First Guaranty Bancshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; balance-sheet comparisons are to December 31, 2021. First Guaranty is a Louisiana bank holding company whose subsidiary operates 36 banking facilities, serving customers primarily in Louisiana and Texas, with newer markets in Kentucky and West Virginia. Amounts below are in millions unless noted.
Financial performance and position
- Third-quarter results: Net income was $8.1 million, up 3.4% from $7.8 million; diluted/common EPS as reported was $0.70 versus $0.67. Net interest income rose to $25.4 million from $23.8 million, while provision for loan losses increased to $1.5 million from $0.3 million. Noninterest income was $4.0 million versus $2.1 million, largely reflecting $1.6 million of loan-sale gains. Noninterest expense rose to $17.8 million from $15.8 million.
- Nine-month results: Net income was $23.8 million, up 23.5% from $19.2 million; EPS was $2.05 versus $1.72. Net interest income increased to $76.7 million from $64.9 million. Noninterest income was $8.5 million versus $8.0 million, and noninterest expense increased to $52.4 million from $46.8 million. Preferred dividends were $1.7 million in 2022 versus $0.8 million in 2021.
- Margins and returns: Net interest margin was 3.46% for Q3, down 7 basis points year over year; for the first nine months it was 3.59%, up 22 basis points. Management attributed the quarterly margin decline to higher funding costs as market rates rose. Nine-month return on average assets was 1.07% versus 0.92%; return on average common equity was 15.29% versus 13.55%.
- Balance-sheet growth: Total assets reached $3.10 billion, up 7.6%. Loans, net of unearned income, were $2.42 billion, up 11.9%; deposits were $2.71 billion, up 4.3%. Shareholders’ equity was $231.4 million versus $223.9 million. Accumulated other comprehensive loss widened to $16.0 million from $6.6 million, primarily from securities valuation losses.
- Credit quality: Allowance for loan and lease losses was $23.5 million, or 0.97% of loans, compared with $24.0 million, or 1.11%, at year-end. Nine-month provision was $2.9 million versus $1.8 million; charge-offs were $5.1 million versus $1.5 million. Nonperforming assets declined to $13.5 million, or 0.44% of assets, from $20.0 million, or 0.70%; nonaccrual loans fell to $10.4 million from $16.7 million. No TDRs were outstanding at quarter-end.
- Cash flow and liquidity: Nine-month operating cash flow was $33.6 million versus $8.9 million; investing cash outflow was $386.3 million, primarily reflecting loan growth and securities activity; financing cash inflow was $200.2 million. Cash and cash equivalents fell to $109.4 million from $261.9 million. Management said liquidity was sufficient and reported $301.5 million of net FHLB borrowing capacity, $100.5 million of correspondent-bank lines and a $23.7 million Federal Reserve discount-window line, with no discount-window advances outstanding.
- Debt and funding: Short-term borrowings totaled $106.4 million, including $80.0 million of FHLB advances and $20.0 million drawn on a parent-company line; the FHLB advances were repaid in October 2022. Senior long-term debt was $22.7 million and junior subordinated debentures were $15.0 million. Public funds were $1.07 billion, or 39.5% of deposits.
- Capital: The Bank was reported as well capitalized. At September 30, its Tier 1 leverage, Tier 1 risk-based, total risk-based and common equity Tier 1 ratios were 9.39%, 10.60%, 11.49% and 10.60%, respectively. Its capital conservation buffer was 3.49%, above the 2.50% minimum.
Material changes and management commentary
- Loan growth was concentrated in non-farm non-residential real estate, one-to-four-family, multifamily and commercial lease lending. Real estate secured 69.3% of loans; non-farm non-residential real estate was 40.5% of the portfolio. Approximately 39.4% of loans were floating-rate, and $465.5 million were scheduled to reprice within 90 days.
- Deposits grew, but interest-bearing demand balances and their cost rose as rates increased. Interest expense increased 75.6% year over year in Q3. Management emphasized attracting noninterest-bearing and lower-cost deposits.
- The company transferred securities from available-for-sale to held-to-maturity during Q1. At quarter-end, HTM securities had a carrying value of $319.9 million and estimated fair value of $243.8 million, including $76.2 million of gross unrealized losses. Management stated it intended and was able to hold securities until maturity or recovery and reported no credit-related other-than-temporary impairment. AFS securities had $4.0 million of gross unrealized losses.
- Interest-rate sensitivity analysis showed a liability-sensitive position: modeled net interest income declined 2.52% under an instantaneous +100-basis-point shock and 11.30% under +400 basis points. These are model estimates and depend on stated assumptions.
- Management expects adoption of the current expected credit loss standard (CECL) on January 1, 2023 and anticipates it will increase the allowance; the filing does not quantify the expected increase. No specific earnings guidance was provided.
- Management cited economic uncertainty, inflation and interest-rate changes, securities-market movements, credit losses, competition, regulatory changes and COVID-19 effects among forward-looking risks. The filing also notes $47.9 million of LIBOR-indexed loans; management did not expect the transition to alternative reference rates to have a significant financial-statement impact.
Contingencies and unusual items
- A lawsuit alleging overpayment of loan interest had a possible loss range of $0 to $0.5 million; judgment was rendered against the company, which is appealing. A $0.1 million liability was accrued. A separate customer-funds lawsuit had a possible loss range of $0 to $1.5 million and no liability was accrued.
- The SEC requested information about the company’s long-running employee stock grant and management bonus practices. The filing says no process had been instituted and describes the matter as an information request.
- First Guaranty sold a government-guaranteed loan with a $24.7 million principal balance in Q3, generating $1.6 million in loan-sale gains. A property with a reported net book value of approximately $1.0 million was sold after quarter-end.
Important facts for investors to verify
- How deposit pricing, public-funds concentration and short-term borrowing needs evolve as rates and liquidity conditions change.
- Whether CECL adoption increases the allowance as anticipated, and the resulting effect on earnings and capital.
- Whether credit performance, charge-offs and commercial real estate concentrations remain manageable as the loan book grows.
- How securities fair-value losses, the HTM portfolio’s long duration and interest-rate sensitivity affect capital, liquidity and future net interest income.
- Developments in the two lawsuits and the SEC’s information request regarding the stock grant program.