First Guaranty Bancshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited consolidated results for the company and its wholly owned bank subsidiary. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and financial performance
First Guaranty is a Louisiana-based financial holding company whose bank provides commercial banking services across Louisiana, Texas, Kentucky and West Virginia. At June 30, 2023, it reported $3.24 billion in assets, $2.59 billion in loans before allowance, and $2.77 billion in deposits.
- Q2: Interest income was $43.8 million, up 34.5% year over year, but interest expense rose to $22.9 million from $6.2 million. Net interest income fell 20.5% to $20.9 million; net interest margin was 2.74%, down 98 basis points. Net income was $2.7 million versus $8.1 million; earnings available to common shareholders were $2.1 million, or $0.19 per share, versus $7.5 million, or $0.70 per share.
- First half: Interest income rose 35.0% to $85.1 million, while interest expense increased to $41.9 million from $11.7 million. Net interest income declined 15.7% to $43.2 million; net interest margin was 2.86%, down 80 basis points. Net income was $6.1 million versus $15.7 million; common earnings were $5.0 million, or $0.46 per share, versus $14.5 million, or $1.36 per share.
- Other earnings measures: First-half noninterest income rose to $5.5 million from $4.5 million, while noninterest expense increased to $39.9 million from $34.6 million. Return on average assets was 0.34% for Q2 and 0.39% for the first half, versus 1.11% and 1.08%, respectively, in 2022.
- Cash flow: First-half operating cash flow was $11.7 million, investing cash outflow was $27.0 million, and financing cash inflow was $78.3 million. Cash and cash equivalents increased $63.0 million to $146.2 million.
Financial position, credit and liquidity
- Total assets grew 2.7% from year-end 2022. Loans, net of unearned income, increased 2.8% to $2.59 billion; deposits increased 1.6% to $2.77 billion. Loan growth included commercial real estate and residential lending; commercial and industrial loans and commercial leases declined.
- The allowance for credit losses was $31.9 million, or 1.23% of loans, versus $23.5 million and 0.93% at year-end. The first-half provision was $0.9 million versus $1.4 million in 2022. CECL adoption added about $8.1 million to the loan allowance; its after-tax cumulative adjustment reduced retained earnings by $7.9 million.
- Credit indicators weakened: nonaccrual loans rose to $23.9 million from $13.6 million; nonperforming assets increased to $25.7 million, or 0.79% of assets, from $14.8 million, or 0.47%. Special mention loans were $46.8 million, up $16.5 million; substandard loans were $87.9 million, up $45.2 million. Management cited a $35.1 million shopping-center-secured relationship downgraded to substandard and a $14.4 million commercial lease relationship downgraded to special mention.
- Deposits shifted toward higher-cost funding: noninterest-bearing demand deposits declined $58.2 million, while time deposits rose $97.1 million. Estimated uninsured deposits were $285.9 million excluding collateralized public funds, and $818.1 million including them. Public funds were 39.8% of deposits.
- Cash and cash equivalents were $146.2 million. Available-for-sale securities were $80.2 million and held-to-maturity securities were $320.5 million. HTM fair value was $250.0 million, about $70.6 million below amortized cost; management attributed securities losses to market rates rather than credit impairment and stated it intended and was able to hold the securities for recovery.
- Short-term borrowings totaled $57.4 million; long-term FHLB advances were $120.0 million; senior long-term debt was $20.3 million; junior subordinated debentures were $15.0 million. The company reported $316.1 million of net FHLB borrowing capacity and $184.3 million available at the Federal Reserve discount window, with no discount-window advances outstanding.
- Shareholders’ equity was $238.9 million. The bank’s regulatory capital ratios included a 9.29% Tier 1 leverage ratio, 10.22% Tier 1 risk-based ratio and 11.18% total risk-based ratio; management reported the bank was well capitalized and its 3.18% capital conservation buffer exceeded the 2.50% minimum.
Material changes, outlook and risks
- The principal earnings pressure was the sharply higher cost of deposits and borrowings as market rates rose. Management said asset yields also increased, but not enough to offset funding costs. Demand deposits tied to public funds and Treasury rates were a particular cost driver.
- Noninterest expense rose, including legal and professional fees, software, regulatory assessments and personnel costs. Noninterest income benefited from COVID-19-related salary tax credits, recoveries of prior legal fees and loan-servicing-asset valuation changes. PPP fee income fell substantially year over year.
- First Guaranty issued 714,286 common shares in a May private placement for $10.0 million, intended for general corporate purposes, growth and regulatory capital. Q2 common dividends were $0.16 per share; preferred dividends continued.
- The company adopted CECL on January 1, 2023. The adoption increased the allowance for loans and HTM securities and established a $2.9 million reserve for unfunded commitments; prior-period figures were not recast.
- The proposed Lone Star Bank acquisition was terminated by mutual agreement on July 10, 2023. Estimated transaction costs through June 30 were approximately $0.4 million. No specific earnings guidance was provided. Management said liquidity was sufficient for current operating needs, while noting economic uncertainty could increase future credit-loss allowances.
- Interest-rate risk remains significant: the filing describes a liability-sensitive position and a negative cumulative one-year gap. Risks also include CRE concentrations, worsening criticized and nonperforming loans, deposit pricing and retention, and substantial securities unrealized losses.
- A customer lawsuit alleging losses from third-party fraud had a possible loss range of $0 to $1.5 million; the bank denied the allegations, intended to defend the case and recorded no liability. A separate disputed-interest-rate lawsuit settled in Q1 for $0.6 million. The filing also cites an SEC settlement payment related to the Employee Stock Grant Program as a contributor to higher first-half legal expenses.
Most important facts for investors to verify
- Whether deposit costs continue to outpace loan and securities yield increases, and whether net interest margin stabilizes.
- Trends in nonaccrual, special mention and substandard loans, especially the $35.1 million shopping-center relationship, and adequacy of the CECL allowance.
- Deposit retention and mix, uninsured-deposit exposure, and continued access to contingent borrowing capacity.
- Realized or further changes in the securities portfolio’s unrealized losses, and the liquidity implications of the large HTM position.
- Regulatory capital after the private placement and as the holding company’s small-bank-holding-company status is expected to change by March 31, 2024 or earlier under certain circumstances.
- Final costs and consequences of the terminated Lone Star transaction, and developments in outstanding litigation.