First Guaranty Bancshares, Inc. — Q1 2014 Form 10-Q
Business context and period. First Guaranty Bancshares is a Louisiana bank holding company operating First Guaranty Bank, with 21 banking facilities. This unaudited report covers the three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. Unless noted, amounts below are in millions.
Financial performance and position
| Metric | Q1 2014 / Mar. 31, 2014 | Prior comparable / Dec. 31, 2013 |
|---|---|---|
| Net income | $2.785; $2.686 available to common shareholders; diluted/basic EPS reported as $0.43 | $2.089; $1.806 available to common shareholders; EPS $0.29 |
| Net interest income | $10.525; net interest margin 2.98% | $9.584; margin 2.85% |
| Total interest income / expense | $12.881 / $2.356 | $12.504 / $2.920 |
| Provision for loan losses | $0.300 | $0.904 |
| Noninterest income / expense | $1.631 / $7.624 | $2.230 / $7.704 |
| Assets | $1,441.854 | $1,436.441 |
| Net loans / allowance for loan losses | $700.294 / $9.617 | $692.811 / $10.355 |
| Deposits | $1,296.769 | $1,303.099 |
| Borrowings | $10.539 total: $10.189 short-term, $0.350 long-term | $6.288 total |
| Stockholders’ equity | $129.456 | $123.405 |
| Cash and cash equivalents | $79.838 | $61.484 |
Cash flow from operations was $7.076, investing activities provided $14.463, and financing activities used $3.185. Cash and cash equivalents increased $18.354 during the quarter. The common dividend remained $0.16 per share.
Reported returns were 0.78% on average assets and 12.27% on average common equity, compared with 0.60% and 7.69%, respectively, a year earlier. The company reported a 34.5% statutory tax rate. Book value per common share was $14.31, versus $13.35 at year-end.
Material changes and operating developments
- Net income rose 33% year over year; common EPS increased from $0.29 to $0.43. Management attributed the improvement principally to higher loan interest income, lower funding costs, and a smaller loan-loss provision.
- Net interest income increased 9.8%. The average yield on interest-earning assets edged down to 3.69% from 3.72%, while the average cost of interest-bearing liabilities fell to 0.85% from 1.11%.
- Noninterest income declined $0.599, largely reflecting securities gains of $0.153 versus $0.777 a year earlier. Noninterest expense decreased slightly, to $7.624 from $7.704; salary and benefit costs increased while other expense declined.
- Loans net of allowance increased $7.5, or 1.1%, from year-end. Total deposits decreased $6.3, or 0.5%, which management linked to seasonal public-fund fluctuations. Public funds were $516.9, or 39.9% of deposits.
- Nonperforming assets declined to $15.878 from $18.256; nonaccrual loans fell to $12.948 from $14.485, and other real estate owned fell to $2.743 from $3.357. Impaired loans were $27.315, down from $29.875. TDRs remained $3.236.
- The allowance declined to $9.617, or 1.35% of loans and 73.3% of nonperforming loans. First-quarter charge-offs were $1.137, concentrated in two hotel-secured commercial real estate relationships. Management said the allowance was adequate and cited improved credit quality.
- Available-for-sale and held-to-maturity securities totaled $619.701, down from $634.504. A $4.372 after-tax securities-related gain in other comprehensive income reduced accumulated other comprehensive loss to $4.762 from $9.134.
Liquidity, capital, risks, and outlook
- Management said liquidity was sufficient for current needs. Available borrowing sources included $106.1 of net FHLB capacity and $70.5 of correspondent-bank federal funds lines; a $2.5 revolving line had $0.7 available. These figures are subject to facility terms and collateral requirements.
- Time deposits due within one year totaled $413.5. Certificates of deposit of $100,000 or more totaled approximately $436.8; $226.4 of certificates had remaining terms over one year. Management described public funds as a stable funding source, but they represented a substantial share of deposits.
- The company reported that it and its bank met regulatory well-capitalized thresholds. Consolidated ratios were 8.97% Tier 1 leverage, 13.88% Tier 1 risk-based capital, and 14.90% total risk-based capital. No regulatory capital shortfall was reported.
- Interest-rate risk analysis showed a liability-sensitive cumulative one-year gap of $357.339 negative, equal to 25.5% of earning assets. Management identified interest rates, securities values, funding mix, and asset-liability repricing as important risks.
- Credit risk remains relevant: 72.5% of loans were secured primarily or secondarily by real estate, including 47.0% in non-farm, non-residential real estate. Four borrower relationships represented $6.4 of nonaccrual loans. Management reported $493.8 of securities pledged as collateral.
- Off-balance-sheet commitments included $42.469 to extend credit, $110.172 in unfunded lines, and $7.667 in commercial and standby letters of credit. Management did not expect legal proceedings to have a material adverse effect; no material risk-factor changes were reported.
- No specific earnings or financial guidance was provided. Management emphasized attracting core deposits, maintaining net interest margin, and managing credit, interest-rate, and liquidity risks. The filing cautions that quarterly results may not indicate full-year results and identifies allowance estimates, goodwill, and intangible-asset valuations as significant estimates.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. A recently issued accounting update on residential mortgage foreclosure accounting was not expected to have a material impact.
Important facts for investors to verify
- Whether the decline in nonperforming assets and management’s allowance adequacy assessment are supported by subsequent loan performance, collateral values, charge-offs, and delinquencies.
- Exposure and repayment outlook for commercial real estate and the two hotel-related relationships with first-quarter charge-offs.
- Stability and cost of public-fund deposits, large certificates of deposit, and other funding, including collateral requirements and maturities.
- Sensitivity of net interest income and securities values to rate changes, given the negative one-year repricing gap and the portfolio’s 5.6-year weighted average life.
- The reconciliation of earnings improvement with lower securities gains, and the sustainability of lower provision expense and preferred dividends under the SBLF terms.
- Capital ratios, available borrowing capacity, and the status of commitments and contingencies in subsequent filings.