First Guaranty Bancshares, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. First Guaranty is a Louisiana-based bank holding company operating through First Guaranty Bank, primarily in Louisiana and Texas, with additional Kentucky and West Virginia markets.
Financial performance and position
- Earnings: Net income was $3.5 million, down 54.3% from $7.6 million in Q1 2022. Net income available to common shareholders was $2.9 million; diluted/basic earnings per common share as presented were $0.27 versus $0.65. Return on average assets was 0.45% and return on average common equity was 5.80%.
- Net interest and margins: Net interest income declined to $22.3 million from $25.0 million. Net interest margin was 2.99%, down 60 basis points year over year; net interest rate spread fell to 2.29% from 3.34%. Interest income rose 35.5% to $41.3 million, but interest expense increased 245.5% to $19.0 million.
- Other income and expenses: Noninterest income increased to $2.7 million from $2.0 million, partly from legal-fee recoveries and a more favorable loan-servicing-asset valuation. Noninterest expense rose to $20.2 million from $16.8 million, including higher personnel, legal and professional, software, and data-processing costs. Income before taxes was $4.5 million; income tax expense was $1.1 million.
- Loans and credit: Loans net of unearned income were $2.57 billion, up $55.2 million from year-end. The allowance for credit losses was $31.5 million, or 1.22% of loans, versus $23.5 million, or 0.93%, at year-end. Q1 provision was $0.3 million; charge-offs were $1.0 million and recoveries were $0.5 million.
- Asset quality: Nonperforming assets rose to $24.6 million (0.76% of assets) from $14.8 million (0.47%). Nonaccrual loans were $15.7 million; loans 90 days past due and still accruing were $8.1 million, up from $1.1 million. Other real estate owned increased to $0.9 million from $0.1 million. Special-mention loans increased to $43.7 million, principally after a $12.7 million commercial lease relationship was downgraded.
- Deposits, liquidity, and cash flow: Deposits increased 5.1% to $2.86 billion. Cash and cash equivalents were $168.9 million, up from $83.2 million. Operating cash flow was $4.0 million; investing activities used $4.2 million; financing activities provided $85.9 million. Estimated uninsured deposits were $355.0 million, excluding specified collateralized public funds. Public funds were 40.0% of deposits.
- Debt and capital: At quarter-end, borrowings included $50.0 million of short-term FHLB advances, $20.0 million of short-term borrowings, $20.0 million of long-term FHLB advances, $21.1 million of senior long-term debt, and $15.0 million of junior subordinated debentures. Shareholders’ equity was $228.7 million, down from $235.0 million; book value per common share was $18.25 versus $18.84. The Bank reported Tier 1 leverage of 9.17%, Tier 1 risk-based capital of 10.03%, total risk-based capital of 10.98%, and a 2.98% capital conservation buffer; it stated that it remained well capitalized.
Material changes and notable items
- First Guaranty adopted CECL on January 1, 2023. Adoption reduced retained earnings by $7.9 million after tax and increased the loan allowance by $8.1 million at adoption; it also established a $2.9 million reserve for unfunded commitments and a $0.1 million allowance for held-to-maturity securities. The total CECL adjustment described by management was $10.0 million.
- Held-to-maturity securities had a $320.2 million carrying amount and an estimated fair value of $254.3 million, reflecting approximately $66.1 million of gross unrealized losses. Management said it intended and was able to hold the securities until maturity or recovery; no other-than-temporary impairment loss was recognized.
- Available-for-sale securities declined $50.4 million to $81.1 million, primarily due to Treasury maturities. Total investment securities were $401.3 million.
- Net interest margin pressure reflected the rapid rise in funding costs: the average rate on interest-bearing liabilities increased to 3.24% from 1.04%, while the yield on interest-earning assets increased to 5.53% from 4.38%.
Outlook, risks, and contingencies
- No numerical earnings or margin guidance is provided. Management emphasized attracting lower-cost deposits and described continued loan growth opportunities, particularly in Texas. It cited economic uncertainty as a possible source of future allowance increases.
- The company entered a definitive agreement in January 2023 to acquire Lone Star Bank in an all-stock transaction. The filing describes the proposed acquisition and expected market expansion but does not provide a completed closing or a clear closing timetable. On May 4, 2023, the Bank purchased property in Fate, Texas, with plans for a branch subject to regulatory approvals.
- Interest-rate and liquidity risks are significant: the filing describes a liability-sensitive position with a negative cumulative one-year gap of $1.17 billion. Management reported $314.9 million of net FHLB borrowing capacity, $100.5 million of correspondent-bank federal funds lines, and $188.2 million of Federal Reserve discount-window availability, with no discount-window advances outstanding. A $20.0 million parent-company line balance left $6.5 million available.
- The portfolio is concentrated in real estate: 71.5% of loans were real-estate secured, including 39.8% in non-farm non-residential lending. Hotel and hospitality loans totaled $183.0 million against an internal guidance limit of approximately $200.0 million. The company also disclosed exposure to oil-and-gas support businesses and $45.7 million of LIBOR-indexed loans; it did not expect a significant financial-statement impact from the anticipated transition to alternative reference rates.
- First Guaranty Bank is defending a customer-fraud-related lawsuit with a possible loss range of $0 to $1.5 million; no liability was accrued. A separate disputed-interest-rate lawsuit was settled for $0.6 million in Q1. The SEC requested information about the Employee Stock Grant Program; the company said no process had been instituted and that it had reserved $0.6 million in connection with the discussions.
- The Board declared a $0.16-per-share common dividend, unchanged from Q1 2022, and the company paid $0.6 million in preferred dividends. Management identified forward-looking risks including economic conditions, competition, inflation and interest rates, securities markets, regulation, and the ability to execute growth and acquisitions.
Important facts for investors to verify
- Deposit stability and funding costs, including uninsured deposits, public-funds concentration, brokered deposits, and upcoming time-deposit maturities.
- Whether earnings and net interest margin stabilize as deposit pricing and asset yields reprice.
- Trends in delinquency, nonaccruals, special-mention loans, charge-offs, and the CECL allowance assumptions.
- The liquidity and capital implications of unrealized losses on held-to-maturity securities, and the company’s ability to hold them as stated.
- Status, terms, regulatory approvals, and integration risks for the Lone Star Bank acquisition; progress on the planned Fate branch.
- Outcomes and potential costs of the pending customer-fraud litigation and SEC inquiry concerning the stock grant program.