First Guaranty Bancshares, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter earnings filing. First Guaranty is a Louisiana bank holding company operating 27 banking facilities, primarily in Louisiana and Texas.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets at year-end | $1.817 billion | $1.750 billion |
| Total loans, net of unearned income | $1.225 billion | $1.149 billion |
| Total deposits | $1.630 billion | $1.549 billion |
| Shareholders’ equity | $147.3 million | $144.0 million |
| Net interest income | $57.0 million | $53.2 million |
| Net income | $14.2 million | $11.8 million |
| Net earnings per common share | $1.61 | $1.37 |
| Net interest margin | 3.41% | 3.33% |
| Return on average assets | 0.82% | 0.71% |
| Return on average common equity | 9.98% | 8.59% |
Interest income rose to $78.4 million, while interest expense increased to $21.4 million as deposit and borrowing costs rose. The average yield on interest-earning assets increased 45 basis points to 4.68%; the average cost of interest-bearing liabilities increased 46 basis points to 1.60%. The efficiency ratio worsened to 69.46% from 62.64%.
Operating cash flow was $26.9 million; investing activities provided $6.8 million and financing activities provided $56.3 million. Cash and cash equivalents increased $89.9 million to $128.0 million. The filing reports total year-end borrowings of $34.5 million, consisting primarily of $19.8 million senior debt and $14.7 million junior subordinated debentures; short-term borrowings were zero. The Bank reported $108.6 million of net FHLB borrowing capacity and $100.5 million of correspondent-bank federal funds lines.
Public funds were $645.5 million, or 39.6% of deposits. The loan-to-deposit ratio was 75.2%. The Bank was classified as well-capitalized; its reported total risk-based capital ratio was 12.97%, Tier 1 leverage ratio 9.79%, and common equity Tier 1 ratio 12.20%.
Changes versus 2017
- Net income rose 21.0%, while loans grew 6.6%, deposits 5.2%, and assets 3.8%.
- Net interest income increased, mainly from loan growth, higher asset yields, and the shift from securities toward higher-yielding loans. Net interest margin improved eight basis points.
- The provision for loan losses fell to $1.4 million from $3.8 million. Net charge-offs were negative $0.2 million, reflecting recoveries exceeding charge-offs; a $1.6 million recovery followed settlement of a commercial and industrial nonaccrual credit.
- Reported noninterest income fell to $5.3 million from $8.3 million, primarily because securities results moved from a $1.4 million gain to a $1.8 million loss. Noninterest expense increased to $43.3 million from $38.5 million, including higher personnel and occupancy costs.
- Investment securities declined $96.4 million to $405.3 million as securities were sold to fund loan growth and reduce interest-rate exposure. Unrealized losses in accumulated other comprehensive income increased to $7.1 million from $1.6 million.
- Asset quality improved: nonperforming assets declined to $10.0 million, or 0.55% of assets, from $14.7 million, or 0.84%. The allowance for loan losses increased to $10.8 million, or 0.88% of loans.
Outlook, commentary, risks and unusual items
- Management intends to pursue organic loan and deposit growth, expand SBA, USDA and commercial leasing lending, maintain public-funds relationships, and consider disciplined acquisitions. It opened a Lake Charles, Louisiana loan production office in the fourth quarter. The filing provides no numerical earnings or revenue guidance.
- Two facilities were under construction, with total construction commitments of $12.9 million. The company did not sell shares under its $25 million at-the-market offering in 2018.
- Credit risk is concentrated in commercial real estate: non-farm non-residential loans were $586.3 million, or 47.7% of loans; 76.9% of loans were secured by real estate. Management disclosed a commercial real estate concentration measure of 350.54% of total capital and heightened regulatory scrutiny risk.
- Funding is materially dependent on public deposits, which may fluctuate or require higher rates. Interest-rate modeling estimated that an instantaneous parallel 400-basis-point increase would reduce 12-month net interest income by 5.98%; the filing notes limitations in these estimates.
- Other material risks include regional economic and real-estate weakness, oil-and-gas exposure, syndicated lending, hurricanes and severe weather, cybersecurity and operational disruptions, competition, and execution risks from future acquisitions. Nonperforming assets and allowance estimates are sensitive to collateral values and economic assumptions.
- The 2018 results included a lower federal corporate tax rate of 21%, compared with 35% in 2017. The company recorded a one-time $0.9 million tax expense in 2017 for deferred-tax remeasurement. It also recognized securities-sale losses in 2018. The independent auditor issued an unqualified opinion; management concluded internal controls over financial reporting were effective.
Important facts for investors to verify
- Whether loan growth and improved credit metrics persist, particularly given the large commercial real-estate exposure and the increase in the allowance allocated to that category.
- The sustainability of earnings: 2018 benefited from a substantial credit recovery and a lower tax rate, while securities losses and higher operating costs weighed on results.
- The stability and pricing of public-funds and other deposits, including the effect of rising funding costs on net interest margin and liquidity.
- Actual capital ratios and liquidity capacity under stress, including the effect of the $34.5 million debt balance, pledged collateral, and $344.3 million of FHLB letters of credit used to collateralize public deposits.
- Potential future effects of the expected-credit-loss standard (CECL), scheduled to take effect for the company after December 15, 2019; management was still evaluating the impact.