First Guaranty Bancshares, Inc. — 2014 Q2 Form 10-Q
Business and period: Louisiana bank holding company operating First Guaranty Bank, with 21 banking facilities. This unaudited report covers the three and six months ended June 30, 2014; balance-sheet comparisons are to December 31, 2013.
Financial performance and position
| Metric | Q2 2014 / June 30, 2014 | Comparable period / prior date |
|---|---|---|
| Interest income | $13.3 million for Q2; $26.2 million for six months | $12.5 million and $25.0 million, respectively, in 2013 |
| Net interest income | $11.0 million for Q2; $21.5 million for six months | $9.6 million and $19.2 million in 2013 |
| Net income | $2.7 million for Q2; $5.5 million for six months | $2.1 million and $4.2 million in 2013 |
| Common earnings / EPS | $2.6 million and $0.41 for Q2; $5.3 million and $0.84 for six months | $1.9 million and $0.31; $3.7 million and $0.59 in 2013 |
| Net interest margin | 3.13% for Q2; 3.08% for six months | 2.84% and 2.83% in 2013 |
| Assets / loans | Assets $1.471 billion; net loans $727.8 million | Assets $1.436 billion; net loans $692.8 million at year-end 2013 |
| Deposits / borrowings | Deposits $1.328 billion; borrowings $3.6 million | Deposits $1.303 billion; borrowings $6.3 million at year-end 2013 |
| Cash and cash equivalents | $22.5 million | $61.5 million at year-end 2013 |
| Equity | $135.2 million | $123.4 million at year-end 2013 |
For the first six months, operating cash flow was $9.6 million, investing cash flow was negative $68.6 million, and financing cash flow was positive $20.0 million. Cash declined by $39.0 million. The company paid common dividends of $0.32 per share for the half-year.
Material changes and credit quality
- Six-month net income rose 29% year over year, principally from higher loan interest income, lower funding costs and a lower loan-loss provision. Net interest income increased 12%; the provision fell to $0.7 million from $1.7 million.
- Noninterest income declined to $3.1 million from $4.5 million for six months, mainly because securities gains fell to $0.2 million from $1.5 million. Noninterest expense was $15.7 million versus $15.6 million; salary and benefit costs increased.
- Loans grew 5.1% net of allowance from year-end, while securities increased $39.6 million. Management attributed the cash reduction in part to deploying funds into loans and securities.
- The allowance for loan losses declined to $8.4 million, or 1.1% of loans, from $10.4 million, or 1.5%. Six-month charge-offs were $2.8 million versus $2.2 million; management said they were concentrated in three relationships and substantially covered by prior specific reserves.
- Nonperforming assets decreased to $15.4 million from $18.3 million; nonaccrual loans were $14.2 million. Impaired loans were $26.2 million versus $29.9 million. Troubled debt restructurings remained $3.2 million, including $0.2 million on nonaccrual.
- Other real estate declined to $0.9 million from $3.4 million, largely after property sales. The loan portfolio is concentrated in real estate: 71.2% was secured primarily or secondarily by real estate, including 45.9% in non-farm non-residential real estate.
Outlook, liquidity, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said it expects to pay the contractual minimum 1.0% dividend rate on SBLF preferred capital through December 31, 2015, and described liquidity as sufficient for current operating needs.
- Available-for-sale securities were $529.1 million and held-to-maturity securities were $145.0 million. The securities portfolio’s weighted average life was 5.1 years; management cited a 4.8-year forecast under then-current rates and approximately 5.4 years under a parallel 400-basis-point rate shock. Interest-rate movements, deposit pricing and securities values remain risks.
- Liquidity resources included $198.4 million of net FHLB borrowing capacity, $70.5 million of correspondent-bank federal funds lines and a Federal Reserve discount-window line. Public funds were $545.3 million, or 41.1% of deposits; securities pledged to secure public deposits and borrowings had a reported market value of $506.4 million.
- The company reported regulatory capital ratios above stated “well-capitalized” thresholds: consolidated total risk-based capital was 14.34% and Tier 1 leverage was 9.14% at June 30. Management said the company and bank were well capitalized.
- Other comprehensive income was $8.6 million for the first half, largely reflecting improvement in unrealized securities losses as market rates declined; accumulated other comprehensive loss narrowed to $0.6 million from $9.1 million. This increased reported equity but is subject to market-value changes.
- Off-balance-sheet exposure included $50.0 million of commitments to extend credit, $104.6 million of unfunded credit lines and $7.7 million of letters of credit. The company said ordinary-course litigation was not expected to materially affect its financial position. No material risk-factor changes were reported; forward-looking results remain subject to economic, competitive, interest-rate, credit and regulatory risks.
Key investor verification points
- Check whether loan growth and margin improvement continue, particularly as 45% of loans are floating-rate and $193.4 million of floating-rate loans were at their rate floors at June 30.
- Review subsequent charge-offs, criticized and impaired loans, nonaccruals, and whether the reduced allowance remains adequate.
- Assess the durability and cost of funding, including public-fund concentration, large time deposits, and the significant cash decline.
- Distinguish recurring earnings from securities gains and monitor expense growth, especially compensation and other-real-estate costs.
- Track interest-rate sensitivity, securities valuation and pledged collateral, as well as capital ratios and dividend capacity.