First Guaranty Bank(FGBI) - 2023 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (unaudited) Unaudited Q1 2023 financial statements show total assets grew to $3.24 billion, but net income declined to $3.5 million due to increased interest expense and a $7.9 million CECL-related reduction in retained earnings Consolidated Balance Sheets Total assets increased by 2.7% to $3.24 billion as of March 31, 2023, driven by growth in net loans and deposits, while shareholders' equity slightly decreased due to CECL adoption Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $3,237,796 | $3,151,347 | +2.7% | | Net Loans | $2,542,774 | $2,495,559 | +1.9% | | Total Deposits | $2,862,588 | $2,723,792 | +5.1% | | Total Liabilities | $3,009,120 | $2,916,356 | +3.2% | | Total Shareholders' Equity | $228,676 | $234,991 | -2.7% | Consolidated Statements of Income Q1 2023 net income available to common shareholders significantly decreased to $2.9 million from $7.0 million year-over-year, as a 245.5% surge in interest expense offset interest income growth, compressing net interest income Q1 2023 vs Q1 2022 Income Statement (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Total Interest Income | $41,287 | $30,479 | +35.5% | | Total Interest Expense | $18,986 | $5,496 | +245.5% | | Net Interest Income | $22,301 | $24,983 | -10.7% | | Provision for credit losses | $314 | $632 | -50.3% | | Net Income | $3,468 | $7,585 | -54.3% | | Net Income Available to Common Shareholders | $2,886 | $7,003 | -58.8% | | Earnings Per Common Share | $0.27 | $0.65 | -58.5% | Notes to Unaudited Consolidated Financial Statements The notes detail accounting policies, notably the January 1, 2023, CECL adoption which increased the allowance for credit losses by $8.2 million and reduced retained earnings by $7.9 million, also covering securities, loans, and litigation - The company adopted the Current Expected Credit Loss (CECL) standard on January 1, 2023, requiring estimation of lifetime expected credit losses for financial assets using a modified retrospective approach[22][23][24] Impact of ASU 2016-13 (CECL) Adoption (in thousands) | Account | Dec 31, 2022 Balance | Impact of Adoption | Jan 1, 2023 Balance | | :--- | :--- | :--- | :--- | | Allowance for credit losses | $(23,518) | $(8,220) | $(31,738) | | Deferred tax asset | $6,420 | $2,100 | $8,520 | | Reserve for unfunded loan commitments | — | $(2,900) | $(2,900) | | Retained earnings | $76,351 | $(7,900) | $68,451 | - As of March 31, 2023, the securities portfolio held significant unrealized losses, with held-to-maturity securities having an amortized cost of $320.3 million and a fair value of $254.3 million, though management intends and is able to hold them until maturity or recovery[34][38] - The company is a defendant in a lawsuit alleging fault for a customer's loss due to third-party fraud, with a possible loss range of $0.0 million to $1.5 million, and no liability has been recorded as the case is in early stages[72] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 54.3% Q1 2023 net income decline to significant net interest margin compression, driven by rising interest expense, while total assets grew 2.7% to $3.2 billion and nonperforming assets increased, alongside disclosures of a pending acquisition and an SEC inquiry - Net income for Q1 2023 was $3.5 million, a 54.3% decrease from Q1 2022, with earnings per common share falling to $0.27 from $0.65[107] - The net interest margin decreased by 60 basis points to 2.99% in Q1 2023 from 3.59% in Q1 2022, due to rising interest rates increasing liability costs faster than asset yields[107] - The company entered a definitive agreement to acquire Lone Star Bank, which would add approximately $3.2 billion in combined assets and four new banking locations in Texas[109][110] - The SEC requested information regarding the company's Employee Stock Grant Program, for which the company has provided data and reserved $0.6 million[114] Financial Condition Total assets increased by $86.4 million to $3.2 billion at March 31, 2023, driven by loan and deposit growth, while nonperforming assets significantly rose to 0.76% of total assets, and shareholders' equity declined due to CECL and dividends Nonperforming Assets (in thousands) | Category | March 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total nonaccrual loans | $15,669 | $13,566 | | Loans 90+ days delinquent & accruing | $8,075 | $1,142 | | Total Real Estate Owned | $887 | $113 | | Total non-performing assets | $24,631 | $14,821 | | Non-performing assets to total assets | 0.76% | 0.47% | - The allowance for credit losses on loans increased to $31.5 million, or 1.22% of total loans, at March 31, 2023, primarily due to the $8.1 million day-one adjustment from CECL adoption[107][144] - Total deposits increased by 5.1% to $2.9 billion, with significant growth in interest-bearing demand and time deposits, and uninsured deposits estimated at $355.0 million[145][148] Results of Operations Q1 2023 net income declined due to a $2.7 million decrease in net interest income, as a $13.5 million surge in interest expense outpaced the $10.8 million rise in interest income, while noninterest expenses also increased due to legal and personnel costs Net Interest Margin Analysis | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Average Yield on Earning Assets | 5.53% | 4.38% | | Average Rate on Interest-Bearing Liabilities | 3.24% | 1.04% | | Net Interest Rate Spread | 2.29% | 3.34% | | Net Interest Margin | 2.99% | 3.59% | - Interest expense increased by 245.5% year-over-year to $19.0 million, primarily driven by higher market rates on interest-bearing demand deposits, especially public funds indexed to Treasury rates[170] - Noninterest expense increased to $20.2 million from $16.8 million year-over-year, driven by a $1.0 million rise in salaries and benefits and a $2.4 million increase in other expenses, including legal and professional fees[184] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed via ALM, with a March 31, 2023, interest sensitivity analysis revealing a liability-sensitive position and a negative cumulative gap of $1.17 billion within one year, indicating potential net interest income pressure in a rising rate environment - The company's principal market risk is interest rate risk, arising from the maturity mismatch between its longer-term assets and shorter-term liabilities[201] Interest Sensitivity Gap Analysis (March 31, 2023, in thousands) | Period | Earning Assets | Source of Funds | Period Gap | Cumulative Gap | | :--- | :--- | :--- | :--- | :--- | | 3 Months Or Less | $838,533 | $1,896,251 | $(1,057,718) | $(1,057,718) | | Over 3 Months thru 12 Months | $268,100 | $382,146 | $(114,046) | $(1,171,764) | | Total One Year | $1,106,633 | $2,278,397 | $(1,171,764) | $(1,171,764) | Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[208] Part II. Other Information Legal Proceedings The company settled a loan overpayment lawsuit for $0.6 million in Q1 2023 and faces a pending fraud-related lawsuit with a potential loss range up to $1.5 million, though management believes current legal proceedings will not materially affect financial condition - A lawsuit alleging overpayment on a loan was settled in Q1 2023 for $0.6 million[210] - A pending lawsuit alleges bank fault in a customer's fraud-related loss, with a possible loss range of $0.0 million to $1.5 million, and the bank is defending without accruing a liability[210] Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K were reported for the period - No material changes to risk factors were reported for the period[211] Exhibits This section lists filed exhibits, including the merger agreement with Lone Star Bank, corporate governance documents, and various officer certifications