Executive Summary / Key Takeaways

• First Guaranty Bancshares is undergoing a significant strategic shift focused on reducing risk, particularly within its commercial real estate loan portfolio, in response to increased regulatory scrutiny and market conditions.
• This de-risking strategy resulted in a net loss of $6.2 million in Q1 2025, primarily driven by a substantial $14.5 million provision for credit losses, including losses from the sale of $70 million in criticized commercial real estate loans.
• Nonaccrual loans increased to $133.4 million, concentrated in a few large commercial real estate relationships, highlighting ongoing asset quality challenges despite portfolio reduction efforts.
• The company has taken steps to enhance capital, including reducing the common stock dividend and completing private placements of common stock, while maintaining regulatory capital ratios above well-capitalized minimums.
• While near-term profitability is impacted by credit costs and portfolio contraction, the strategic pivot aims to create a more stable, less liability-sensitive balance sheet for the long term, positioning the bank as a niche community-focused player amidst competition from larger, more technologically advanced regional banks and agile fintechs.

A Strategic Pivot In A Shifting Landscape

First Guaranty Bancshares, Inc., operating through its subsidiary First Guaranty Bank, has a history stretching back to 1934, growing its footprint primarily across Louisiana and Texas, with more recent expansion into Kentucky and West Virginia. This growth has included strategic acquisitions, such as Homestead Bancorp, Premier Bancshares, and Union Bancshares, which helped establish its presence and customer base. The bank has traditionally emphasized personalized commercial banking services, localized decision-making, and building strong customer relationships, competing on service quality and accessibility alongside competitive pricing.

The banking industry landscape is currently shaped by evolving interest rate environments, increased regulatory focus on specific asset classes like commercial real estate (CRE), and the accelerating pace of technological adoption. Larger regional banks like Regions Financial (RF), Hancock Whitney (HWC), First Horizon (FHN), and Prosperity Bancshares (PB) often leverage greater scale and investment in digital technologies to drive efficiency and expand their reach. Fintech firms and online banks also present indirect competition by offering streamlined, lower-cost digital alternatives for deposits and certain lending products.

In this dynamic environment, First Guaranty initiated a significant strategic modification in 2024, continuing into the first quarter of 2025. The core of this strategy is to actively reduce exposure to commercial real estate loans, particularly those secured by non-owner occupied properties and construction projects. This strategic shift is a direct response to heightened regulatory scrutiny on CRE portfolios, driven by concerns over valuations in a higher interest rate environment and lingering impacts from the COVID-19 pandemic. The company has implemented enhanced risk management practices, including annual stress tests for large CRE exposures, generally requiring personal guarantees, limiting loan-to-values to 80% or less, and requiring upfront borrower equity contributions for construction loans.

While the company aims to update its product mix and related technology to attract customers, the competitive analysis indicates that larger rivals are already leveraging digital platforms for faster processing and lower operating costs per transaction or loan. This suggests that while First Guaranty's focus on personalized service and local relationships provides a competitive moat, particularly in niche markets like agricultural lending, it faces a quantifiable challenge in matching the operational efficiency and technological capabilities of larger competitors and agile fintechs. Bridging this technology gap will be crucial for maintaining competitiveness and improving cost structures relative to peers like Prosperity Bancshares, which demonstrates significantly lower operating costs per loan.

Q1 2025 Performance: The Cost of De-Risking

The first quarter of 2025 provided a clear look at the near-term financial impact of First Guaranty's strategic de-risking. The company reported a net loss of $6.2 million for the three months ended March 31, 2025, a significant decrease from the net income of $2.3 million in the same period of 2024. This swing to a loss was primarily driven by a substantial increase in the provision for credit losses, which totaled $14.5 million in Q1 2025 compared to $2.3 million in Q1 2024.

A notable component of this increased provision was $5.8 million directly related to the sale of two commercial real estate loans totaling $70 million that were identified as experiencing credit deterioration. This action, while impacting current earnings, is consistent with the stated strategy to reduce risk exposure. Total loan charge-offs in the quarter were $6.9 million, including the $5.8 million from these loan sales.

Asset quality metrics also reflected the ongoing portfolio adjustments and challenges. Nonaccrual loan balances increased by $24.9 million to $133.4 million at March 31, 2025, compared to $108.5 million at December 31, 2024. This increase was concentrated in two large commercial real estate relationships totaling $40.3 million (a $33 million assisted living center loan and a $7.4 million land development loan), partially offset by the sale of $14.1 million in nonaccrual loans. The increase in classified assets, including substandard and special mention loans, was primarily due to downgrades of several large loan relationships. At March 31, 2025, the largest six non-performing loan relationships comprised 78% of total non-performing loans, indicating a high concentration of risk within a limited number of credits.

Total loan balances decreased by $181.0 million, or 6.7%, to $2.51 billion at March 31, 2025, from $2.69 billion at December 31, 2024. This reduction, seen across various CRE categories and commercial leases, is a direct outcome of the strategy to reduce loan concentration risk through sales, payoffs, and amortization. Unfunded loan commitments for CRE construction also declined significantly, from $147.0 million in Q2 2024 to $58.0 million in Q1 2025, further illustrating the strategic shift away from this segment.

Net interest income saw a modest increase to $22.2 million in Q1 2025 from $21.9 million in Q1 2024. However, the net interest margin compressed to 2.35% from 2.58%. This compression was influenced by a lower average yield on interest-earning assets (particularly interest-earning deposits with banks) and an increase in the average balance of interest-bearing liabilities, partially offset by a decrease in the average rate paid on interest-bearing liabilities, driven by the repricing of public funds deposits indexed to Treasury rates.

Noninterest income saw a slight increase, primarily due to higher service charges, commissions, and fees, while noninterest expense decreased, benefiting from lower personnel and other operating costs, despite including $0.7 million in fees related to the loan sale.

Financial Health, Capital, and Liquidity Management

First Guaranty's balance sheet reflected the strategic adjustments in the first quarter. Total assets decreased by $143.5 million to $3.80 billion, driven mainly by the reduction in loans and investment securities, partially offset by an increase in cash and cash equivalents.

Total deposits decreased by $136.8 million to $3.30 billion. This decrease was primarily in interest-bearing demand deposits (influenced by seasonal public funds fluctuations) and time deposits (specifically brokered time deposits), partially offset by growth in noninterest-bearing demand and savings deposits. The company continues its strategy of managing public funds deposits, which are generally stable, and is actively increasing the proportion collateralized by reciprocal deposit insurance programs to free up securities for higher-yielding investments. Uninsured deposits, including collateralized public funds, were estimated at $941.1 million at quarter-end.

Borrowings included $7.1 million in short-term repurchase agreements and $135.0 million in long-term FHLB advances maturing in 2027. The company converted previous short-term floating rate FHLB borrowings to lower fixed rates to manage interest expense. Available borrowing capacity remained substantial, with $371.9 million at the FHLB, $93.0 million in federal funds lines, and $226.5 million at the Federal Reserve discount window, supporting management's view of sufficient liquidity.

Shareholders equity decreased slightly to $251.4 million from $255.0 million. The net loss and common stock dividends ($0.01 per share in Q1 2025 vs $0.16 in Q1 2024) were partially offset by the issuance of common stock through a private placement ($1.6 million in Q1 2025, with another $1.7 million in early Q2 2025) and an improvement in accumulated other comprehensive loss due to decreased unrealized losses on available for sale securities. The reduction in the common stock dividend was a deliberate action taken in Q3 2024 to enhance capital, aligning with the new business strategy. As of March 31, 2025, both the bank and the holding company maintained regulatory capital ratios above the minimums required to be considered well-capitalized, including exceeding the capital conservation buffer.

Risks and Outlook

The primary risks facing First Guaranty relate to the execution of its strategic pivot, particularly managing credit quality within the remaining loan portfolio and navigating the interest rate environment. The concentration of non-performing loans in a few large CRE relationships remains a key area of focus. Economic uncertainty could lead to further credit deterioration and necessitate additional increases to the allowance for credit losses. The bank's liability-sensitive position, as indicated by the negative cumulative interest sensitivity gap on a one-year basis, exposes net interest income to potential pressure if interest rates were to rise significantly, although efforts are underway to create a more balanced asset-liability mix. Litigation risk, including a lawsuit with a potential loss range of $0.0 million to $1.5 million, also remains a factor, though management does not currently expect a material adverse effect from existing proceedings.

Management anticipates continuing to reduce commercial real estate secured loans throughout 2025. They also expect continued reduction in specific non-performing loan relationships through collateral sales. This outlook reinforces the commitment to the de-risking strategy, signaling that portfolio contraction and potential credit costs associated with resolving problem assets may continue in the near term.

Conclusion

First Guaranty Bancshares is in the midst of a significant strategic transformation aimed at reducing risk and repositioning its balance sheet. The first quarter of 2025 results underscore that this process comes with near-term costs, notably a net loss driven by a substantial provision for credit losses tied to active portfolio management and asset quality challenges. The increase in nonaccrual loans, concentrated in large CRE credits, highlights the ongoing work required to resolve troubled assets.

However, the proactive steps to reduce CRE exposure, decrease unfunded commitments, and strengthen capital through dividend adjustments and equity issuance demonstrate a clear commitment to building a more resilient institution. While the bank operates in a competitive landscape against larger, more technologically advanced rivals and faces ongoing macroeconomic uncertainties, its focus on de-risking and managing its funding structure suggests a deliberate effort to enhance long-term stability. Investors should monitor the pace of loan portfolio reduction, trends in asset quality metrics, the impact of interest rates on net interest margin, and the effectiveness of capital enhancement initiatives as key indicators of the success of this strategic pivot. The path forward involves navigating the near-term impacts of de-risking while striving to establish a foundation for more sustainable performance in the future.