First Guaranty Bancshares, Inc. — Q2 2019 Form 10-Q
Business context and period. First Guaranty Bancshares is a Louisiana bank holding company operating through First Guaranty Bank, with 26 banking facilities serving customers primarily in Louisiana and Texas. This unaudited filing covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. Amounts below are in U.S. dollars.
Financial performance and position
- Q2 earnings: Net income was $3.2 million, down 30.1% from $4.6 million in Q2 2018; diluted/basic earnings per share as reported were $0.36 versus $0.52. Pretax income was $4.1 million versus $5.8 million.
- First-half earnings: Net income was $6.3 million, down 22.6% from $8.2 million; earnings per share were $0.72 versus $0.93.
- Interest income and margin: Q2 interest income was $23.4 million, up 21.6%, while interest expense rose 54.9% to $7.7 million. Net interest income increased 9.9% to $15.7 million. Q2 net interest margin was 3.46% versus 3.44%; first-half margin was unchanged at 3.38%. The first-half net interest rate spread narrowed to 2.97% from 3.09%.
- Other income and expenses: Q2 noninterest income fell to $1.6 million from $1.8 million, while noninterest expense rose to $11.7 million from $10.7 million, largely reflecting higher personnel costs. First-half noninterest income was $2.9 million versus $3.3 million and expenses were $22.8 million versus $20.9 million.
- Profitability: Q2 return on average assets was 0.68% versus 1.07%, and return on average common equity was 8.22% versus 13.11%. First-half figures were 0.68% and 8.32%, respectively, compared with 0.95% and 11.70%.
- Balance sheet: Total assets were $1.87 billion, up 3.1% from year-end. Loans net of unearned income were $1.30 billion, up 6.1%; after the allowance, net loans were $1.29 billion. Deposits were $1.67 billion, up 2.7%. Shareholders’ equity was $159.1 million, up from $147.3 million, reflecting higher accumulated other comprehensive income and retained earnings.
- Credit provision and allowance: The Q2 provision for loan losses was $1.6 million versus a $0.4 million credit in Q2 2018; first-half provision was $2.4 million versus $0.2 million. The allowance was $10.9 million, or 0.84% of loans, and 106.3% of nonperforming loans.
- Cash flow: For the first half, operating activities provided $13.6 million, investing activities used $10.4 million, and financing activities provided $39.0 million. Cash and cash equivalents increased $42.2 million to $170.2 million.
- Debt and liquidity: No short-term borrowings were outstanding. Senior long-term debt was $18.4 million and junior subordinated debentures were $14.7 million. The company reported $109.7 million of net FHLB borrowing capacity and $100.5 million of correspondent-bank federal funds lines, with no balances drawn. Management stated that liquidity was sufficient for current operating needs.
- Regulatory capital: The Bank reported a 9.21% Tier 1 leverage ratio, 11.83% Tier 1 risk-based and common equity Tier 1 ratios, and a 12.58% total risk-based capital ratio; it reported meeting well-capitalized requirements.
Material changes versus comparable periods
- Loan growth and a shift from lower-yielding securities to loans lifted interest income and net interest income. Average loan yield increased, but deposit-cost increases more than offset the improvement in spread.
- Deposit funding costs rose materially: first-half interest expense increased 58.4%, driven by higher balances and rates, particularly on time deposits. Time deposits increased $32.5 million from year-end; noninterest-bearing deposits remained about $250.6 million.
- Investment securities declined $73.4 million to $331.9 million as securities were sold to fund loan growth and reduce interest-rate risk. First-half securities-sale losses were $0.4 million versus $0.2 million in 2018.
- Nonperforming assets rose to $14.0 million, or 0.75% of assets, from $10.0 million, or 0.55%, at year-end. Other real estate owned increased to $3.7 million, primarily following transfer of a commercial property after a loan charge-off.
- First-half 2018 results benefited from a $1.6 million loan recovery, contributing to a credit provision in Q2 2018; this makes the year-over-year provision comparison less favorable in 2019.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management described ongoing efforts to grow loans, attract lower-cost deposits, and manage interest-rate exposure; interim results are not necessarily indicative of full-year performance.
- Credit quality: Nonaccrual loans increased to $9.3 million from $8.7 million at year-end. Loans 90 days or more past due but still accruing rose to $0.9 million from $0.1 million. Agricultural loans were a notable component of nonaccrual balances. The company reported no outstanding troubled debt restructurings at quarter-end.
- Concentrations and funding: Real-estate-secured loans were 76.7% of the portfolio, with non-farm non-residential real estate the largest category at 46.4%. Public funds were 38.8% of deposits; three relationships represented 45% of public-funds deposits under fiscal-agency agreements. Management noted that public deposits can fluctuate and may be renegotiated.
- Interest-rate risk: The company described a liability-sensitive cumulative gap of $308.4 million over one year. Its modeled instantaneous +400-basis-point scenario showed a 0.38% increase in net interest income; modeling depends on assumptions and actual outcomes may differ.
- Acquisition after quarter-end: On July 31, 2019, First Guaranty agreed to acquire Union Bancshares for cash at an expected aggregate price of approximately $43.0 million. Union reported $261.4 million of assets, $185.8 million of loans and $209.0 million of deposits at June 30. Closing was expected in late Q4 2019 or early Q1 2020, subject to regulatory and shareholder approvals.
- Other items: A $0.6 million settlement of interest on a purchased credit-impaired loan was included in Q2 2019 loan interest income. Adoption of the lease standard resulted in recognition of a $0.9 million right-of-use asset and lease liability. Two facilities were under construction, with $12.9 million of commitments and $5.0 million incurred at quarter-end.
- Contingencies and controls: Management said ordinary-course legal proceedings were not expected to have a material adverse effect; it reported no material change in risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether loan growth and higher loan yields can continue to offset rising deposit costs and pressure on net interest spread.
- Subsequent trends in nonaccrual loans, charge-offs, agricultural exposures, OREO disposition values, and allowance adequacy.
- Stability and pricing of public-funds and time-deposit funding, including the concentration of public-funds relationships and upcoming deposit maturities.
- Final regulatory and shareholder approvals, purchase price mechanics, integration costs, and expected effects of the Union Bancshares acquisition.
- Capital and liquidity capacity after planned facility spending, loan growth, dividends, and any acquisition funding needs.