First Guaranty Bancshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; financial statements are unaudited. First Guaranty is a Louisiana-based bank holding company operating through First Guaranty Bank, with banking facilities primarily in Louisiana and Texas and newer markets in Kentucky and West Virginia. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Financial performance and position
- Q3 earnings: Net income was $1.8 million, down 78.0% from $8.1 million a year earlier. Net income available to common shareholders was $1.2 million; diluted/basic earnings per common share were reported as $0.10. For the first nine months, net income was $7.9 million versus $23.8 million, and EPS was $0.56 versus $2.05.
- Net interest and margins: Q3 net interest income was $20.4 million, down from $25.4 million; nine-month net interest income was $63.7 million versus $76.7 million. Net interest margin declined to 2.54% in Q3 from 3.46%, and to 2.75% for nine months from 3.59%. Interest income rose, but funding costs rose faster: Q3 interest expense increased to $27.2 million from $9.8 million; nine-month expense rose to $69.0 million from $21.5 million.
- Other income and costs: Q3 noninterest income was $2.5 million versus $4.0 million, chiefly reflecting no loan-sale gains versus $1.6 million a year earlier. Nine-month noninterest income was $8.0 million versus $8.5 million. Noninterest expense increased to $20.0 million in Q3 from $17.8 million and to $59.9 million for nine months from $52.4 million. Management cited higher personnel, legal and professional, software, data-processing and regulatory costs.
- Returns: Q3 return on average assets was 0.21% versus 1.06%; nine-month ROAA was 0.33% versus 1.07%. Return on average common equity was 2.27% and 4.06%, respectively, compared with 15.15% and 15.29% in the corresponding 2022 periods.
- Balance sheet at September 30: Assets were $3.42 billion, up 8.5% from year-end 2022. Loans, net of unearned income, were $2.70 billion, up 7.2%; deposits were $2.82 billion, up 3.3%. Cash and cash equivalents were $201.3 million, versus $83.2 million at year-end. Shareholders’ equity was $238.8 million versus $235.0 million.
- Funding, debt and liquidity: Deposits included $706.7 million of time deposits, up 32.5% since year-end, while noninterest-bearing demand deposits declined 12.6% to $458.4 million. Short-term borrowings were $152.7 million; FHLB long-term advances were $155.0 million; senior long-term debt was $20.3 million and junior subordinated debentures were $15.0 million. Management reported $207.7 million of net FHLB borrowing capacity, $100.5 million of correspondent-bank federal funds capacity and $214.7 million available at the Federal Reserve discount window, with no discount-window advances outstanding. Management stated liquidity was sufficient for current operating needs.
- Cash flow, nine months: Operating activities provided $8.8 million; investing activities used $144.5 million, including $181.5 million of net loan growth; financing activities provided $253.7 million, including $155.0 million of long-term borrowings and $10.0 million from a common-stock private placement. Cash increased $118.1 million to $201.3 million.
- Capital and distributions: The Bank reported it was well capitalized. At September 30, its Tier 1 leverage ratio was 8.94%, Tier 1 risk-based and common equity Tier 1 ratios were each 9.79%, and total risk-based capital was 10.72%; the capital conservation buffer was 2.72%. The quarterly common dividend remained $0.16 per share; $0.48 per share was paid for the nine-month period.
Material changes versus comparable periods
- Profitability fell sharply as the increase in interest income was outweighed by higher deposit and borrowing costs, lower loan-sale gains, and increased operating expenses.
- Loans expanded, particularly construction and land development, non-farm non-residential, and one-to-four-family residential loans. Real estate secured 72.6% of loans; non-farm non-residential loans represented 38.9% of the portfolio.
- Credit indicators weakened: nonaccrual loans rose to $25.6 million from $13.6 million at year-end; total nonperforming loans increased to $33.7 million from $14.7 million, and nonperforming assets rose to $34.8 million from $14.8 million. Nonperforming assets were 1.02% of assets versus 0.47%.
- The allowance for loan credit losses was $31.9 million, or 1.18% of loans, versus $23.5 million, or 0.93%, at year-end. Adoption of CECL on January 1, 2023 reduced retained earnings by $7.9 million after tax; the adoption also established reserves for HTM securities and unfunded commitments.
- Investment securities fell to $400.5 million from $451.5 million, principally as Treasury securities matured. HTM securities had a reported fair value of $234.8 million against a carrying amount of $320.6 million, reflecting substantial unrealized losses; management attributed the losses principally to market conditions and stated it had the ability and intent to hold securities until recovery.
- Common shares increased following a May 2023 private placement of 714,287 shares for $10.0 million. Book value per common share was $18.00, down from $18.84 at year-end.
Outlook, risks and unusual items
- The filing provides no specific earnings, margin, loan-growth or other quantitative guidance. Management cited interest-rate changes, inflation, economic conditions, competition, regulation and credit quality as factors that could cause actual results to differ from expectations. It noted economic uncertainty could require higher credit-loss allowances.
- Funding costs and interest-rate exposure are significant concerns. The Bank described a liability-sensitive position, with a negative cumulative one-year repricing gap of approximately $1.09 billion. Public funds were 39.7% of deposits; estimated uninsured deposits were $280.0 million excluding collateralized public funds, or $858.2 million including them. Time deposits maturing within one year totaled $507.6 million.
- Credit concentrations and migration warrant monitoring. Special-mention loans rose to $51.4 million from $30.3 million and substandard loans to $92.5 million from $42.7 million. A $36.3 million shopping-center loan relationship was downgraded to substandard; management cited recent appraisals totaling $47.4 million but cautioned full repayment on liquidation was not certain. Hotel and hospitality loans totaled $195.0 million, near the company’s approximately $200 million internal limit; office-space loans totaled approximately $115.0 million.
- After quarter-end, the company entered an October 5, 2023 agreement for a $40.3 million term loan and a revolving line of credit up to $21.0 million. The term-loan proceeds repaid outstanding First Horizon indebtedness. The filing also reports that $100 million of brokered time deposits issued in October were used to reduce short-term FHLB borrowings.
- The proposed Lone Star Bank acquisition agreement was terminated by mutual agreement on July 10, 2023. The company estimated related costs of approximately $0.5 million through September 30.
- A pending customer-fraud-related lawsuit alleges Bank fault for loss of funds, with a possible loss range of $0 to $1.5 million. The Bank denies the allegations; no liability was accrued. A separate disputed-interest-rate lawsuit was settled in Q1 for $0.6 million. Management also identified higher legal and professional expenses, including costs associated with an SEC settlement related to the Employee Stock Grant Program; the filing text does not provide a clear amount for that settlement.
- The Bank reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter. It stated there were no material changes to risk factors disclosed in its latest Form 10-K.
Most important facts for investors to verify
- Whether deposit pricing stabilizes and net interest margin recovers as higher-cost time deposits and other funding reprice.
- Whether nonaccrual, past-due, special-mention and substandard loans continue to rise, especially the shopping-center relationship and commercial real estate exposures.
- Whether liquidity remains adequate as $507.6 million of time deposits mature within one year, public funds remain a substantial funding source, and securities available for sale have declined.
- The extent and timing of any credit losses or forced securities sales, given the HTM portfolio’s fair-value shortfall and the Bank’s stated hold-to-recovery position.
- The final costs and terms of post-quarter borrowing and brokered-deposit actions, and the outcome or potential financial impact of the pending lawsuit and SEC-related settlement.