First Guaranty Bancshares, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. The unaudited consolidated statements include First Guaranty Bancshares and its wholly owned bank subsidiary. The company operates 35 banking facilities, primarily in Louisiana and Texas, with additional markets in Kentucky and West Virginia.
Financial performance and condition
- Earnings: Net income was $2.31 million, down 33.4% from $3.47 million a year earlier. Net income available to common shareholders was $1.73 million; diluted/baseline earnings per common share reported were $0.14 versus $0.27. Return on average assets was 0.26% and return on average common equity was 3.17%.
- Interest and margins: Interest income rose 28.1% to $52.91 million, but interest expense increased 63.2% to $30.99 million. Net interest income declined 1.7% to $21.92 million. Net interest margin fell 41 basis points to 2.58%; net interest rate spread fell 44 basis points to 1.85%.
- Credit costs: Provision for credit losses was $2.30 million, versus $0.31 million. The allowance for loan losses was $31.45 million, or 1.14% of loans, compared with $30.93 million, or 1.13%, at year-end. Loan charge-offs were $2.29 million and recoveries were $0.26 million.
- Loans and credit quality: Loans net of unearned income were $2.75 billion, up $3.5 million from year-end. Nonaccrual loans increased to $28.6 million from $25.2 million; total nonperforming assets rose to $44.5 million, or 1.25% of assets, from $41.7 million, or 1.17%.
- Revenue and expenses: Noninterest income declined to $2.31 million from $2.70 million, mainly reflecting loan-servicing asset valuation changes. Noninterest expense declined to $18.93 million from $20.17 million, including lower legal and professional costs.
- Liquidity and funding: Cash and cash equivalents were $332.1 million, up $45.6 million. Deposits increased 1.8% to $3.06 billion; time deposits grew $42.7 million while noninterest-bearing demand deposits fell $27.6 million. Public funds were $1.24 billion, 40.5% of deposits. Estimated uninsured deposits were $307.5 million excluding collateralized public funds; the estimate including those funds was $924.2 million.
- Debt and capital: Short-term borrowings fell to $6.8 million from $66.3 million. Long-term FHLB advances were $155.0 million; senior long-term debt was $18.1 million, down from $39.1 million; junior subordinated debentures increased to $44.7 million after a $30.0 million issuance in March. Shareholders’ equity was $250.3 million. The Bank’s capital ratios exceeded stated well-capitalized minimums; its capital conservation buffer was 3.39%, and the consolidated buffer was 2.55%.
- Cash flow: Operating activities provided $2.0 million, investing activities provided $41.8 million, and financing activities provided $1.8 million. Cash increased $45.6 million during the quarter.
Material changes versus comparable periods
- Compared with Q1 2023, net income fell 33.4% and earnings per share declined from $0.27 to $0.14. Higher asset yields and loan interest income were outweighed by materially higher deposit and borrowing costs, credit-loss provision, and lower noninterest income.
- Average interest-bearing liability cost increased to 4.38% from 3.24%, while average interest-earning asset yield rose to 6.23% from 5.53%. Management attributed margin pressure primarily to higher funding costs, especially on public-funds demand deposits tied to Treasury rates.
- Compared with December 31, 2023, total assets were nearly flat at $3.56 billion. A $45.5 million decrease in investment securities, mainly from Treasury maturities, was largely offset by increases in cash and loans.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance was provided. Management said it believes liquidity is sufficient for current operating needs and the allowance is adequate under current conditions, while noting economic uncertainty could require higher future credit-loss allowances.
- Interest-rate risk is significant: the company reported a liability-sensitive position and a negative cumulative one-year interest-rate gap of $973.2 million, or 28.3% of earning assets. Results remain sensitive to rates, deposit pricing, repricing behavior and loan demand.
- Commercial real estate represents a material concentration: 76.8% of loans were real-estate secured, including 41.1% in non-farm non-residential real estate. The hotel and hospitality portfolio was $181.4 million against an internal guidance limit of approximately $200 million. Management described stress testing and other CRE controls.
- Held-to-maturity securities had a carrying value of $320.9 million and estimated fair value of $251.6 million, with $69.4 million of gross unrealized losses. Management stated it has the intent and ability to hold securities until maturity or anticipated recovery; one HTM corporate security had a credit-related impairment loss.
- A lawsuit alleges the Bank was at fault for a customer’s loss related to third-party fraud; the stated possible loss range is $0 to $1.5 million. The Bank denies the allegations, plans to defend the case, and has recorded no liability.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It stated there were no material changes to the risk factors in its most recent Form 10-K.
Most important facts for investors to verify
- Whether funding costs and deposit mix stabilize enough to arrest the decline in net interest margin and earnings.
- Whether nonaccrual loans, nonperforming assets and charge-offs continue to rise, particularly in commercial real estate and commercial and industrial lending.
- Deposit concentration and pricing exposure, including the level and stability of public funds and uninsured deposits.
- The implications of the negative one-year interest-rate gap and the sizable unrealized loss position in held-to-maturity securities for liquidity and capital under stress.
- The terms, maturity and cost of the $30 million subordinated debt issuance, and whether capital ratios and dividends remain sustainable.
- Developments in the customer-fraud lawsuit and any resulting change to the estimated exposure.