10-K: First Guaranty Bancshares Reports Mixed Results in 2023 Annual Filing

First Guaranty Bancshares' 2023 annual report reveals a decrease in net income despite growth in assets and loans, alongside increased scrutiny on commercial real estate lending.

Summary

• First Guaranty Bancshares reported a net income of $9.2 million for 2023, a significant decrease from $28.9 million in 2022.
• Total assets grew to $3.6 billion, a 12.7% increase from the previous year, with total loans reaching $2.7 billion, up 9.1%.
• Total deposits also increased to $3.0 billion, a 10.5% rise from 2022.
• The company's net interest margin decreased to 2.69% in 2023 from 3.47% in 2022, attributed to rising interest rates.
• Non-performing assets increased to $41.7 million, or 1.17% of total assets, compared to $14.8 million, or 0.47% in the prior year.
• The allowance for credit losses was 1.13% of total loans at the end of 2023, compared to 0.93% at the end of 2022.
• The company issued $20.0 million of common stock through private placements during 2023.
• First Guaranty terminated a merger agreement with Lone Star Bank, incurring approximately $0.5 million in costs.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with strong growth in assets and loans, but a significant decline in profitability and a rise in non-performing assets. The overall sentiment is cautious due to the negative trends in key financial metrics.

Positives

• Total assets, loans, and deposits all experienced significant growth.
• The company successfully issued $20 million in common stock through private placements.
• First Guaranty maintains a strong deposit market share in several of its markets, such as the Hammond MSA.
• The company has paid a quarterly dividend on its common stock for 122 consecutive quarters as of December 31, 2023.

Negatives

• Net income decreased substantially from $28.9 million to $9.2 million.
• The net interest margin decreased from 3.47% to 2.69%.
• Non-performing assets increased significantly to 1.17% of total assets.
• The company incurred $0.5 million in costs related to a terminated merger agreement.
• Retained earnings decreased by $8.4 million.

Risks

• The company faces risks associated with its concentration in Louisiana and Texas markets, including potential economic downturns and fluctuations in oil and gas prices.
• A downturn in the real estate market could negatively impact the value of collateral securing loans.
• The company's loan portfolio includes a high percentage of non-farm non-residential real estate loans, which carry greater credit risk.
• Syndicated loans may have a higher risk of loss due to limited control over credit monitoring.
• Increased non-performing assets could adversely affect future performance.
• Interest rate shifts may reduce net interest income.
• A lack of liquidity could adversely affect operations.
• The company's strategy of pursuing acquisitions exposes it to financial, execution, and operational risks.
• The company depends primarily on net interest income for its earnings.
• The company faces intense competition in its market areas.
• The company is subject to regulatory enforcement risk, reputation risk and litigation risk regarding its participation in the PPP and Main Street Lending Program.
• The company is subject to environmental liability risk associated with lending activities.
• The company may be unable to successfully maintain and manage its growth.
• The company may be unable to successfully compete with others for business.
• The company faces risks related to its operational, technological and organizational infrastructure.
• Changes in accounting policies or in accounting standards could materially affect how the company reports its financial condition and results of operations.
• The company could recognize losses on securities held in its securities portfolio.
• Hurricanes or other adverse weather conditions can have an adverse impact on the company's market areas.
• The company relies on its management team and its board of directors for the successful implementation of its business strategy.
• The company operates in a highly regulated environment and may be adversely affected by changes in federal, state and local laws and regulations.
• The company may be required to raise additional capital in the future.
• The company is subject to the CRA and fair lending laws.
• Difficult market conditions have adversely affected the industry in which the company operates.
• The company's FDIC deposit insurance premiums and assessments may increase.
• Changes in the policies of monetary authorities and other government action could adversely affect the company's profitability.
• Curtailment of government guaranteed loan programs could affect a segment of the company's business.
• An active, liquid market for the company's securities may not be sustained.
• The company has several large shareholders, and such shareholders may independently vote their shares in a manner that you may not consider to be consistent with your best interest or the best interest of the company's shareholders as a whole.
• The company's ability to declare and pay dividends is limited.
• The Series A Preferred Stock constitutes an equity security and ranks junior to all of the company's indebtedness and will rank junior to the company's and First Guaranty Bank's future indebtedness.
• The Series A Preferred Stock and the depositary shares representing the Series A Preferred Stock effectively rank junior to any existing and all future liabilities of the company's subsidiary First Guaranty Bank.
• Dividends on the Series A Preferred Stock are non-cumulative and discretionary.
• The holders of the Series A Preferred Stock, and therefore the holders of the depositary shares representing the Series A Preferred Stock, have limited voting rights.
• First Guaranty and First Guaranty Bank have incurred indebtedness, and may in the future incur additional indebtedness, which have rights that are senior to those of First Guaranty's shareholders.
• An investment in the company's common stock or depositary shares is not an insured deposit and is not guaranteed by the FDIC.

Future Outlook

First Guaranty plans to continue expanding its Texas markets and growing its loan portfolio, with a focus on small and medium-sized businesses. The company also intends to pursue strategic acquisitions and innovative partnerships.

Management Comments

• Management believes that changes in banking regulations pertaining to rules on certain overdraft payments on consumer accounts have and will continue to have an adverse impact on our service charge income.
• Management believes that the allowance is adequate to cover expected losses in the loan portfolio.
• Management believes there is sufficient liquidity to satisfy current operating needs.

Industry Context

The report reflects the challenges faced by many financial institutions in 2023, including rising interest rates, increased competition for deposits, and increased regulatory scrutiny on commercial real estate lending. The company's focus on digital services and strategic acquisitions aligns with broader industry trends.

Comparison to Industry Standards

• The decrease in net interest margin from 3.47% to 2.69% is a common trend in the banking industry due to the rapid increase in interest rates in 2022 and 2023. This is similar to what was reported by other regional banks such as Hancock Whitney Corporation (HBHC) and Cadence Bank (CADE).
• The increase in non-performing assets to 1.17% of total assets is higher than the average for well-capitalized banks, which is typically below 1%. This is a concern and will likely be scrutinized by regulators.
• The company's loan-to-deposit ratio of 91.3% is relatively high compared to some peers, indicating a more aggressive lending strategy. This is similar to other regional banks such as Home Bancorp (HBCP) and Origin Bancorp (OBNK).
• The company's reliance on public funds deposits, which make up 39.7% of total deposits, is higher than many of its peers, which could pose a risk if these deposits are withdrawn.
• The company's tangible book value per share decreased from $17.23 to $16.03, which is a concern for investors. This is similar to other regional banks that have seen a decrease in book value due to unrealized losses on securities portfolios.

Legal Proceedings

• First Guaranty settled a lawsuit alleging overpayment on a loan for $0.6 million.
• First Guaranty Bank is a defendant in a lawsuit alleging fault for a loss of funds by a customer related to fraud by a third party, with a possible loss range of $0.0 million to $1.5 million.

Related Party Transactions

• First Guaranty has loans, deposits, and other transactions with its executive officers, directors, affiliates, and certain business organizations and individuals with which such persons are associated.
• First Guaranty paid approximately $0.3 million for printing services and supplies and office furniture and equipment to Champion Industries, Inc., of which Mr. Marshall T. Reynolds is President, Chief Executive Officer, Chairman of the Board of Directors and a major shareholder.
• First Guaranty paid interest of $1.2 million under a subordinated note to Edgar Ray Smith III, a director of First Guaranty.
• First Guaranty paid approximately $0.1 million for the purchase and maintenance of First Guaranty's automobiles to subsidiaries of Hood Automotive Group, of which William K. Hood, a director of First Guaranty, is President.
• First Guaranty paid approximately $0.7 million for architectural services in relation to bank branches to Gasaway Gasaway Bankston Architects, of which bank subsidiary board member Andrew B. Gasaway is part owner.
• First Guaranty paid approximately $0.8 million to Centurion Insurance, an insurance brokerage agency, to bind coverage at market terms for property casualty insurance and health insurance. First Guaranty owns a 50% interest in Centurion.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the decline in book value per share.
• Employees may be affected by any potential cost-cutting measures.
• Customers may be impacted by changes in interest rates and service fees.
• Creditors may be concerned about the increase in non-performing assets.
• Suppliers may be affected by changes in the company's financial performance.

Next Steps

• The company plans to continue expanding its Texas markets.
• The company plans to continue growing its loan portfolio.
• The company plans to pursue strategic acquisitions.
• The company plans to seek innovative partnerships.

Key Dates

Keywords

bank, financial services, commercial lending, community bank, loans, deposits, interest rates, credit risk, asset quality, capital, Louisiana, Texas, acquisitions, regulatory, non-performing assets, net interest margin, FDIC, SBA, mortgage, real estate