First Guaranty Bancshares in Hammond, La., is back in the black.
The $3.2 billion-asset company reported third-quarter net income of $12 million, compared with a $45 million loss a year earlier. Nearly all of that profit came from the bank’s sale of its Texas operations to Armstrong Bank of Muskogee, Okla., which contributed about $17.6 million to pretax income.
Strip out the sale, and First Guaranty would have posted a pretax loss of roughly $2.8 million.
The Texas deal included five branches, $234 million in deposits, $88 million in loans, and related assets. Armstrong paid a 7.65% deposit premium.
Loans transferred at par with no discount. The bank also booked a $2.1 million gain on related real estate. Offsetting costs were modest: $1.9 million in legal, professional, and investment banking fees, a $700,000 writeoff of core deposit intangibles from a 2019 acquisition, and $100,000 in severance.
The branch sale is one piece of First Guaranty’s response to an Aug. 7 consent order from the Federal Deposit Insurance Corp. and the Louisiana Office of Financial Institutions. The order requires the bank to reach a 9% Tier 1 leverage ratio and reduce classified and nonperforming assets.
The bank’s chosen path is to get smaller. During the third quarter, it prepaid $135 million in FHLB advances, incurring a $500,000 penalty; used the one-way sell feature of reciprocal deposits to move $291.4 million of deposits and surplus cash off its balance sheet; and redeemed $130.6 million in brokered deposits with surplus cash.
Since the end of last year, total assets fell $925.8 million, loans dropped 23.6% to $1.6 billion, and deposits fell 21.4% to $2.9 billion.
The bank’s Tier 1 leverage ratio rose to 8.29% from 6.90% at year-end, but it remains short of the 9% target.
The core problem is earnings power. Net interest margin fell to 2.08% in the third quarter from 2.34% a year earlier, or 2.14% excluding the FHLB prepayment penalty. Net interest income fell to $17.7 million from $22.2 million.
Funding is expensive. Time deposits make up 51% of total deposits, while noninterest-bearing deposits account for just 13%. As loans run off, the bank has shifted into securities, which grew $162.5 million this year to $1.2 billion. Loans now represent 49.5% of average earning assets, down from 65.1% a year ago.
Credit costs have eased sharply. Provision expense was $3.8 million, down from $47.9 million a year earlier, and chargeoffs fell to $2.5 million from $21.3 million. Nonaccrual loans dropped to $43.8 million from $59.6 million at year-end.
Still, nonperforming assets rose to 4.55% of loans from 3.98% at June 30, largely because the loan book shrank faster than problem assets. Substandard loans total $245.4 million, more than the bank’s $184.7 million in tangible common equity. The allowance for credit losses stands at 2.30% of loans.
The problem loans are concentrated in senior living, multifamily, and land development. Several sit far from the bank’s Louisiana base, with substandard relationships in Utah, Oklahoma, and Ohio and special mention credits in Florida, Georgia, and California.
The fourth quarter should bring more cleanup. First Guaranty signed an agreement to sell its largest nonperforming asset, a $22.6 million independent living center held as OREO, and a letter of intent to sell its second-largest, an $11.4 million assisted living loan in Texas. Both are expected to close in the fourth quarter.