Business context and reporting period
First Guaranty Bancshares, Inc., a Louisiana bank holding company operating through First Guaranty Bank, filed this unaudited Form 10-Q for the quarter ended March 31, 2018. The bank serves customers in Louisiana and North Central Texas. The June 2017 acquisition of Premier Bancshares expanded its Texas presence; consequently, year-over-year comparisons include acquired operations in 2018 but not in first-quarter 2017.
Financial performance and position
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q1 2018 | Comparable / prior-period value |
|---|---|---|
| Interest income | $18.3 | $15.6 in Q1 2017 |
| Net interest income | $13.8 | $12.7 in Q1 2017 |
| Provision for loan losses | $0.6 | $0.7 in Q1 2017 |
| Noninterest income | $1.6 | $2.0 in Q1 2017 |
| Noninterest expense | $10.2 | $9.0 in Q1 2017 |
| Income before taxes | $4.5 | $4.9 in Q1 2017 |
| Net income | $3.6 | $3.3 in Q1 2017 |
| Diluted earnings per share as reported | $0.41 | $0.39 in Q1 2017 |
Net interest margin was 3.32%, down 3 basis points year over year; net interest rate spread was 3.04%, down 10 basis points. Return on average assets was 0.84% in both periods; return on average common equity was 10.29% versus 10.45%. The board declared a $0.16 per-share cash dividend.
- Balance sheet: Total assets were $1.732 billion at March 31, down 1.1% from year-end 2017. Deposits were $1.550 billion, essentially unchanged. Loans before allowance and unearned income were $1.137 billion, down about 1.0% from year-end; net loans were $1.127 billion. Cash and cash equivalents were $32.3 million, down $5.8 million.
- Cash flow: Operating activities provided $7.8 million; investing activities provided $3.1 million; financing activities used $16.7 million. Cash and cash equivalents decreased $5.8 million during the quarter.
- Credit quality: The allowance for loan losses was $9.8 million, or 0.86% of loans, compared with $9.2 million and 0.80% at year-end. Nonperforming assets fell to $12.2 million from $14.7 million; nonperforming loans were 0.96% of loans. Nonaccrual loans declined to $10.5 million from $12.6 million.
- Debt and liquidity: Short-term borrowings were zero, versus $15.5 million at year-end. Senior long-term debt was $22.0 million and junior subordinated debentures were $14.7 million. The company reported $60.6 million of net FHLB borrowing capacity, $95.5 million of federal funds lines and an available $6.5 million revolving line. Management stated liquidity was sufficient for current operating needs.
- Capital: Shareholders’ equity was $140.0 million, down from $144.0 million at year-end, primarily reflecting a $6.2 million increase in accumulated other comprehensive loss from unrealized securities losses. The Bank and holding company exceeded applicable well-capitalized regulatory thresholds. The Bank’s total risk-based capital ratio was 13.27%; the consolidated ratio was 12.42%.
Material changes versus comparable periods
- Net income increased 10.8% year over year, despite lower pretax income, primarily because income tax expense declined to $0.9 million from $1.7 million following the federal corporate tax-rate reduction to 21% from 35%.
- Interest income rose 17.2%, led by loan income, while interest expense increased 55.3% as deposit balances and rates rose. Average interest-bearing liability cost increased to 1.37% from 0.98%.
- Noninterest income declined, chiefly because securities gains fell to $10,000 from $530,000. Noninterest expense rose to $10.2 million from $9.0 million, including higher salaries and occupancy costs.
- Unrealized losses on securities drove other comprehensive loss of $6.2 million, compared with comprehensive income of $3.8 million in Q1 2017. Available-for-sale securities had gross unrealized losses of $11.3 million at quarter-end, versus $5.5 million at year-end; management reported intent and ability to hold securities until recovery or maturity.
- Loans contracted modestly, with reductions in construction and commercial-and-industrial balances partly offset by multifamily growth. Real estate secured 74.8% of the loan portfolio; non-farm non-residential lending represented 46.5%.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings, revenue or margin guidance. Management described a continued strategy of shifting assets from lower-yielding securities toward higher-yielding loans and prioritizing noninterest-bearing deposit growth.
- Interest-rate sensitivity analysis estimated that an instantaneous +100 basis-point shift would reduce 12-month net interest income by 3.13%, and a +400 basis-point shift by 13.32%. Gradual +100 and +400 basis-point scenarios indicated declines of 1.56% and 6.77%, respectively. The filing cautions that actual outcomes may differ because of assumptions and balance-sheet behavior.
- Funding concentration merits attention: public funds were $653.1 million, or 42.1% of deposits. Three relationships represented 38% of public-fund deposits held under fiscal agency agreements. Time deposits of at least $100,000 totaled approximately $432.3 million.
- Credit risks include commercial real estate concentration, criticized and classified loan migration, and exposure to oil-and-gas support businesses. Approximately 2.2% of funded and 0.5% of unfunded loan commitments related to such businesses. Syndicated loans totaled $77.4 million.
- On May 9, 2018, the company received $3.6 million to settle a nonaccrual commercial-and-industrial shared-national-credit loan with a $2.0 million carrying value, producing a reported $1.6 million recovery in Q2 2018. The company also reported routine legal proceedings that it did not expect to have a material adverse effect, and no material changes to previously disclosed risk factors.
- Management identified the allowance for loan losses, foreclosed real estate valuations and securities valuations as estimates particularly susceptible to near-term change. Adoption of the expected-credit-loss standard (ASU 2016-13) was under evaluation; implementation work included a new software application.
Most important facts for investors to verify
- Whether loan growth, deposit pricing and funding mix support net interest margin as deposit costs rise.
- Whether the $1.6 million settlement recovery was realized in Q2 as described, and whether credit-quality improvements persist.
- The adequacy of the $9.8 million allowance given criticized loans, real-estate concentration and the loan portfolio’s subsequent performance.
- Changes in public-fund and large time-deposit balances, including renewal behavior and collateral requirements.
- The effect of interest-rate movements on securities marks, accumulated other comprehensive loss, capital and net interest income.
- Integration and earnings comparability following the Premier acquisition, and the eventual effect of expected-credit-loss accounting.