September 30, 2013 | Comparable period / prior date |
|---|---|---|
| Net income | $2.3 million for Q3; $6.5 million year to date | $3.0 million for Q3 2012; $9.0 million for nine months 2012 |
| Income available to common shareholders | $2.1 million for Q3; $5.9 million year to date | $2.5 million for Q3 2012; $7.6 million for nine months 2012 |
| Diluted/basic earnings per common share as reported | $0.34 for Q3; $0.93 year to date | $0.40 for Q3 2012; $1.20 for nine months 2012 |
| Net interest income | $10.0 million for Q3; $29.3 million year to date | $9.9 million for Q3 2012; $31.6 million for nine months 2012 |
| Net interest margin | 2.86% for nine months | 3.23% for nine months 2012 |
| Total assets | $1.425 billion | $1.407 billion |
| Loans, net of allowance | $679.4 million | $619.2 million |
| Total deposits | $1.251 billion | $1.253 billion |
| Cash and cash equivalents | $60.8 million | $86.2 million |
| Stockholders’ equity | $125.1 million | $134.2 million |
| Short-term / long-term borrowings | $42.5 million / $0.7 million | $14.7 million / $1.1 million |
For the first nine months, operating cash flow was $14.1 million, investing cash flow was negative $61.1 million, and financing cash flow was positive $21.6 million. Cash and cash equivalents declined $25.4 million from year-end.
The company paid common dividends of $0.16 per share in Q3 and $0.48 per share year to date. Reported returns on average assets were 0.62% for Q3 and 0.64% year to date; return on average common equity was 8.55% and 10.0%, respectively.
Material changes and drivers
- Year-to-date net income fell 28.4% from 2012. Management attributed the decline primarily to lower securities interest income and realized securities gains, alongside higher salaries expense. Higher loan interest income, lower deposit interest expense, and a smaller loan-loss provision partly offset these factors.
- Q3 net interest income was slightly higher year over year, but nine-month net interest income declined. The nine-month yield on interest-earning assets fell to 3.71% from 4.26%; management reported lower funding costs as well.
- Loans grew 9.7% net of allowance, while securities declined $23.6 million overall. Available-for-sale securities fell $118.8 million; held-to-maturity securities increased $95.2 million, including agency mortgage-backed securities purchased to support cash flow and interest-rate-risk management.
- Net income was partly offset in equity by a $12.0 million year-to-date other comprehensive loss, reflecting the change in unrealized available-for-sale securities gains to losses. Accumulated other comprehensive loss was $5.9 million at September 30, versus income of $6.0 million at year-end 2012.
- Credit measures improved: nonaccrual loans decreased to $14.5 million from $20.7 million, impaired loans to $36.6 million from $48.6 million, and nonperforming assets to $18.3 million from $23.5 million. The allowance was $10.1 million, or 1.47% of loans and 69.6% of nonperforming loans. Other real estate owned rose to $3.7 million from $2.4 million.
Outlook, risks, and contingencies
- No formal earnings or financial guidance is provided. Management said it expects to continue adding quality loans and reducing interest expense through 2013 and 2014, with the aim of increasing loan interest income and overall income.
- Interest-rate exposure is material: the filing reports a liability-sensitive cumulative one-year gap of negative $420.2 million, or 30.4% of earning assets. Management’s securities-portfolio estimate gives a weighted-average life of about 5.5 years under current rates and about 6.1 years under a parallel 400-basis-point shock.
- Funding warrants attention: public funds were $464.0 million, or 37.1% of deposits; $442.0 million of certificates of deposit were at least $100,000. Short-term borrowings rose $27.7 million, mainly due to seasonal public-fund deposit fluctuations. Management said available liquidity was sufficient, citing borrowing facilities and marketable securities.
- Loans are concentrated in real estate, which represented 72.5% of the portfolio; non-farm non-residential real estate was the largest category at 47.2%. Three credit relationships represented $6.4 million, or 36.7%, of nonaccrual loans.
- Management considered securities unrealized losses temporary and reported no securities with other-than-temporary impairment. The filing identifies general economic, interest-rate, competition, regulatory, credit, and securities-market risks. It reports no material change in previously disclosed risk factors.
- Off-balance-sheet exposures included $40.7 million of commitments to extend credit, $85.7 million of unfunded lines, and $5.4 million of letters of credit. Management stated that pending legal matters were not expected to have a material adverse effect. The company and bank met regulatory capital requirements and were classified as well capitalized.
Important facts for investors to verify
- Whether loan growth continues without a reversal in credit-quality improvements, and whether the allowance remains appropriate relative to charge-offs and nonperforming assets.
- How securities valuation changes affect accumulated other comprehensive income, reported equity, and book value per share.
- Whether deposit mix, public-fund balances, certificate maturities, and increased short-term borrowing create additional funding or liquidity pressure.
- Whether asset yields and net interest margin stabilize as the securities portfolio changes and loans reprice; many floating-rate loans were at their rate floors.
- Whether lower securities gains and the SBLF-related reduction in preferred dividends persist, and how these affect earnings available to common shareholders.