Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of First Guaranty's financial condition and results of operations is intended to highlight the significant factors affecting First Guaranty's financial condition and results of operations presented in the consolidated financial statements included in this Form 10-Q. This discussion is designed to provide readers with a more comprehensive view of the operating results and financial position than would be obtained from reading the consolidated financial statements alone. Reference should be made to those statements for an understanding of the following review and analysis. The financial data at March 31, 2023 and for the three months ended March 31, 2023 and 2022 have been derived from unaudited consolidated financial statements and include, in the opinion of management, all adjustments (consisting of normal recurring accruals and provisions) necessary to present fairly First Guaranty's financial position and results of operations for such periods.
Special Note Regarding Forward-Looking Statements
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company's anticipated future financial performance. This act provides a safe harbor for such disclosure, which protects us from unwarranted litigation, if actual results are different from management expectations. This discussion and analysis contains forward-looking statements and reflects management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "may," "should," "expect," "anticipate," "intend," "plan," "continue," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of factors and uncertainties, including, changes in general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans; changes in our financial condition or results of operations that reduce capital available to pay dividends; increases in our provision for loan losses and changes in the financial condition or future prospects of issuers of securities that we own, which could cause our actual results and experience to differ from the anticipated results and expectations, expressed in such forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
First Quarter March 31, 2023 Financial Overview
First Guaranty Bancshares is a Louisiana corporation and a financial holding company headquartered in Hammond, Louisiana. Our wholly-owned subsidiary, First Guaranty Bank, a Louisiana-chartered commercial bank, provides personalized commercial banking services primarily to Louisiana and Texas customers through 36 banking facilities primarily located in the MSAs of Hammond, Baton Rouge, Lafayette, Shreveport-Bossier City, Lake Charles and Alexandria, Louisiana and Dallas-Fort Worth-Arlington, Waco, Texas. First Guaranty expanded into Kentucky and West Virginia, our Mideast markets, in 2021 with loan and deposit production offices in Vanceburg, Kentucky. The Vanceburg location is now a branch of the bank. As discussed further below, we are subject to a pending acquisition that would expand our markets into Houston and the I-10 corridor west of Houston. We emphasize personal relationships and localized decision making to ensure that products and services are matched to customer needs. We compete for business principally on the basis of personal service to customers, customer access to officers and directors and competitive interest rates and fees.
Financial highlights for the first quarter 2023 are as follows:
•Total assets increased $86.4 million to $3.2 billion, or 2.7% at March 31, 2023 when compared with December 31, 2022. Total loans at March 31, 2023 were $2.6 billion, an increase of $55.2 million, or 2.2%, compared with December 31, 2022. Total deposits were $2.9 billion at March 31, 2023, an increase of $138.8 million, or 5.1%, compared with December 31, 2022. Retained earnings were $69.6 million at March 31, 2023, a decrease of $6.7 million compared to $76.4 million at December 31, 2022. Shareholders' equity was $228.7 million and $235.0 million at March 31, 2023 and December 31, 2022, respectively.
•Net income for the first quarter of 2023 and 2022 was $3.5 million and $7.6 million, respectively, a decrease of $4.1 million or 54.3%.
•Earnings per common share were $0.27 and $0.65 for the first quarter of 2023 and 2022, respectively. Total weighted average shares outstanding were 10,716,796 for the three months ended March 31, 2023 and 2022.
•First Guaranty participated in the SBA Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act authorized the SBA to guarantee loans under a new 7(a) loan program known as the PPP. As a qualified SBA lender, we were automatically authorized to originate PPP loans. The SBA guaranteed 100% of the PPP loans made to eligible borrowers and will forgive such loans. The program has been conducted in two phases which First Guaranty classifies as Round 1 loans (originated in 2020) and Round 2 loans (originated in 2021). As of March 31, 2023, First Guaranty had remaining Round 1 PPP loans of $2.0 million with deferred fees of $16,000 and Round 2 PPP loans of $3.6 million with deferred fees of $11,000 remaining. $5,000 in PPP fees were recognized in the first quarter of 2023 compared to $0.6 million in the first quarter of 2022.
•The allowance for credit losses was 1.22% of total loans at March 31, 2023 compared to 0.93% at December 31, 2022. First Guaranty had $5.7 million at March 31, 2023 of SBA guaranteed PPP loans that have no related allowance due to the 100% government guarantee in accordance with regulatory guidance.
•Net interest income for the first quarter of 2023 was $22.3 million compared to $25.0 million for the same period in 2022.
•The provision for credit losses for the first quarter of 2023 was $0.3 million compared to $0.6 million for the same period in 2022.
•First Guaranty had $0.9 million of other real estate owned as of March 31, 2023 compared to $0.1 million at December 31, 2022.
•Noninterest income for the first quarter of 2023 was $2.7 million compared to $2.0 million for the same period in 2022.
•The net interest margin for the three months ended March 31, 2023 was 2.99% which was a decrease of sixty basis points from the net interest margin of 3.59% for the same period in 2022. First Guaranty attributed the decrease in the net interest margin in the first quarter of 2023 compared to the first quarter of 2022 to the increase in market interest rates that began in 2022 and continued through the first quarter of 2023 that increased the cost of liabilities. Loans as a percentage of average interest earning assets increased to 83.5% at March 31, 2023 compared to 76.4% at March 31, 2022.
•Investment securities totaled $401.3 million at March 31, 2023, a decrease of $50.2 million when compared to $451.5 million at December 31, 2022. Losses on the sale of securities for the first quarter of 2023 were $0 compared to $17,000 for the same period in 2022. At March 31, 2023, available for sale securities, at fair value, totaled $81.1 million, a decrease of $50.4 million when compared to $131.5 million at December 31, 2022. At March 31, 2023, held to maturity securities, at amortized cost and net of the allowance for credit losses totaled $320.2 million, an increase of $0.2 million when compared to $320.1 million at December 31, 2022. The allowance for credit losses for HTM securities was $0.1 million at March 31, 2023.
•Total loans net of unearned income were $2.6 billion at March 31, 2023, a net increase of $55.2 million from December 31, 2022. Total loans net of unearned income are reduced by the allowance for credit losses which totaled $31.5 million at March 31, 2023 and $23.5 million at December 31, 2022, respectively. First Guaranty adopted ASC 326 effective January 1, 2023 and recorded a cumulative adjustment to the allowance of $7.0 million.
•Nonaccrual loans increased $2.1 million to $15.7 million at March 31, 2023 compared to $13.6 million at December 31, 2022.
•First Guaranty adopted ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments." (CECL) effective January 1, 2023. The total adjustment for CECL was $10.0 million which includes $7.0 million for the ACL, $0.1 million for HTM securities, and $2.9 million for unfunded loan commitments. The $2.9 million for unfunded loan commitments is recorded in other liabilities.
•Return on average assets for the three months ended March 31, 2023 and 2022 was 0.45% and 1.05%, respectively. Return on average common equity for the three months ended March 31, 2023 and 2022 was 5.80% and 14.99%, respectively. Return on average assets is calculated by dividing annualized net income by average assets. Return on average common equity is calculated by dividing annualized net income by average common equity.
•Book value per common share was $18.25 as of March 31, 2023 compared to $18.84 as of December 31, 2022. The decrease was due primarily to a decrease in retained earnings and changes in accumulated other comprehensive income ("AOCI"). AOCI is comprised of unrealized gains and losses on available for sale securities, including unrealized losses on available for sale securities at the time of transfer to held to maturity.
•First Guaranty's Board of Directors declared cash dividends of $0.16 per common share in the first quarter of 2023 and 2022. First Guaranty has paid 119 consecutive quarterly dividends as of March 31, 2023.
•First Guaranty paid preferred stock dividends of $0.6 million during the first three months of 2023 and 2022.
•First Guaranty was a defendant in a lawsuit alleging overpayment on a loan related to a disputed interest rate. First Guaranty settled this lawsuit in February of 2023 for $0.6 million.
Recent Developments
Lone Star Acquisition
On January 6, 2023, we entered into a definitive agreement to acquire Lone Star Bank, a Texas state-chartered bank with its main office in Houston, Texas. Under the terms of the agreement, we will acquire all of the issued and outstanding shares of Lone Star Bank common stock in exchange solely for shares of First Guaranty common stock through the merger of Lone Star Bank with and into First Guaranty Bank, with First Guaranty Bank surviving the merger. Based on December 31, 2022 financials, the combined financial institution would have approximately $3.2 billion in total assets, $2.5 billion in total loans, and $2.8 billion in total deposits following the close of the merger.
As a result of the proposed merger, First Guaranty Bank will acquire four banking locations in Texas: two locations in Houston and two locations west of Houston along the I-10 corridor in Sealy and Columbus.
Organic Expansion
On May 4, 2023, First Guaranty Bank purchased property in Fate, Texas, a city located in the center of Rockwell County, Texas. Plans are in process to construct and open a full-service branch of the Bank, pending all required regulatory approvals. This purchase continues to implement our expansion plans in Texas area markets.
Employee Stock Grant Program
As disclosed in previous filings by First Guaranty Bancshares, Inc., for approximately 15 years First Guaranty Bank, a subsidiary of First Guaranty Bancshares, Inc. has utilized an “Employee Stock Grant Program” to incentivize and reward bank employees for performance. Each quarter, the Board of Directors of First Guaranty Bank allocates a $75,000 payment to an attorney to be used to purchase, on the open market, shares of stock with First Guaranty Bancshares, Inc. The attorney receives nominations which come from managers throughout the Bank for awards to employees which range from clerical through top Management. An average of just over 100 employees receive awards, in full ownership with no vesting nor other requirements, each quarter with an average award of approximately 37 shares per employee awarded.
The total cost of this program per year is approximately $300,000 with total shares awarded of approximately 15,000 shares.
In addition, the same process is utilized by First Guaranty Bancshares, Inc. at the conclusion of each year for the grant of stock bonuses to members of Management of First Guaranty Bank, selected by the Board of Directors of First Guaranty Bancshares, Inc. Those awards have averaged approximately $275,000 or 12,500 shares per year. The SEC has requested information concerning this practice. No process has been instituted. First Guaranty has provided the requested information. First Guaranty has reserved $0.6 million in conjunction with these discussions.
Financial Condition
Changes in Financial Condition from December 31, 2022 to March 31, 2023
Assets
Total assets at March 31, 2023 were $3.2 billion, an increase of $86.4 million, or 2.7%, from December 31, 2022. Assets increased primarily due to increases in net loans of $47.2 million and cash and cash equivalents of $85.7 million, partially offset by a decrease in investment securities of $50.2 million at March 31, 2023 compared to December 31, 2022.
Loans
Net loans increased $47.2 million, or 1.9%, to $2.5 billion at March 31, 2023 from December 31, 2022. Construction and land development loans increased $56.4 million principally due to advances on existing construction lines and new originations that was partially offset by the conversion of loans to permanent financing. Non-farm non-residential loan balances increased $34.3 million due to new originations. One-to-four family residential loans increased $19.7 million primarily due to new originations. Agricultural loans increased $1.3 million due to seasonal activity. Consumer and other loans increased $1.3 million primarily due to new originations. Multifamily loans increased $0.8 million primarily due to the conversion of existing construction loans to permanent financing and the origination of new loans. Farmland loans decreased $1.8 million primarily due to paydowns on agricultural loan commitments. Commercial lease loan balances decreased $15.1 million primarily due to paydowns. First Guaranty has continued to expand its commercial lease portfolio which generally has higher yields than commercial real estate loans but shorter average lives. Commercial and industrial loans decreased $40.9 million primarily due to paydowns. SBA PPP loans totaled $5.7 million at March 31, 2023 compared to $5.9 million at December 31, 2022. These totals are included in commercial and industrial loans. Round 1 SBA PPP loans totaled $2.0 million at March 31, 2023 and December 31, 2022. Round 2 SBA PPP loans decreased from $3.9 million at December 31, 2022 to $3.6 million at March 31, 2023 due to SBA loan forgiveness and payments received. First Guaranty had approximately 3.7% of funded and 1.7% of unfunded commitments in our loan portfolio to businesses engaged in support or service activities for oil and gas operations. First Guaranty's hotel and hospitality portfolio totaled $183.0 million at March 31, 2023. As part of the management of risks in our loan portfolio, First Guaranty had previously established an internal guidance limit of approximately $200.0 million for its hotel and hospitality portfolio. First Guaranty's office space portfolio totaled approximately $61.4 million at March 31, 2023. First Guaranty had $345.5 million in loans related to our Texas markets at March 31, 2023 which was an increase of $11.6 million or 3.5% from $333.8 million at December 31, 2022. First Guaranty continues to have significant loan growth associated with its Texas branches. We anticipate additional growth opportunities in Texas as it contains four major cities in Austin, Dallas, Houston, and San Antonio, plus the continued growth and development of these areas is exceeding that of other areas of the country. First Guaranty had $251.7 million in loans related to our new Mideast markets in Kentucky and West Virginia at March 31, 2023 which was an increase of $40.8 million or 19.3% from $210.9 million at December 31, 2022. Syndicated loans at March 31, 2023 were $76.5 million, of which $23.7 million were shared national credits. Syndicated loans decreased $11.8 million from $88.3 million at December 31, 2022.
As of March 31, 2023, 71.5% of our loan portfolio was secured by real estate. The largest portion of our loan portfolio, at 39.8% as of March 31, 2023, was non-farm non-residential loans secured by real estate. Approximately 40.5% of the loan portfolio was based on a floating rate tied to the prime rate or LIBOR as of March 31, 2023. 61.5% of the loan portfolio is scheduled to mature within five years from March 31, 2023. First Guaranty had $45.7 million in loans that were priced off of the LIBOR index rate at March 31, 2023. As it is anticipated that LIBOR will be discontinued after June 30, 2023, First Guaranty is reviewing its loan documents to determine alternative reference rates such as the Secured Overnight Financing Rate ("SOFR") and does not anticipate there will be a significant financial statement impact with the transition.
Special mention loans increased $13.4 million to $43.7 million at March 31, 2023 compared to $30.3 million at December 31, 2022. The increase in special mention loans was primarily the result of the downgrade of one commercial lease loan relationship from pass status to special mention totaling $12.7 million.
Net loans are reduced by the allowance for credit losses which totaled $31.5 million at March 31, 2023 and $23.5 million at December 31, 2022. First Guaranty adopted ASC 326 effective January 1, 2023 and recorded a cumulative adjustment to the allowance of $7.0 million. Loan charge-offs were $1.0 million during the first three months of 2023 and $0.8 million during the same period in 2022. Recoveries totaled $0.5 million during the first three months of 2023 and $0.3 million during the same period in 2022. The provision for credit losses totaled $0.3 million for the first three months of 2023 and $0.6 million for the same period in 2022. See Note 4 of the Notes to Consolidated Financial Statements for more information on loans and Note 5 for more information on the allowance for credit losses.
Investment Securities
Investment securities at March 31, 2023 totaled $401.3 million, a decrease of $50.2 million compared to $451.5 million at December 31, 2022. The portfolio consists of both available for sale (AFS) and held to maturity securities (HTM). The securities designated as held to maturity are agency and corporate debt securities that are part of First Guaranty’s investment strategy and public funds collateralization program. We purchase securities for our investment portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk and meet pledging requirements for public funds and borrowings.
The securities portfolio consisted principally of U.S. Government and Government agency securities, agency mortgage-backed securities, corporate debt securities and municipal bonds. U.S. government agencies consist of FHLB, Federal Farm Credit Bank ("FFCB"), Freddie Mac and Fannie Mae obligations. Mortgage-backed securities that we purchase are issued by Freddie Mac and Fannie Mae. Management monitors the securities portfolio for both credit and interest rate risk. We generally limit the purchase of corporate securities to individual issuers to manage concentration and credit risk. Corporate securities generally have a maturity of 10 years or less. U.S. Government securities consist of U.S. Treasury securities that have maturities of less than two years. Government agency securities generally have maturities of 15 years or less. Agency mortgage-backed securities have stated final maturities of 15 to 20 years.
Our available for sale securities portfolio totaled $81.1 million at March 31, 2023, a decrease of $50.4 million, or 38.3%, compared to $131.5 million at December 31, 2022. The decrease was primarily due to the maturity of U.S. Treasury securities.
Our held to maturity securities portfolio totaled $320.2 million at March 31, 2023, an increase of $0.2 million, or 0.1%, compared to $320.1 million at December 31, 2022.
At March 31, 2023, $49.9 million, or 12.4%, of the securities portfolio was scheduled to mature in less than one year. The majority of these securities were U.S. Treasury securities. $3.3 million, or 0.8%, of the securities portfolio, not including collateralized mortgage obligations and mortgage-backed securities, were scheduled to mature between one and five years. The majority of these securities were U.S. Treasury securities. $100.4 million, or 25.0%, of the securities portfolio, not including collateralized mortgage obligations and mortgage-backed securities, were scheduled to mature between five and ten years. Securities, not including collateralized mortgage obligations and mortgage-backed securities, with contractual maturity dates over 10 years totaled $245.3 million, or 61.1%, of the total securities portfolio at March 31, 2023. The average maturity of the securities portfolio is affected by call options that may be exercised by the issuer of the securities and are influenced by market interest rates. Prepayments of mortgages that collateralize mortgage-backed securities also affect the maturity of the securities portfolio. Based on internal forecasts as of March 31, 2023, management believes that the securities portfolio has a forecasted weighted average life of approximately 10.82 years based on the current interest rate environment. The portfolio had an estimated effective duration of 8.69 years at March 31, 2023.
There were no credit related other-than-temporary impairment of available for sale securities during the three months ended March 31, 2023 or March 31, 2022. An allowance for credit losses of $0.1 million for held to maturity securities was recorded upon the adoption of ASC 326.
Nonperforming Assets
Non-performing assets consist of non-performing loans and other real-estate owned. Non-performing loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Loans are ordinarily placed on nonaccrual status when principal and interest is delinquent for 90 days or more. However, management may elect to continue the accrual when the asset is well secured and in the process of collection. It is our policy to discontinue the accrual of interest income on any loan for which we have reasonable doubt as to the payment of interest or principal. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Nonaccrual loans are returned to accrual status when the financial position of the borrower indicates there is no longer any reasonable doubt as to the payment of principal or interest and a reasonable payment performance period is observed (generally considered six months or longer). Other real estate owned consists of property acquired through formal foreclosure, in-substance foreclosure or by deed in lieu of foreclosure.
The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
| | | | | | | | | | | | | | |
| (in thousands) | | March 31, 2023 | | December 31, 2022 |
| Nonaccrual loans: | | | | |
| Real Estate: | | | | |
| Construction and land development | | $ | 221 | | | $ | 225 | |
| Farmland | | 677 | | | 290 | |
| 1- 4 family | | 6,209 | | | 3,826 | |
| Multifamily | | — | | | — | |
| Non-farm non-residential | | 2,675 | | | 3,746 | |
| Total Real Estate | | 9,782 | | | 8,087 | |
| Non-Real Estate: | | | | |
| Agricultural | | 1,469 | | | 1,622 | |
| Commercial and industrial | | 1,026 | | | 819 | |
| Commercial leases | | 1,799 | | | 1,799 | |
| Consumer and other | | 1,593 | | | 1,239 | |
| Total Non-Real Estate | | 5,887 | | | 5,479 | |
| Total nonaccrual loans | | 15,669 | | | 13,566 | |
| | | | |
| Loans 90 days and greater delinquent & accruing: | | | | |
| Real Estate: | | | | |
| Construction and land development | | 190 | | | 427 | |
| Farmland | | — | | | — | |
| 1- 4 family | | — | | | 332 | |
| Multifamily | | — | | | 157 | |
| Non-farm non-residential | | 1,641 | | | 103 | |
| Total Real Estate | | 1,831 | | | 1,019 | |
| Non-Real Estate: | | | | |
| Agricultural | | — | | | — | |
| Commercial and industrial | | 6,244 | | | 123 | |
| Commercial leases | | — | | | — | |
| Consumer and other | | — | | | — | |
| Total Non-Real Estate | | 6,244 | | | 123 | |
| Total loans 90 days and greater delinquent & accruing | | 8,075 | | | 1,142 | |
| | | | |
| Total non-performing loans | | 23,744 | | | 14,708 | |
| | | | |
| Real Estate Owned: | | | | |
| Construction and land development | | — | | | — | |
| Farmland | | — | | | — | |
| 1- 4 family | | 113 | | | 113 | |
| Multifamily | | — | | | — | |
| Non-farm non-residential | | 774 | | | — | |
| Total Real Estate Owned | | 887 | | | 113 | |
| | | | |
| Total non-performing assets | | $ | 24,631 | | | $ | 14,821 | |
| | | | |
| Non-performing assets to total loans | | 0.96 | % | | 0.59 | % |
| Non-performing assets to total assets | | 0.76 | % | | 0.47 | % |
| Non-performing loans to total loans | | 0.92 | % | | 0.58 | % |
| Nonaccrual loans to total loans | | 0.61 | % | | 0.54 | % |
| Allowance for credit losses to nonaccrual loans | | 200.83 | % | | 173.36 | % |
| Net loan charge-offs to average loans | | 0.08 | % | | 0.18 | % |
At March 31, 2023, nonperforming assets totaled $24.6 million, or 0.76% of total assets, compared to $14.8 million, or 0.47%, of total assets at December 31, 2022, which represented an increase of $9.8 million, or 66.2%. The increase in non-performing assets occurred primarily due to an increase in nonaccrual loans, 90 days or greater delinquent and still accruing, and other real estate owned. Non-performing loans included loans previously classified as purchase credit deteriorated following the adoption of CECL.
Nonaccrual loans increased from $13.6 million at December 31, 2022 to $15.7 million at March 31, 2023. The increase in nonaccrual loans was concentrated primarily in one-to four family, farmland, consumer and other, and commercial and industrial loans. Nonaccrual loans included $1.4 million in loans with a government guarantee. These are structured as net loss guarantees in which up to 90% of loss exposure is covered.
At March 31, 2023, loans 90 days or greater delinquent and still accruing totaled $8.1 million, an increase of $6.9 million compared to $1.1 million at December 31, 2022. The increase in loans 90 days or greater delinquent and still accruing was concentrated primarily in commercial and industrial and non-farm non-residential loans. The largest 90 day or greater delinquent was a commercial and industrial loan with a balance of approximately $5.0 million.
Other real estate owned at March 31, 2023 totaled $0.9 million, an increase of $0.8 million compared to $0.1 million at December 31, 2022. The increase was due to the addition of a $0.8 million non-farm non-residential property during the first quarter of 2023. This property was related to loan that was on nonaccrual status at December 31, 2022.
At March 31, 2023, our largest non-performing assets were comprised of the following nonaccrual loans and 90 days or greater delinquent and still accruing loans: (1) a commercial and industrial loan that totaled $5.0 million; (2) a $2.2 million loan relationship that is classified as purchased credit deteriorated (3) a commercial lease loan that totaled $1.8 million; (4) a non-farm non-residential loan secured by a mobile home facility that totaled $1.3 million; and (5) a non-farm nonresidential loan that totaled $1.1 million. This loan was originated for the sale of other real estate owned and was included in nonaccrual until establishment of a satisfactory payment history by the borrower.
Allowance for Credit Losses
First Guaranty adopted FASB ASC Topic 326 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments” Update No. 2016-13 (“ASU 2016-13”). ASU 2016-13 on January 1, 2023. ASU 2016-13, referred to as the Current Expected Credit Loss (“CECL”) standard, requires financial assets measured on an amortized cost basis, including loans and held-to-maturity debt securities, to be presented at an amount net of an allowance for credit losses, which reflects expected losses for the full life of the financial asset. Unfunded lending commitments are also within the scope of this topic. Under prior GAAP losses were not recognized until the occurrence of the loss was probable. See Recent Accounting Pronouncements for more information on the adoption of ASC 326.
The allowance for credit losses on loans is maintained to absorb potential losses in the loan portfolio. The allowance is increased by the provision for loan losses, offset by recoveries of previously charged-off loans and is decreased by loan charge-offs. The provision is a charge to current expense to provide for current expected loan losses and to maintain the allowance commensurate with management's evaluation of the risks inherent in the loan portfolio. Various factors are taken into consideration when determining the amount of the provision and the adequacy of the allowance. These factors include but are not limited to:
•past due and non-performing assets;
•specific internal analysis of loans requiring special attention;
•the current level of regulatory classified and criticized assets and the associated risk factors with each;
•changes in underwriting standards or lending procedures and policies;
•charge-off and recovery practices;
•national and local economic and business conditions;
•nature and volume of loans;
•overall portfolio quality;
•adequacy of loan collateral;
•quality of loan review system and degree of oversight by our board of directors;
•competition and legal and regulatory requirements on borrowers;
•examinations of the loan portfolio by federal and state regulatory agencies and examinations; and
•review by our internal loan review department and independent accountants.
The data collected from all sources in determining the adequacy of the allowance is evaluated on a regular basis by management with regard to current national and local economic trends, prior loss history, underlying collateral values, credit concentrations and industry risks. An estimate of potential loss on specific loans is developed in conjunction with an overall risk evaluation of the total loan portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.
The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, or collateral dependent. For such loans that are also classified as collateral dependent, an allowance is established when the collateral value is lower than the carrying value of that loan. The general component covers non-classified loans and special mention loans and is based on historical loss experience for the past three years adjusted for qualitative factors described above. An unallocated component is maintained to cover uncertainties that could affect the estimate of probable losses.
The balance in the allowance for credit losses is principally influenced by the provision for loan losses, recoveries, and by net loan loss experience. Additions to the allowance are charged to the provision for credit losses. Losses are charged to the allowance as incurred and recoveries on losses previously charged to the allowance are credited to the allowance at the time recovery is collected.
The allowance for credit losses on loans was $31.5 million, or 1.22% of total loans, and 132.5% of nonperforming loans at March 31, 2023.
Comparing March 31, 2023 to December 31, 2022, there were changes within the specific components of the allowance balance.
A provision for loan losses of $0.3 million was made during the three months ended March 31, 2023 and $0.6 million for the same period in 2022. The provisions made were taken to provide for current loan losses and to maintain the allowance proportionate to risks inherent in the loan portfolio.
The loan portfolio factors in the first three months of 2023 that primarily affected the allocation of the allowance included the following:
•The adoption of the CECL methodology under ASU 2016-13 was the largest contributor to changes in both the size and allocation of the allowance for credit losses. First Guaranty also made adjustments of certain qualitative factors to take into account the current estimated impact of COVID-19, changes in other market conditions, loan concentrations including those related to commercial real estate and loan relationships and related economic conditions on borrowers' ability to repay loans and for allocations to impaired loans within their respective categories.
•Construction and land development loans increased during the first three months of 2023 due to advances on existing construction lines of credit and new loan originations. The allowance increase related to this portfolio was due to growth in the portfolio along with changes in the qualitative analysis of the portfolio related to economic conditions.
•One-to four-family residential loans increased during the first three months of 2023. The allowance increase related to this portfolio was due to changes in the qualitative analysis of the portfolio and due to portfolio growth, and also the adoption of CECL.
•Multifamily loans increased slightly during the first three months of 2023. The allowance related to this portfolio was increased due to the adoption of the CECL methodology and due to the growth in the portfolio which increased by $0.8 million during the first three months of 2023.
•Non-farm non-residential loans increased by $34.3 million during the first three months of 2023. The allowance increase related to this portfolio was due primarily to growth in the portfolio and also to the adoption of CECL.
•Commercial and industrial loans decreased during the first three months of 2023. The allowance increase related to this portfolio was due to the adoption of the CECL methodology.
•Commercial leases decreased during the first three months of 2023 from $385.3 million at December 31, 2022 to $302.5 million at March 31, 2023. The allowance decrease related to this portfolio was due to the reduction in this portfolio and due to changes in the qualitative analysis of the portfolio related.
•Consumer and other loans increased slightly during the first three months of 2023. The decrease in the related loan loss allowance balance was due primarily to qualitative analysis and the adoption of the CECL methodology.
First Guaranty charged off $1.0 million in loan balances during the first three months of 2023. The details of the $1.0 million in charged-off loans were as follows:
1.First Guaranty charged off $0.2 million in consumer loans related to Hurricane Ida relief loans during the first quarter of 2023. These loans were originated in the fall of 2021 following Hurricane Ida that impacted Louisiana in August 2021.
2.First Guaranty charged off $0.1 million on a non-farm non-residential loan during the first quarter of 2023. This loan had no remaining principal balance at March 31, 2023. The $0.7 million property related to this loan was moved to other real estate owned during the first quarter of 2023.
3.Smaller loans and overdrawn deposit accounts comprised the remaining $0.7 million of charge-offs for the first three months of 2023.
Other information related to the allowance for credit losses is as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended
March 31, 2023 | | Three Months Ended
March 31, 2022 |
| Loans: | | | | |
| Average outstanding balance | | $ | 2,528,622 | | | $ | 2,154,264 | |
| Balance at end of period | | $ | 2,574,242 | | | $ | 2,231,119 | |
| | | | |
| Allowance for Credit Losses: | | | | |
| Balance at beginning of year | | $ | 23,518 | | | $ | 24,029 | |
| Adoption of ASC 326 | | 8,120 | | | — | |
| Charge-offs | | (973) | | | (836) | |
| Recoveries | | 489 | | | 319 | |
| Provision | | 314 | | | 632 | |
| Balance at end of period | | $ | 31,468 | | | $ | 24,144 | |
Deposits
Managing the mix and pricing the maturities of deposit liabilities is an important factor affecting our ability to maximize our net interest margin. The strategies used to manage interest-bearing deposit liabilities are designed to adjust as the interest rate environment changes. We regularly assess our funding needs, deposit pricing and interest rate outlooks. From December 31, 2022 to March 31, 2023, total deposits increased $138.8 million, or 5.1%, to $2.9 billion. Noninterest-bearing demand deposits decreased $5.4 million, or 1.0%, to $519.0 million at March 31, 2023. The decrease in noninterest-bearing demand deposits was primarily concentrated in individual and public fund noninterest-bearing demand deposits. Interest-bearing demand deposits increased $71.1 million, or 4.9%, to $1.5 billion at March 31, 2023. The increase in interest-bearing demand deposits was primarily concentrated in public funds interest-bearing demand deposits and brokered deposits of approximately $50.0 million. Savings deposits increased $0.2 million, or 0.1%, to $206.0 million at March 31, 2023, primarily related to increases in individual savings deposits. Time deposits increased $72.9 million, or 13.7%, to $606.2 million at March 31, 2023, primarily due to increases in consumer and business time deposits along with increased brokered time deposits of approximately $20.0 million.
As we seek to strengthen our net interest margin and improve our earnings, attracting non-interest-bearing or lower cost deposits will be a primary emphasis. Management will continue to evaluate and update our product mix and related technology in its efforts to attract additional customers. We currently offer a number of deposit products that are competitively priced and designed to attract and retain customers with primary emphasis on noninterest-bearing deposits and other lower cost deposits.
As of March 31, 2023, the aggregate amount of outstanding certificates of deposit in amounts greater than $250,000 was approximately $154.0 million. At March 31, 2023, approximately $31.9 million of First Guaranty's certificates of deposit greater than $250,000 had a remaining term greater than one year.
The total amount of our uninsured deposits (deposits in excess of $250,000, as calculated in accordance with FDIC regulations) was estimated at $355.0 million at March 31, 2023. This total excludes public funds deposits that are collateralized by securities or FHLB letters of credit.
The following table compares deposit categories for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Deposits | | For the Three Months Ended
March 31, | | For the Years Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| (in thousands except for %) | | Average Balance | | Percent | | Weighted
Average Rate | | Average Balance | | Percent | | Weighted
Average Rate | | Average Balance | | Percent | | Weighted
Average Rate |
| Noninterest-bearing Demand | | $ | 510,302 | | | 18.5 | % | | — | % | | $ | 552,786 | | | 20.7 | % | | — | % | | $ | 477,802 | | | 19.8 | % | | — | % |
| Interest-bearing Demand | | 1,488,105 | | | 53.8 | % | | 3.6 | % | | 1,362,396 | | | 50.9 | % | | 1.6 | % | | 1,082,922 | | | 45.0 | % | | 0.7 | % |
| Savings | | 204,271 | | | 7.4 | % | | 1.2 | % | | 212,329 | | | 7.9 | % | | 0.4 | % | | 191,967 | | | 8.0 | % | | 0.1 | % |
| Time | | 561,154 | | | 20.3 | % | | 2.6 | % | | 546,776 | | | 20.5 | % | | 2.0 | % | | 655,025 | | | 27.2 | % | | 2.0 | % |
| Total Deposits | | $ | 2,763,832 | | | 100.0 | % | | 2.5 | % | | $ | 2,674,287 | | | 100.0 | % | | 1.2 | % | | $ | 2,407,716 | | | 100.0 | % | | 0.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individual and Business Deposits | | For the Three Months Ended
March 31, | | For the Years Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| (in thousands except for %) | | Average Balance | | Percent | | Weighted
Average Rate | | Average Balance | | Percent | | Weighted
Average Rate | | Average Balance | | Percent | | Weighted
Average Rate |
| Noninterest-bearing Demand | | $ | 499,599 | | | 30.9 | % | | — | % | | $ | 544,948 | | | 32.9 | % | | — | % | | $ | 471,371 | | | 29.7 | % | | — | % |
| Interest-bearing Demand | | 436,529 | | | 27.0 | % | | 4.1 | % | | 424,257 | | | 25.7 | % | | 2.1 | % | | 390,481 | | | 24.6 | % | | 1.0 | % |
| Savings | | 157,019 | | | 9.7 | % | | 0.1 | % | | 170,571 | | | 10.3 | % | | 0.1 | % | | 154,560 | | | 9.8 | % | | 0.1 | % |
| Time | | 524,627 | | | 32.4 | % | | 2.5 | % | | 514,167 | | | 31.1 | % | | 2.0 | % | | 569,924 | | | 35.9 | % | | 2.2 | % |
| Total Individual and Business Deposits | | $ | 1,617,774 | | | 100.0 | % | | 1.9 | % | | $ | 1,653,943 | | | 100.0 | % | | 1.2 | % | | $ | 1,586,336 | | | 100.0 | % | | 1.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Public Funds Deposits | | For the Three Months Ended
March 31, | | For the Years Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| (in thousands except for %) | | Average Balance | | Percent | | Weighted
Average Rate | | Average Balance | | Percent | | Weighted
Average Rate | | Average Balance | | Percent | | Weighted
Average Rate |
| Noninterest-bearing Demand | | $ | 10,703 | | | 0.9 | % | | — | % | | $ | 7,838 | | | 0.8 | % | | — | % | | $ | 6,431 | | | 0.8 | % | | — | % |
| Interest-bearing Demand | | 1,051,576 | | | 91.8 | % | | 3.3 | % | | 938,139 | | | 91.9 | % | | 1.3 | % | | 692,441 | | | 84.3 | % | | 0.5 | % |
| Savings | | 47,252 | | | 4.1 | % | | 4.7 | % | | 41,758 | | | 4.1 | % | | 1.9 | % | | 37,407 | | | 4.5 | % | | 0.2 | % |
| Time | | 36,527 | | | 3.2 | % | | 3.1 | % | | 32,609 | | | 3.2 | % | | 1.4 | % | | 85,101 | | | 10.4 | % | | 0.8 | % |
| Total Public Funds Deposits | | $ | 1,146,058 | | | 100.0 | % | | 3.3 | % | | $ | 1,020,344 | | | 100.0 | % | | 1.4 | % | | $ | 821,380 | | | 100.0 | % | | 0.5 | % |
The following table sets forth the distribution of our time deposit accounts.
| | | | | | | | |
| (in thousands) | | March 31, 2023 |
| Time deposits of less than $100,000 | | $ | 190,972 | |
| Time deposits of $100,000 through $250,000 | | 261,259 | |
| Time deposits of more than $250,000 | | 154,000 | |
| Total Time Deposits | | $ | 606,231 | |
The following table sets forth the maturity of the time deposits greater than $250,000 at March 31, 2023.
| | | | | | | | |
| (in thousands) | | March 31, 2023 |
| Three months or less | | $ | 11,936 | |
| Three to six months | | 24,144 | |
| Six months to one year | | 86,034 | |
| One to three years | | 27,629 | |
| More than three years | | 4,257 | |
| Total Time Deposits greater than $250,000 | | $ | 154,000 | |
Public funds deposits totaled $1.1 billion at March 31, 2023 and December 31, 2022. Public funds time deposits totaled $46.0 million at March 31, 2023 compared to $32.4 million at December 31, 2022. Public funds deposits increased due to new balances from existing customers that were primarily attributed to seasonal fluctuations. First Guaranty has developed a program for the retention and management of public funds deposits. Since the end of 2012, First Guaranty has maintained public funds deposits in excess of $400.0 million. These deposits are from public entities such as school districts, hospital districts, sheriff departments and municipalities. The majority of these funds are under fiscal agency agreements with terms of three years or less. Deposits under fiscal agency agreements are generally stable but public entities may maintain the ability to negotiate term deposits on a specific basis including with other financial institutions. These deposits generally have stable balances as we maintain both operating accounts and time deposits for these entities. There is a seasonal component to public deposit levels associated with annual tax collections. Public funds will increase at the end of the year and during the first quarter. In addition to seasonal fluctuations, there are monthly fluctuations associated with internal payroll and short-term tax collection accounts for our public funds deposit accounts. Public funds deposit accounts are collateralized by FHLB letters of credit, by expanded reciprocal deposit insurance programs, by Louisiana municipal bonds and by eligible government and government agency securities such as those issued by the FHLB, FFCB, Fannie Mae, and Freddie Mac. First Guaranty continues to grow the proportion of its public funds portfolio that is collateralized by reciprocal deposit insurance as an alternative to pledging securities or utilizing FHLB letters of credit. First Guaranty initiated this strategy to more efficiently invest these deposits in higher yielding loans to improve the net interest margin and earnings. Total public funds collateralized by reciprocal deposit insurance programs decreased to $544.3 million at March 31, 2023 compared to $576.3 million at December 31, 2022.
The following table sets forth public funds as a percent of total deposits.
| | | | | | | | | | | | | | |
| (in thousands except for %) | | March 31, 2023 | | December 31, 2022 |
| Public Funds: | | | | |
| Noninterest-bearing Demand | | $ | 9,465 | | | $ | 11,730 | |
| Interest-bearing Demand | | 1,040,837 | | | 1,022,760 | |
| Savings | | 48,648 | | | 46,354 | |
| Time | | 45,988 | | | 32,427 | |
| Total Public Funds | | $ | 1,144,938 | | | $ | 1,113,271 | |
| Total Deposits | | $ | 2,862,588 | | | $ | 2,723,792 | |
| Total Public Funds as a percent of Total Deposits | | 40.0 | % | | 40.9 | % |
Borrowings
First Guaranty maintains borrowing relationships with other financial institutions as well as the Federal Home Loan Bank on a short and long-term basis to meet liquidity needs. First Guaranty had $76.6 million in short-term borrowings outstanding at March 31, 2023 compared to $146.4 million at December 31, 2022. The short-term borrowings at March 31, 2023 were comprised of short-term Federal Home Loan Bank advances of $50.0 million, a line of credit of $20.0 million, with an outstanding balance of $20.0 million and repurchase agreements of $6.6 million. The short-term borrowings outstanding at December 31, 2022 were comprised of short-term Federal Home Loan Bank advances of $120.0 million, a line of credit of $20.0 million with an outstanding balance of $20.0 million and repurchase agreements of $6.4 million. First Guaranty had available lines of credit of $26.5 million, with $20.0 million outstanding at March 31, 2023. A net availability of $6.5 million remained.
First Guaranty had senior long-term debt totaling $21.1 million as of March 31, 2023 and $21.9 million at December 31, 2022.
First Guaranty had subordinated debt totaling $15.0 million at March 31, 2023 and December 31, 2022.
First Guaranty had $504.6 million in Federal Home Loan Bank letters of credit as of March 31, 2023 compared to $388.6 million at December 31, 2022. Federal Home Loan Bank letters of credit are obtained primarily for collateralizing public deposits.
Total Shareholders' Equity
Total shareholders' equity decreased to $228.7 million at March 31, 2023 from $235.0 million at December 31, 2022. The decrease in shareholders' equity was principally the result of a decrease of $6.7 million in retained earnings, partially offset by a decrease of $0.4 million in accumulated other comprehensive loss. The $6.7 million decrease in retained earnings was primarily due to the adoption of CECL which had a $7.9 million after tax reduction to retained earnings, $1.7 million in cash dividends paid on shares of our common stock and $0.6 million in cash dividends paid on shares of our preferred stock, partially offset by net income of $3.5 million during the three months ended March 31, 2023. The decrease in accumulated other comprehensive loss was primarily attributed to the decrease in unrealized losses on available for sale securities during the three months ended March 31, 2023.
Results of Operations for the First Quarter Ended March 31, 2023 and 2022
Performance Summary
Three months ended March 31, 2023 compared to the three months ended March 31, 2022. Net income for the three months ended March 31, 2023 was $3.5 million, a decrease of $4.1 million, or 54.3%, from $7.6 million for the three months ended March 31, 2022. The decrease in net income for the three months ended March 31, 2023 as compared to the prior year period was the result of several factors. First Guaranty experienced an increase in interest income, a decrease in the provision for loan losses, and an increase in noninterest income. This increased income was offset by an increase in interest expense and an increase in noninterest expense. Loan interest income increased due to the growth in First Guaranty's loan portfolio, including loan fees recognized as an adjustment to yield. Securities interest income increased due to an increase in the average yield of the investment portfolio. The decrease in the provision was related to changes within the portfolio. Noninterest income increased primarily due to valuation changes related to the loan servicing assets and recoveries of prior legal fees. The loan servicing asset was valued lower in the first quarter of 2022 compared to the first quarter of 2023. Factors that offset the increase in net income included an increase in interest expense due to increases in volume and market interest rates. Noninterest expense increased primarily due to increased personnel expenses, legal and professional fees, software expense, and data processing expenses. Earnings per common share for the three months ended March 31, 2023 was $0.27 per common share, a decrease of 58.5% or $0.38 per common share from $0.65 per common share for the three months ended March 31, 2022.
Net Interest Income
Our operating results depend primarily on our net interest income, which is the difference between interest income earned on interest-earning assets, including loans and securities, and interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. Interest rate fluctuations, as well as changes in the amount and type of interest-earning assets and interest-bearing liabilities, combine to affect net interest income. First Guaranty’s assets and liabilities are generally most affected by changes in the Federal Funds rate, LIBOR rate, SOFR rate, short term Treasury rates such as one month and three month Treasury bills, and longer term Treasury rates such as the U.S. ten year Treasury rate. Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities. There may also be a time lag in the effect of interest rate changes on assets and liabilities. It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds.
A financial institution's asset and liability structure is substantially different from that of a non-financial company, in that virtually all assets and liabilities are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a financial institution's performance. The impact of interest rate changes depends on the sensitivity to the change of our interest-earning assets and interest-bearing liabilities. The effects of the changing interest rate environment in recent periods and our interest sensitivity position is discussed below.
Three months ended March 31, 2023 compared to the three months ended March 31, 2022. Net interest income for the three months ended March 31, 2023 and 2022 was $22.3 million and $25.0 million, respectively. The decrease in net interest income for the three months ended March 31, 2023 as compared to the prior year period was primarily due to an increase in the average balance of our total interest-bearing liabilities and an increase in the average rate of our total interest-bearing liabilities, partially offset by an increase in the average balance of our total interest-earning assets and an increase in the average yield of our total interest-earning assets. For the three months ended March 31, 2023, the average balance of our total interest-bearing liabilities increased by $222.7 million to $2.4 billion due to growth in interest bearing and non-interest bearing demand deposits. The average rate of our total interest-bearing liabilities increased by 220 basis points to 3.24% for the three months ended March 31, 2023 from 1.04% for the three months ended March 31, 2022. The rise in market interest rates, particularly associated with Treasury rates, contributed to the increase in our liabilities cost. The primarily source of the increase in liabilities cost was associated with interest bearing demand deposits for public funds that are primarily indexed to Treasury rates. For the three months ended March 31, 2023, the average balance of our total interest-earning assets increased by $207.7 million to $3.0 billion due to strong growth in our loan portfolio. The average yield of our interest-earning assets increased by 115 basis points to 5.53% for the three months ended March 31, 2023 from 4.38% for the three months ended March 31, 2022 due to an improved mix of higher yielding assets. As a result, our net interest rate spread decreased 105 basis points to 2.29% for the three months ended March 31, 2023 from 3.34% for the three months ended March 31, 2022. Our net interest margin decreased 60 basis points to 2.99% for the three months ended March 31, 2023 from 3.59% for the three months ended March 31, 2022.
Interest Income
Three months ended March 31, 2023 compared to the three months ended March 31, 2022. Interest income increased $10.8 million, or 35.5%, to $41.3 million for the three months ended March 31, 2023 as compared to the prior year period. First Guaranty's loan portfolio expanded during the first quarter of 2023 due to growth associated with our loan originations. These factors contributed to the increase in interest income as the average balance of our total interest-earning assets, primarily associated with loans, increased, and the average yield of interest-earning assets increased. The average balance of our interest-earning assets increased $207.7 million to $3.0 billion for the three months ended March 31, 2023 as compared to the prior year. The average yield of interest-earning assets increased by 115 basis points to 5.53% for the three months ended March 31, 2023 compared to 4.38% for the three months ended March 31, 2022.
Interest income on securities increased $48,000 to $2.4 million for the three months ended March 31, 2023 as compared to the prior year period primarily as a result of an increase in average yield of securities. The average yield on securities increased nine basis points to 2.27% for the three months ended March 31, 2023 compared to 2.18% for the three months ended March 31, 2022 due to the decrease in lower yielding Treasury securities that matured in the first quarter of 2023. The average balance of securities decreased $7.8 million to $426.6 million for the three months ended March 31, 2023 from $434.4 million for the three months ended March 31, 2022 primarily due to an decrease in the average balance of our U.S. Treasuries securities portfolio compared to the prior year.
Interest income on loans increased $10.1 million, or 36.1%, to $38.1 million for the three months ended March 31, 2023 as compared to the prior year period as a result of an increase in the average balance and average yield of loans. The average balance of loans (excluding loans held for sale) increased by $374.4 million to $2.5 billion for the three months ended March 31, 2023 from $2.2 billion for the three months ended March 31, 2022 as a result of new loan originations. The average yield on loans (excluding loans held for sale) increased by 84 basis points to 6.12% for the three months ended March 31, 2023 from 5.28% for the three months ended March 31, 2022 due to the improved mix of loans along with an increase in market interest rates.
Interest Expense
Three months ended March 31, 2023 compared to the three months ended March 31, 2022. Interest expense increased $13.5 million, or 245.5%, to $19.0 million for the three months ended March 31, 2023 from $5.5 million for the three months ended March 31, 2022 due primarily to an increase in market interest rates and due to an increase in the average balance of interest-bearing liabilities. The average rate of interest-bearing demand deposits was 3.56% for the three months ended March 31, 2023 and 0.70% for the three months ended March 31, 2022. The increase in market interest rates, particularly U.S. Treasury rates, contributed to the increase in rates paid on interest-bearing demand deposits. The largest concentration of interest-bearing demand deposits is associated with public funds deposits that are primarily indexed to Treasury rates. Treasury rates increased as the Federal Reserve increased rates to address increased inflation in the U.S. economy. The average rate of time deposits increased 64 basis points during the three months ended March 31, 2023 to 2.58% as compared to the prior year period. The increase in the average rate of time deposits was due to changes in market rates. The average balance of interest-bearing liabilities increased by $222.7 million during the three months ended March 31, 2023 to $2.4 billion as compared to the prior year period. This increase was a result of a $164.6 million increase in the average balance of interest-bearing demand deposits, a $0.3 million increase in the average balance of savings deposits, and an $72.9 million increase in the average balance of borrowings, which were partially offset by a $15.0 million decrease in the average balance of time deposits.
The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
The net interest income yield shown below in the average balance sheet is calculated by dividing net interest income by average interest-earning assets and is a measure of the efficiency of the earnings from balance sheet activities. It is affected by changes in the difference between interest on interest-earning assets and interest-bearing liabilities and the percentage of interest-earning assets funded by interest-bearing liabilities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
| (in thousands except for %) | | Average Balance | | Interest | | Yield/Rate (5) | | Average Balance | | Interest | | Yield/Rate (5) |
| Assets | | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | | |
| Interest-earning deposits with banks | | $ | 72,506 | | | $ | 751 | | | 4.20 | % | | $ | 231,556 | | | $ | 102 | | | 0.18 | % |
| Securities (including FHLB stock) | | 426,625 | | | 2,387 | | | 2.27 | % | | 434,420 | | | 2,339 | | | 2.18 | % |
| Federal funds sold | | 431 | | | — | | | — | % | | 232 | | | — | | | — | % |
| Loans held for sale | | — | | | — | | | — | % | | — | | | — | | | — | % |
| Loans, net of unearned income(6) | | 2,528,622 | | | 38,149 | | | 6.12 | % | | 2,154,264 | | | 28,038 | | | 5.28 | % |
| Total interest-earning assets | | 3,028,184 | | | $ | 41,287 | | | 5.53 | % | | 2,820,472 | | | $ | 30,479 | | | 4.38 | % |
| | | | | | | | | | | | |
| Noninterest-earning assets: | | | | | | | | | | | | |
| Cash and due from banks | | 19,269 | | | | | | | 18,481 | | | | | |
| Premises and equipment, net | | 58,152 | | | | | | | 58,393 | | | | | |
| Other assets | | 26,737 | | | | | | | 28,589 | | | | | |
| Total Assets | | $ | 3,132,342 | | | | | | | $ | 2,925,935 | | | | | |
| | | | | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | |
| Demand deposits | | $ | 1,488,105 | | | $ | 13,049 | | | 3.56 | % | | $ | 1,323,532 | | | $ | 2,276 | | | 0.70 | % |
| Savings deposits | | 204,271 | | | 579 | | | 1.15 | % | | 204,008 | | | 61 | | | 0.12 | % |
| Time deposits | | 561,154 | | | 3,576 | | | 2.58 | % | | 576,199 | | | 2,755 | | | 1.94 | % |
| Borrowings | | 120,803 | | | 1,782 | | | 5.98 | % | | 47,886 | | | 404 | | | 3.42 | % |
| Total interest-bearing liabilities | | 2,374,333 | | | $ | 18,986 | | | 3.24 | % | | 2,151,625 | | | $ | 5,496 | | | 1.04 | % |
| | | | | | | | | | | | |
| Noninterest-bearing liabilities: | | | | | | | | | | | | |
| Demand deposits | | 510,302 | | | | | | | 545,013 | | | | | |
| Other | | 12,749 | | | | | | | 6,839 | | | | | |
| Total Liabilities | | 2,897,384 | | | | | | | 2,703,477 | | | | | |
| | | | | | | | | | | | |
| Shareholders' equity | | 234,958 | | | | | | | 222,458 | | | | | |
| Total Liabilities and Shareholders' Equity | | $ | 3,132,342 | | | | | | | $ | 2,925,935 | | | | | |
| Net interest income | | | | $ | 22,301 | | | | | | | $ | 24,983 | | | |
| | | | | | | | | | | | |
| Net interest rate spread (1) | | | | | | 2.29 | % | | | | | | 3.34 | % |
| Net interest-earning assets (2) | | $ | 653,851 | | | | | | | $ | 668,847 | | | | | |
| Net interest margin (3), (4) | | | | | | 2.99 | % | | | | | | 3.59 | % |
| | | | | | | | | | | | |
| Average interest-earning assets to interest-bearing liabilities | | | | | | 127.54 | % | | | | | | 131.09 | % |
(1)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2)Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(3)Net interest margin represents net interest income divided by average total interest-earning assets.
(4)The tax adjusted net interest margin was 2.99% and 3.60% for the above periods ended March 31, 2023 and 2022, respectively. A 21% tax rate was used to calculate the effect on securities income from tax exempt securities for the above periods ended March 31, 2023 and 2022, respectively.
(5)Annualized.
(6)Includes loan fees of $1.4 million and $2.1 million or the above periods ended March 31, 2023 and 2022, respectively. PPP loan fee income of $5,000 and $0.6 million was recognized for above periods ended March 31, 2023 and 2022, respectively.
Provision for Credit and Loan Losses
A provision for credit and loan losses is a charge to income in an amount that management believes is necessary to maintain an adequate allowance for credit losses. The provision is based on management's regular evaluation of current economic conditions in our specific markets as well as regionally and nationally, changes in the character and size of the loan portfolio, underlying collateral values securing loans, and other factors which deserve recognition in estimating loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.
For the three months ended March 31, 2023, the provision for loan losses was $0.3 million compared to $0.6 million for the same period in 2022. The decrease in the provision was attributable to the evaluation of the loan portfolio at March 31, 2023. Total charge-offs were $1.0 million for the three months ended March 31, 2023 and $0.8 million for the same period in 2022. Charge-offs for the three months ended March 31, 2023 were concentrated in consumer relief loans associated with Hurricane Ida and a non-farm non-residential loan. Hurricane Ida consumer relief loans charge-offs totaled $0.2 million during the first quarter of 2023. Partially offsetting these charge-offs were recoveries that totaled $0.5 million for the three months ended March 31, 2023 and $0.3 million for the same period in 2022.
We believe that the allowance is adequate to cover current expected losses in the loan portfolio given the current economic conditions, and current expected net charge-offs and non-performing asset levels. Economic uncertainty may result in additional increases to the allowance for credit losses in future periods.
Noninterest Income
Our primary sources of recurring noninterest income are customer service fees, ATM and debit card fees, loan fees, gains on the sales of loans and available for sale securities and other service fees. Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method.
Noninterest income totaled $2.7 million for the three months ended March 31, 2023, an increase of $0.7 million from $2.0 million for the three months ended March 31, 2022. The increase was primarily due to recoveries of prior legal fees and due to an improved valuation of loan servicing assets in the first quarter of 2023 compared to the valuation of the loan servicing asset in the first quarter of 2022. Service charges, commissions and fees totaled $0.8 million for the three months ended March 31, 2023 and 2022. ATM and debit card fees totaled $0.8 million for the three months ended March 31, 2023 and 2022. Net securities losses were $0 for the three months ended March 31, 2023 compared to $17,000 for the same period in 2022. Net gains on the sale of loans were $12,000 for the three months ended March 31, 2023 compared to net losses of $1,000 for the same period in 2022. Other noninterest income totaled $1.1 million for the three months ended March 31, 2023 compared to $0.4 million for the same period in 2022.
Noninterest Expense
Noninterest expense includes salaries and employee benefits, occupancy and equipment expense and other types of expenses. Noninterest expense totaled $20.2 million for the three months ended March 31, 2023 and $16.8 million for the three months ended March 31, 2022. Salaries and benefits expense totaled $10.0 million for the three months ended March 31, 2023 and $9.0 million for the three months ended March 31, 2022. The increase was primarily due to the increase in personnel expense from new hires including those in the Mideast market. Occupancy and equipment expense totaled $2.2 million for the three months ended March 31, 2023 and 2022. Other noninterest expense totaled $8.0 million for the three months ended March 31, 2023 and $5.6 million for the same period in 2022. Legal and professional fees were higher due to the settlement of a lawsuit and the establishment of a reserve in conjunction with the above-referenced ongoing discussions with the SEC regarding the Employee Stock Grant Program.
The following table presents, for the periods indicated, the major categories of other noninterest expense:
| | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| (in thousands) | | 2023 | | 2022 |
| Other noninterest expense: | | | | |
| Legal and professional fees | | $ | 2,175 | | | $ | 855 | |
| Data processing | | 530 | | | 229 | |
| ATM fees | | 397 | | | 412 | |
| Marketing and public relations | | 528 | | | 377 | |
| Taxes - sales, capital, and franchise | | 560 | | | 362 | |
| Operating supplies | | 238 | | | 156 | |
| Software expense and amortization | | 1,240 | | | 926 | |
| Travel and lodging | | 400 | | | 245 | |
| Telephone | | 85 | | | 114 | |
| Amortization of core deposit intangibles | | 174 | | | 174 | |
| Donations | | 170 | | | 156 | |
| Net costs from other real estate and repossessions | | 27 | | | 94 | |
| Regulatory assessment | | 491 | | | 552 | |
| Other | | 945 | | | 918 | |
| Total other noninterest expense | | $ | 7,960 | | | $ | 5,570 | |
Income Taxes
The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other non-deductible expenses and the statutory tax rate. The provision for income taxes for the three months ended March 31, 2023 and 2022 was $1.1 million and $2.0 million, respectively. The provision for income taxes decreased due to a decrease in income before income taxes. First Guaranty's statutory tax rate was 21.0% for the three months ended March 31, 2023 and 2022.
Liquidity and Capital Resources
Liquidity
Liquidity refers to the ability or flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows us to have sufficient funds available to meet customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. Liquid assets include cash and due from banks, interest-earning demand deposits with banks, federal funds sold and available for sale investment securities.
First Guaranty's cash and cash equivalents totaled $168.9 million at March 31, 2023 compared to $83.2 million at December 31, 2022. Loans maturing within one year or less at March 31, 2023 totaled $378.8 million. At March 31, 2023, time deposits maturing within one year or less totaled $450.0 million compared to $312.9 million at December 31, 2022. Time deposits maturing after one year through three years totaled $131.3 million at March 31, 2023 compared to $183.0 million at December 31, 2022. Time deposits maturing after three years totaled $25.0 million at March 31, 2023 compared to $37.4 million at December 31, 2022. First Guaranty's held to maturity ("HTM") securities portfolio at March 31, 2023 was $320.2 million, or 79.8% of the investment portfolio, compared to $320.1 million, or 70.9% at December 31, 2022. First Guaranty's available for sale ("AFS") securities portfolio was $81.1 million, or 20.2% of the investment portfolio as of March 31, 2023 compared to $131.5 million, or 29.1% of the investment portfolio at December 31, 2022. The majority of the AFS portfolio was comprised of U.S. Government Treasuries, municipal bonds and subordinated debt securities. Management believes these securities are readily marketable and enhance First Guaranty's liquidity.
First Guaranty maintained a net borrowing capacity at the Federal Home Loan Bank totaling $314.9 million and $369.5 million at March 31, 2023 and December 31, 2022, respectively with $70.0 million in FHLB advances outstanding at March 31, 2023 compared to $120.0 million at December 31, 2022, respectively. The advances outstanding at March 31, 2023 were comprised of short-term advances totaling $50.0 million along with a long-term advance that totaled $20.0 million. This long term FHLB advance matures in the first quarter of 2025. The advances outstanding at December 31, 2022 were comprised of short-term advances that totaled $120.0 million. The change in borrowing capacity with the Federal Home Loan Bank was due to changes in the value that First Guaranty receives on pledged collateral and due to First Guaranty's usage of the line. First Guaranty has increasingly transitioned public funds deposits into reciprocal deposit programs for collateralization as an alternative to FHLB letters of credit. We also maintain federal funds lines of credit at various correspondent banks with borrowing capacity of $100.5 million. First Guaranty has two revolving lines of credit totaling $26.5 million at the parent company level secured by a pledge of the Bank's common stock, with an outstanding balance of $20.0 million at March 31, 2023. We also have a discount window line with the Federal Reserve Bank that totaled $188.2 million at March 31, 2023 which was an increase of $159.2 million compared to availability of $29.0 million at December 31, 2022. First Guaranty did not have any advances under this facility at March 31, 2023. Management believes there is sufficient liquidity to satisfy current operating needs.
Capital Resources
First Guaranty's capital position is reflected in shareholders' equity, subject to certain adjustments for regulatory purposes. Further, our capital base allows us to take advantage of business opportunities while maintaining the level of resources we deem appropriate to address business risks inherent in daily operations.
Total shareholders' equity decreased to $228.7 million at March 31, 2023 from $235.0 million at December 31, 2022. The decrease in shareholders' equity was principally the result of a $6.7 million decrease in retained earnings, driven in large part by the one time CECL adjustment, partially offset by a $0.4 million a decrease in accumulated other comprehensive loss. The $6.7 million decrease in retained earnings was due to an after tax CECL adjustment of $7.9 million, $1.7 million in cash dividends paid on shares of our common stock and $0.6 million in cash dividends paid on shares of our preferred stock, partially offset by net income of $3.5 million during the three months ended March 31, 2023. The decrease in accumulated other comprehensive loss was primarily attributed to the decrease in unrealized losses on available for sale securities during the three months ended March 31, 2023.
Regulatory Capital
Risk-based capital regulations adopted by the FDIC require banks to achieve and maintain specified ratios of capital to risk-weighted assets. Similar capital regulations apply to bank holding companies over $3.0 billion in assets. The risk-based capital rules are designed to measure "Tier 1" capital (consisting of common equity, retained earnings and a limited amount of qualifying perpetual preferred stock and trust preferred securities, net of goodwill and other intangible assets and accumulated other comprehensive income) and total capital in relation to the credit risk of both on- and off- balance sheet items. Under the guidelines, one of its risk weights is applied to the different on-balance sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk weighting. Applicable bank holding companies and all banks must maintain a minimum total capital to total risk weighted assets ratio of 8.00%, at least half of which must be in the form of core or Tier 1 capital. These guidelines also specify that bank holding companies that are experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels.
In order to avoid limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers, an institution must hold a capital conservation buffer above its minimum risk-based capital requirements. As of March 31, 2023, the Bank's capital conservation buffer was 2.98% exceeding the minimum of 2.50%.
As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Federal Reserve Board has amended its small bank holding company and savings and loan holding company policy statement to provide that holding companies with consolidated assets of less than $3 billion that are (i) not engaged in significant nonbanking activities, (ii) do not conduct significant off-balance sheet activities, and (3) do not have a material amount of SEC-registered debt or equity securities, other than trust preferred securities, that contribute to an organization's complexity, are no longer subject to regulatory capital requirements, effective August 30, 2018.
In addition, as a result of the legislation, the federal banking agencies have developed a "Community Bank Leverage Ratio" (the ratio of a bank's Tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A "qualifying community bank" that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered "well capitalized" under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution's risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies set the new Community Bank Leverage Ratio at 9%. Pursuant to the CARES Act, the federal banking agencies set the Community Bank Leverage Ratio at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the Community Bank Leverage Ratio increased to 8.5% for the calendar year. Community banks will have until January 1, 2022, before the Community Bank Leverage Ratio requirement will return to 9%. A financial institution can elect to be subject to this new definition. As of March 31, 2023, the Bank did not elect to follow the Community Bank Leverage Ratio.
At March 31, 2023, we satisfied the minimum regulatory capital requirements and were well capitalized within the meaning of federal regulatory requirements.
| | | | | | | | | | | | | | | | | | | | |
| | | "Well Capitalized Minimums" | | As of March 31, 2023 | | As of December 31, 2022 |
| Bank: | | | | | | |
| Tier 1 Leverage Ratio | | 5.00 | % | | 9.17 | % | | 9.35 | % |
| Tier 1 Risk-based Capital Ratio | | 8.00 | % | | 10.03 | % | | 10.31 | % |
| Total Risk-based Capital Ratio | | 10.00 | % | | 10.98 | % | | 11.16 | % |
| Common Equity Tier One Capital Ratio | | 6.50 | % | | 10.03 | % | | 10.31 | % |
Although we had over $3.0 billion in assets at March 31, 2023, under Federal Reserve guidance, First Guaranty will maintain its status as a "small bank holding company" until March 31, 2024 or earlier in certain circumstances. Once we are no longer a small bank holding company, both the Bank and the Company will be required to maintain specified ratios of capital to risk-weighted assets.