First Guaranty Bancshares, Inc. — 2016 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2016, not a standalone fourth quarter. First Guaranty is a Louisiana bank holding company operating 21 banking facilities, principally in Hammond, Baton Rouge, Lafayette and Shreveport-Bossier City. It reported $1.501 billion in assets, $1.326 billion in deposits and $124.3 million in shareholders’ equity at year-end.
Financial results and condition
| Metric | 2016 | 2015 | Change / note |
|---|---|---|---|
| Net income | $14.1 million | $14.5 million | Down 2.8% |
| Net income available to common shareholders | $14.1 million | $14.1 million | Down $28,000 |
| Earnings per common share | $1.85 | $2.01 | Down 8.0%; share amounts reflect the 2015 10% stock dividend |
| Net interest income | $48.4 million | $47.5 million | Up 1.9% |
| Net interest margin | 3.39% | 3.26% | Up 13 basis points |
| Provision for loan losses | $3.7 million | $3.9 million | Down $0.2 million |
| Noninterest income | $9.5 million | $9.0 million | Includes $3.8 million of securities gains |
| Noninterest expense | $32.9 million | $31.1 million | Up $1.8 million |
| Operating cash flow | $22.2 million | $17.2 million | Investing cash outflow was $67.8 million; cash and equivalents fell $19.2 million |
- Growth and balance sheet: Total assets rose 2.8% year over year. Loans, net of unearned income, grew 12.8% to $948.9 million; deposits increased 2.3% to $1.326 billion. The loan-to-deposit ratio was 71.6% at year-end.
- Funding and securities: Investment securities declined 8.6% to $499.3 million as management shifted assets toward loans. Public funds were $556.9 million, or 42.0% of deposits; brokered deposits were $91.1 million. Cash and cash equivalents ended at $18.1 million.
- Margins and earnings quality: Management attributed the higher net interest margin to shifting assets from lower-yielding securities to loans. Interest expense rose 17.8% to $10.1 million, including increased costs from debt issued to redeem Treasury preferred stock. Securities gains rose to $3.8 million and materially contributed to noninterest income.
- Credit quality: Nonperforming assets were $22.2 million, or 1.48% of assets, versus $22.0 million, or 1.51%, in 2015. Nonaccrual loans increased to $21.7 million from $20.0 million; impaired loans increased to $28.8 million from $25.8 million. The allowance was $11.1 million, 1.17% of loans and 50.9% of nonperforming loans. Net charge-offs were 0.23% of average loans, down from 0.44%.
- Capital and debt: The company and bank were reported as well-capitalized. Consolidated total risk-based capital was 12.79%; the bank’s was 12.99%. Total shareholders’ equity rose to $124.3 million, while accumulated other comprehensive loss widened to $4.0 million. Year-end borrowings included $22.1 million of senior long-term debt, $14.6 million of junior subordinated debentures and $6.5 million of short-term borrowings.
- Liquidity: Management said liquidity was sufficient. Available borrowing sources included $45.8 million of net FHLB capacity, a $14.9 million Federal Reserve discount-window line and $70.5 million of correspondent-bank federal funds lines. The filing also reports $226.1 million of FHLB letters of credit used to collateralize public deposits.
Material changes versus 2015
- Loan growth was funded in part by reducing the securities portfolio; non-farm non-residential real estate loans increased to $417.0 million, or 43.9% of loans, while commercial and industrial loans fell to $194.0 million.
- Net income declined despite higher net interest income, as increased interest and noninterest expenses more than offset higher interest and noninterest income. The efficiency ratio increased to 56.85% from 55.11% (GAAP basis).
- Deposits increased, with growth in noninterest-bearing and interest-bearing demand and savings balances partly offset by a decline in time deposits.
- Nonperforming assets were broadly stable as a percentage of assets, but nonaccrual loans rose and a $7.7 million syndicated commercial and industrial loan was downgraded to doubtful. It had a $2.3 million specific reserve at year-end.
- The allowance for loan losses increased to $11.1 million from $9.4 million. Shareholders’ equity rose, while AOCI deteriorated because of unrealized securities losses.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management’s stated strategy is to grow loans and deposits, emphasize local lending and pursue acquisitions. It expected the Premier transaction to close in late Q2 or early Q3 2017, subject to regulatory and shareholder approvals.
- Premier merger: The January 30, 2017 agreement contemplated an approximately $21.0 million purchase price, split equally between cash and First Guaranty common stock. Premier reported approximately $154 million of assets, $114 million of loans and $129 million of deposits at December 31, 2016. Integration, approval, execution and goodwill impairment risks are disclosed.
- Concentration and credit risks: The loan book is concentrated in Louisiana and real estate, including commercial real estate. Three relationships represented $14.0 million, or 64.6%, of nonaccrual loans. The troubled syndicated oil-and-gas-services credit may require further reserves or charge-offs. Public funds concentration creates deposit-retention and liquidity risk.
- Interest-rate exposure: Management’s model showed a liability-sensitive one-year gap. An instantaneous 100-basis-point increase was estimated to reduce 12-month net interest income by 3.21%; a 400-basis-point increase by 14.10%. These are model estimates, not forecasts.
- Unusual items: 2016 noninterest expense included approximately $0.3 million of flood-related costs. Securities gains were $3.8 million; the filing reports a $0.1 million credit-related impairment charge in earnings and $6,000 of non-credit impairment in other comprehensive income. The company redeemed its $39.4 million Treasury SBLF preferred stock in December 2015, funding the redemption with new senior and subordinated debt.
- Contingencies and controls: The company reported no legal proceedings expected to have a material adverse effect and no losses on off-balance-sheet commitments in 2016. The independent auditor issued an unqualified opinion on the financial statements; management and the auditor reported effective internal control over financial reporting.
Investor verification priorities
- Confirm the Premier merger’s final approvals, consideration, integration costs, financing and expected contribution to earnings and capital.
- Review subsequent developments in the $7.7 million doubtful syndicated loan and other concentrated nonaccrual relationships, including additional reserves, charge-offs or recoveries.
- Assess the sustainability of earnings excluding securities gains, and monitor expense growth, deposit pricing and the net interest margin.
- Evaluate public-funds retention, collateral requirements, brokered deposits and actual borrowing capacity alongside the decline in cash balances.
- Check capital and dividend capacity after debt service and any merger-related effects; the bank’s dividend payments to the parent are subject to legal and regulatory limits.
- Reconcile filing details where presentation is inconsistent: the risk-factor discussion contains a January 30, 2016 merger date, while the subsequent-events disclosure and merger agreement state January 30, 2017.