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, 2022 and for the three months ended March 31, 2022 and 2021 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; the ongoing effects of the COVID-19 pandemic on First Guaranty's operations and financial performance; 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, 2022 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 and our new Mideast markets in Kentucky and West Virginia. 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 2022 are as follows:
•Total assets increased $32.0 million, or 1.1%, to $2.9 billion at March 31, 2022 when compared with December 31, 2021. Total loans at March 31, 2022 were $2.2 billion, an increase of $71.8 million, or 3.3%, compared with December 31, 2021. Total deposits were $2.6 billion at March 31, 2022, an increase of $27.4 million, or 1.1%, compared with December 31, 2021. Retained earnings were $61.9 million at March 31, 2022, an increase of $5.3 million compared to $56.7 million at December 31, 2021. Shareholders' equity was $221.8 million and $223.9 million at March 31, 2022 and December 31, 2021, respectively.
•Net income for the first quarter of 2022 and 2021 was $7.6 million and $5.0 million, respectively, an increase of $2.6 million or 51%.
•Earnings per common share were $0.65 and $0.47 for the first quarter of 2022 and 2021, respectively. Total weighted average shares outstanding were 10,716,796 for the three months ended March 31, 2022 and 2021.
•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, 2022, First Guaranty had remaining Round 1 PPP loans of $4.7 million with deferred fees of $0.1 million and Round 2 PPP loans of $15.6 million with deferred fees of $0.7 million remaining. $0.6 million in PPP fees were recognized during the three months ended March 31, 2022.
•The allowance for loan and lease losses was 1.08% of total loans at March 31, 2022 compared to 1.11% at December 31, 2021. First Guaranty had acquisition related loan discounts that totaled approximately $1.3 million at March 31, 2022. First Guaranty had $20.2 million at March 31, 2022 of SBA guaranteed PPP loans that have no related allowance due to the government guarantee in accordance with regulatory guidance.
•Net interest income for the first quarter of 2022 was $25.0 million compared to $19.6 million for the same period in 2021.
•The provision for loan losses was $0.6 million for the first quarter of 2022 and 2021.
•First Guaranty had $1.9 million of other real estate owned as of March 31, 2022 compared to $2.1 million at December 31, 2021.
•Noninterest income for the first quarter of 2022 was $2.0 million compared to $2.3 million for the same period in 2021. Excluding the impact of securities gains, noninterest income for the first quarter of 2022 was $2.0 million compared to $2.2 million for the first quarter of 2021.
•The net interest margin for the three months ended March 31, 2022 was 3.59% which was an increase of 34 basis points from the net interest margin of 3.25% for the same period in 2021. First Guaranty attributed the increase in the net interest margin in the first quarter of 2022 compared to the same period in 2021 to an improved mix of loans compared to securities and cash along with continued reduction in First Guaranty's cost of funds. Loans as a percentage of average interest earning assets decreased to 76.4% at March 31, 2022 compared to 78.2% at March 31, 2021.
•Investment securities totaled $452.8 million at March 31, 2022, an increase of $88.6 million when compared to $364.2 million at December 31, 2021. Losses on the sale of securities for the first quarter of 2022 were $17,000 compared to gains of $0.1 million for the same period in 2021. At March 31, 2022, available for sale securities, at fair value, totaled $133.2 million, a decrease of $77.4 million when compared to $210.6 million at December 31, 2021. At March 31, 2022, held to maturity securities, at amortized cost, totaled $319.6 million, an increase of $166.0 million when compared to $153.5 million at December 31, 2021. During the first quarter of 2022, First Guaranty designated $165.8 million of AFS securities for HTM status.
•Total loans net of unearned income were $2.2 billion, a net increase of $71.8 million from December 31, 2021. Total loans net of unearned income are reduced by the allowance for loan and lease losses which totaled $24.1 million at March 31, 2022 and $24.0 million at December 31, 2021, respectively.
•Total impaired loans decreased $3.5 million to $11.5 million at March 31, 2022 compared to $15.0 million at December 31, 2021.
•Nonaccrual loans decreased $1.6 million to $15.1 million at March 31, 2022 compared to $16.7 million at December 31, 2021.
•First Guaranty is a smaller reporting company and has delayed the adoption of ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments." First Guaranty uses the incurred loss model for the calculation of its allowance.
•Return on average assets for the three months ended March 31, 2022 and 2021 was 1.05% and 0.80%, respectively. Return on average common equity for the three months ended March 31, 2022 and 2021 was 14.99% and 11.31%, 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 $17.61 as of March 31, 2022 compared to $16.45 as of March 31, 2021. Book value per share was $17.81 per share as of December 31, 2021. The year over year increase was due primarily to an increase in retained earnings partially offset by changes in accumulated other comprehensive income ("AOCI"). The year to date change was primarily due to changes in AOCI partially offset by an increase in retained earnings. 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 2022. First Guaranty also declared $0.16 per common share in the first quarter of 2021, which was the equivalent of $0.15 per share after adjusting for the 10% common stock dividend paid in December 2021. First Guaranty has paid 115 consecutive quarterly dividends as of March 31, 2022.
•First Guaranty paid preferred stock dividends of $0.6 million during the first three months of 2022.
Recent Developments
As disclosed in previous filings by First Guaranty Bancshares, Inc., for approximately 15 years First Guaranty Bank, a subsidiary of First Guaranty Bancshares, Inc., utilized an “Employee Stock Grant Program” to incentivize and reward bank employees for performance. Each quarter, the Board of Directors of First Guaranty Bank allocated a $75,000 payment to an attorney to be used to purchase, on the open market, shares of First Guaranty Bancshares, Inc. stock. Nominations came from managers throughout the Bank for awards to employees which ranged from clerical through top Management. An average of just over 100 employees received 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 was approximately $300,000 with total shares awarded of approximately 15,000 shares.
In addition, the same process was 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 averaged approximately $275,000 or 12,500 shares per year.
The SEC has requested information concerning this practice. No process has been instituted; only, a request for information.
Financial Condition
Changes in Financial Condition from December 31, 2021 to March 31, 2022
Assets
Total assets at March 31, 2022 were $2.9 billion, an increase of $32.0 million, or 1.1%, from December 31, 2021. Assets increased primarily due to increases in investment securities of $88.6 million and net loans of $71.6 million, partially offset by a decrease in cash and cash equivalents of $129.2 million at March 31, 2022 compared to December 31, 2021.
Loans
Net loans increased $71.6 million, or 3.4%, to $2.2 billion at March 31, 2022 from December 31, 2021. Construction and land development loans increased $26.2 million principally due to advances on existing construction lines and new originations. Commercial and industrial loans increased $14.3 million primarily due to new originations. SBA PPP loans totaled $20.2 million at March 31, 2022 compared to $35.4 million at December 31, 2021. These totals are included in commercial and industrial loans. Round 1 SBA PPP loans decreased from $12.7 million at December 31, 2021 to $4.7 million at March 31, 2022 due to SBA loan forgiveness and payments received. Round 2 SBA PPP loans decreased from $22.6 million at December 31, 2021 to $15.6 million at March 31, 2022 due to SBA loan forgiveness and payments received. Commercial lease loan balances increased $11.3 million primarily due to new lease originations. First Guaranty has continued to expand its commercial lease portfolio which generally has higher yields than commercial real estate loans but shorter average lives. Non-farm non-residential loan balances increased $7.7 million due to new originations. One-to-four family residential loans increased $5.4 million primarily due to new originations. Multifamily loans increased $3.4 million primarily due to the conversion of existing construction loans to permanent financing and the origination of new loans. Agricultural loans increased $2.1 million due to seasonal activity. Consumer and other loans increased $0.6 million primarily due to new originations. Farmland loans increased $30,000 primarily due to increases on agricultural loan commitments. First Guaranty had approximately 5.8% of funded and 1.3% 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 motel portfolio totaled $161.1 million at March 31, 2022. As part of the management of risks in our loan portfolio, First Guaranty had previously established an internal guidance limit of approximately $187.0 million for its hotel and motel portfolio. First Guaranty had $265.3 million in loans related to our Texas markets at March 31, 2022 which was an increase of $7.5 million or 2.9% from $257.8 million at December 31, 2021. 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. Syndicated loans at March 31, 2022 were $48.9 million, of which $17.9 million were shared national credits. Syndicated loans increased $1.5 million from $47.4 million at December 31, 2021.
As of March 31, 2022, 66.6% of our loan portfolio was secured by real estate. The largest portion of our loan portfolio, at 40.0% as of March 31, 2022, was non-farm non-residential loans secured by real estate. Approximately 32.8% of the loan portfolio was based on a floating rate tied to the prime rate or LIBOR as of March 31, 2022. 75.6% of the loan portfolio is scheduled to mature within five years from March 31, 2022. First Guaranty had $46.4 million in loans that were priced off of the LIBOR index rate at March 31, 2022. As it is anticipated that LIBOR will be discontinued after 2022, First Guaranty is reviewing its loan documents to determine alternative reference rates and does not anticipate there will be a significant financial statement impact with the transition.
Special mention loans decreased $43.9 million to $94.8 million at March 31, 2022 compared to $138.7 million at December 31, 2021. The decrease in special mention loans was primarily the result of the upgrade of several loan relationships from special mention to pass status.
Net loans are reduced by the allowance for loan and lease losses which totaled $24.1 million at March 31, 2022 and $24.0 million at December 31, 2021. Loan charge-offs were $0.8 million during the first three months of 2022 and $0.4 million during the same period in 2021. Recoveries totaled $0.3 million during the first three months of 2022 and $0.1 million during the same period in 2021. The provision for loan losses totaled $0.6 million for the first three months of 2022 and 2021. 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 loan and lease losses.
Investment Securities
Investment securities at March 31, 2022 totaled $452.8 million, an increase of $88.6 million compared to $364.2 million at December 31, 2021. The portfolio consists of both available for sale (AFS) and held to maturity securities (HTM) at March 31, 2022. 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 bills that have maturities of less than 30 days. 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 $133.2 million at March 31, 2022, a decrease of $77.4 million, or 36.7%, compared to $210.6 million at December 31, 2021. The decrease was primarily due to the transfer of AFS securities to the HTM portfolio in the first quarter of 2022.
Our held to maturity securities portfolio totaled $319.6 million at March 31, 2022, an increase of $166.0 million, or 108.1%, compared to $153.5 million at December 31, 2021. The increase was primarily due to the transfer of AFS securities to the HTM portfolio in the first quarter of 2022.
At March 31, 2022, $50.9 million, or 11.2%, of the securities portfolio was scheduled to mature in less than one year. $53.5 million, or 11.8%, of the securities portfolio, not including collateralized mortgage obligations and mortgage-backed securities, were scheduled to mature between one and five years. $94.4 million, or 20.8%, 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 $253.6 million, or 56.0%, of the total securities portfolio at March 31, 2022. 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, 2022, management believes that the securities portfolio has a forecasted weighted average life of approximately 10.46 years based on the current interest rate environment. A parallel interest rate shock of 400 basis points is forecasted to increase the weighted average life of the portfolio to approximately 10.59 years. The portfolio had an estimated effective duration of 8.76 years at March 31, 2022.
There were no credit related other-than-temporary impairment of securities during the three months ended March 31, 2022 or March 31, 2021.
Nonperforming Assets
Non-performing assets consist of non-performing loans and other real-estate owned. Non-performing loans (including nonaccruing troubled debt restructurings described below) 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, 2022 | | December 31, 2021 |
Nonaccrual loans: | | | | |
Real Estate: | | | | |
Construction and land development | | $ | 257 | | | $ | 530 | |
Farmland | | 291 | | | 787 | |
1- 4 family | | 3,266 | | | 2,861 | |
Multifamily | | — | | | — | |
Non-farm non-residential | | 8,172 | | | 8,733 | |
Total Real Estate | | 11,986 | | | 12,911 | |
Non-Real Estate: | | | | |
Agricultural | | 1,690 | | | 2,302 | |
Commercial and industrial | | 671 | | | 699 | |
Commercial leases | | — | | | — | |
Consumer and other | | 784 | | | 803 | |
Total Non-Real Estate | | 3,145 | | | 3,804 | |
Total nonaccrual loans | | 15,131 | | | 16,715 | |
| | | | |
Loans 90 days and greater delinquent & accruing: | | | | |
Real Estate: | | | | |
Construction and land development | | 21 | | | 246 | |
Farmland | | — | | | — | |
1- 4 family | | 170 | | | 514 | |
Multifamily | | 162 | | | 162 | |
Non-farm non-residential | | 478 | | | 281 | |
Total Real Estate | | 831 | | | 1,203 | |
Non-Real Estate: | | | | |
Agricultural | | — | | | — | |
Commercial and industrial | | 123 | | | 23 | |
Commercial leases | | — | | | — | |
Consumer and other | | — | | | 19 | |
Total Non-Real Estate | | 123 | | | 42 | |
Total loans 90 days and greater delinquent & accruing | | 954 | | | 1,245 | |
| | | | |
Total non-performing loans | | 16,085 | | | 17,960 | |
| | | | |
Real Estate Owned: | | | | |
Construction and land development | | — | | | — | |
Farmland | | — | | | — | |
1- 4 family | | 362 | | | 817 | |
Multifamily | | — | | | — | |
Non-farm non-residential | | 1,492 | | | 1,255 | |
Total Real Estate Owned | | 1,854 | | | 2,072 | |
| | | | |
Total non-performing assets | | $ | 17,939 | | | $ | 20,032 | |
| | | | |
Non-performing assets to total loans | | 0.80 | % | | 0.93 | % |
Non-performing assets to total assets | | 0.62 | % | | 0.70 | % |
Non-performing loans to total loans | | 0.72 | % | | 0.83 | % |
Nonaccrual loans to total loans | | 0.68 | % | | 0.77 | % |
Allowance for loan and lease losses to nonaccrual loans | | 159.57 | % | | 143.76 | % |
At March 31, 2022, nonperforming assets totaled $17.9 million, or 0.62% of total assets, compared to $20.0 million, or 0.70%, of total assets at December 31, 2021, which represented a decrease of $2.1 million, or 10.4%. The decrease in non-performing assets occurred primarily due to a reduction nonaccrual loans, 90 day past due and still accruing loans and other real estate owned.
Nonaccrual loans decreased from $16.7 million at December 31, 2021 to $15.1 million at March 31, 2022. The decrease in nonaccrual loans was concentrated primarily in agricultural, non-farm non-residential and farmland loans. Nonaccrual loans included $1.3 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, 2022, loans 90 days or greater delinquent and still accruing totaled $1.0 million, a decrease of $0.3 million compared to $1.2 million at December 31, 2021. The decrease in loans 90 days or greater delinquent and still accruing was concentrated primarily in one-to four-family, construction and land development and consumer and other loans.
Other real estate owned at March 31, 2022 totaled $1.9 million, a decrease of $0.2 million compared to $2.1 million at December 31, 2021. First Guaranty has a reserve for other real estate owned losses. This reserve totaled $0.7 million at March 31, 2022 compared to $0.5 million at December 31, 2021.
At March 31, 2022, our largest non-performing assets were comprised of the following nonaccrual loans, 90 day plus and still accruing loans and other real estate owned: (1) a non-farm non-residential loan secured by a hotel that totaled $3.4 million; (2) a non-farm non-residential loan secured by a childcare facility that totaled $1.7 million; (3) a $1.7 million non-farm non-residential property included in other real estate owned; (4) a non-farm non-residential loan secured by a mobile home facility that totaled $1.3 million; (5) a non-farm non-residential loan secured by a waste treatment facility that totaled $0.9 million; and (6) an agricultural/farmland loan relationship that totaled $0.9 million. The agricultural loan is partially guaranteed by the USDA Farm Service Agency. First Guaranty subsequently sold the loan note associated with the $3.4 million non-performing hotel loan after March 31, 2022.
Troubled Debt Restructurings
Another category of assets which contribute to our credit risk is troubled debt restructurings ("TDRs"). A TDR is a loan for which a concession has been granted to the borrower due to a deterioration of the borrower's financial condition. Such concessions may include reduction in interest rates, deferral of interest or principal payments, principal forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. We strive to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before such loan reaches nonaccrual status. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. TDRs that are not performing in accordance with their restructured terms and are either contractually 90 days past due or placed on nonaccrual status are reported as non-performing loans. Our policy provides that nonaccrual TDRs are returned to accrual status after a period of satisfactory and reasonable future payment performance under the terms of the restructuring. Satisfactory payment performance is generally no less than six consecutive months of timely payments and demonstrated ability to continue to repay.
Under section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was signed into law on March 27, 2020 and as subsequently modified by later legislation, financial institutions had the option to temporarily suspend certain requirements under U.S. generally accepted accounting principles related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. This provision allowed a financial institution the option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief could only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. First Guaranty elected to adopt these provisions of the CARES Act.
The following is a summary of loans restructured as TDRs at March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
(in thousands) | | March 31, 2022 | | December 31, 2021 |
Restructured Loans: | | | | |
In Compliance with Modified Terms | | $ | — | | | $ | — | |
Past Due 30 through 89 days and still accruing | | — | | | — | |
Past Due 90 days and greater and still accruing | | — | | | — | |
Nonaccrual | | — | | | 3,382 | |
Restructured Loans that subsequently defaulted | | — | | | — | |
Total Restructured Loans | | $ | — | | | $ | 3,382 | |
At March 31, 2022, we had no outstanding TDRs. The TDR at December 31, 2021 was a $3.4 million non-farm non-residential loan secured by commercial real estate that is on nonaccrual. The restructuring of this loan was related to interest rate and amortization concessions. The loan is secured by a hotel facility. This loan was not eligible for a CARES Act modification. This loan was no longer reportable as a TDR at March 31, 2022.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses 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 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, and impaired. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan 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 loan and lease 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 loan 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 loan and lease losses was $24.1 million, or 1.08% of total loans, and 150.1% of nonperforming loans at March 31, 2022.
Comparing March 31, 2022 to December 31, 2021, there were changes within the specific components of the allowance balance.
A provision for loan losses of $0.6 million was made during the three months ended March 31, 2022 and 2021. The provisions made were taken to provide for current loan losses and to maintain the allowance proportionate to risks inherent in the loan portfolio. First Guaranty’s incurred loan loss calculation method incorporates risk factors in the loan portfolio such as historical loss rates along with qualitative and quantitative factors. The composition of the loan portfolio affects the final allowance calculation.
The loan portfolio factors in the first three months of 2022 that primarily affected the allocation of the allowance included the following:
•The loan portfolio risks that changed and affected the allocation of the allowance were due to changes in historical loss rates, adjustments of certain qualitative factors to take into account the current estimated impact of COVID-19 and related economic conditions on borrowers' ability to repay loans and for allocations to impaired loans within their respective categories. First Guaranty adjusted allocations within its qualitative and quantitative factors to account for changes in potential COVID-19 related losses.
•Construction and land development loans increased during the first three months of 2022 due to advances on existing construction lines of credit and new loan originations. Several loans previously in this category moved to permanent financing and are now included in the multifamily loan category as of March 31, 2022. The allowance decrease related to this portfolio was due to changes in the qualitative analysis of the portfolio related to COVID-19 and improving economic conditions.
•One-to four-family residential loans increased during the first three months of 2022. The allowance decrease related to this portfolio was due to changes in the qualitative analysis of the portfolio related to COVID-19 and improving economic conditions.
•Multifamily loans increased during the first three months of 2022. The allowance related to this portfolio was increased due to the growth in the portfolio which increased by $3.4 million during the first three months of 2022.
•Non-farm non-residential loans increased during the first three months of 2022. 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 COVID-19 and historical loss rates. First Guaranty continues to maintain a significant allowance for hotel loans based on qualitative factors primarily related to COVID-19 and related credit ratings for hotel loans.
•Commercial and industrial loans increased during the first three months of 2022. The allowance decrease related to this portfolio was due to the changes in historical loss rates and changes in the qualitative analysis of the portfolio related to COVID-19 and improving economic conditions.
•Commercial leases increased during the first three months of 2022. The allowance decrease related to this portfolio was due to the changes in historical loss rates and changes in the qualitative analysis of the portfolio related to COVID-19 and improving economic conditions. Commercial leases grew during the first three months of 2022 from $246.0 million at December 31, 2021 to $257.3 million at March 31, 2022.
•Consumer and other loans increased during the first three months of 2022. The increase in the related loan loss allowance balance was due primarily to increased balances.
•First Guaranty continues to monitor the acquired loans from the Union acquisition on November 7, 2019. Discounts on the acquired Union loans were approximately $1.3 million at March 31, 2022.
First Guaranty charged off $0.8 million in loan balances during the first three months of 2022. The $0.8 million in charged off loans were comprised of smaller loans and overdrawn deposit accounts.
Other information related to the allowance for loan and lease losses is as follows:
| | | | | | | | | | | | | | |
(in thousands) | | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
Loans: | | | | |
Average outstanding balance | | $ | 2,154,264 | | | $ | 1,911,914 | |
Balance at end of period | | $ | 2,231,119 | | | $ | 1,966,432 | |
| | | | |
Allowance for Loan and Lease Losses: | | | | |
Balance at beginning of year | | $ | 24,029 | | | $ | 24,518 | |
Charge-offs | | (836) | | | (439) | |
Recoveries | | 319 | | | 105 | |
Provision | | 632 | | | 608 | |
Balance at end of period | | $ | 24,144 | | | $ | 24,792 | |
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, 2021 to March 31, 2022, total deposits increased $27.4 million, or 1.1%, to $2.6 billion. Noninterest-bearing demand deposits increased $23.4 million, or 4.4%, to $556.0 million at March 31, 2022. The increase in noninterest-bearing demand deposits was primarily due to growth of compensating balances associated with new loan originations, existing loan customers, and new customers as part of First Guaranty's efforts to increase lower cost deposits. Interest-bearing demand deposits increased $23.8 million, or 1.9%, to $1.3 billion at March 31, 2022. The increase in interest-bearing demand deposits was primarily concentrated in public funds interest-bearing demand deposits. Included in the increase in interest-bearing demand deposits were public funds time deposits that converted into interest-bearing deposits that were primarily collateralized by reciprocal deposit insurance. Savings deposits increased $3.9 million, or 1.9%, to $205.6 million at March 31, 2022, primarily related to increases in individual savings deposits. Time deposits decreased $23.6 million, or 4.0%, to $563.0 million at March 31, 2022, primarily due to the transition of several public funds customers from time deposits to interest-bearing deposits.
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. First Guaranty has over $200 million in time deposits with average rates in excess of 3.00% that are scheduled to mature during 2022 through 2024 with the majority of the maturities in 2023 and 2024.
As of March 31, 2022, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $250,000 was approximately $151.4 million. At March 31, 2022, approximately $76.9 million of First Guaranty's certificates of deposit greater than or equal to $250,000 had a remaining term greater than one year.
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, |
| | 2022 | | 2021 | | 2020 |
(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 | | $ | 545,013 | | | 20.6 | % | | — | % | | $ | 477,802 | | | 19.8 | % | | — | % | | $ | 393,734 | | | 19.2 | % | | — | % |
Interest-bearing Demand | | 1,323,532 | | | 50.0 | % | | 0.7 | % | | 1,082,922 | | | 45.0 | % | | 0.7 | % | | 722,433 | | | 35.3 | % | | 0.8 | % |
Savings | | 204,008 | | | 7.7 | % | | 0.1 | % | | 191,967 | | | 8.0 | % | | 0.1 | % | | 163,332 | | | 8.0 | % | | 0.2 | % |
Time | | 576,199 | | | 21.7 | % | | 1.9 | % | | 655,025 | | | 27.2 | % | | 2.0 | % | | 767,075 | | | 37.5 | % | | 2.2 | % |
Total Deposits | | $ | 2,648,752 | | | 100.0 | % | | 0.8 | % | | $ | 2,407,716 | | | 100.0 | % | | 0.8 | % | | $ | 2,046,574 | | | 100.0 | % | | 1.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individual and Business Deposits | | For the Three Months Ended March 31, | | For the Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
(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 | | $ | 538,267 | | | 32.6 | % | | — | % | | $ | 471,371 | | | 29.7 | % | | — | % | | $ | 382,940 | | | 27.5 | % | | — | % |
Interest-bearing Demand | | 406,721 | | | 24.6 | % | | 1.1 | % | | 390,481 | | | 24.6 | % | | 1.0 | % | | 280,587 | | | 20.1 | % | | 1.0 | % |
Savings | | 164,417 | | | 9.9 | % | | 0.1 | % | | 154,560 | | | 9.8 | % | | 0.1 | % | | 127,804 | | | 9.2 | % | | 0.1 | % |
Time | | 544,580 | | | 32.9 | % | | 2.0 | % | | 569,924 | | | 35.9 | % | | 2.2 | % | | 600,887 | | | 43.2 | % | | 2.5 | % |
Total Individual and Business Deposits | | $ | 1,653,985 | | | 100.0 | % | | 0.9 | % | | $ | 1,586,336 | | | 100.0 | % | | 1.0 | % | | $ | 1,392,218 | | | 100.0 | % | | 1.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Public Funds Deposits | | For the Three Months Ended March 31, | | For the Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
(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 | | $ | 6,746 | | | 0.7 | % | | — | % | | $ | 6,431 | | | 0.8 | % | | — | % | | $ | 10,794 | | | 1.7 | % | | — | % |
Interest-bearing Demand | | 916,811 | | | 92.1 | % | | 0.5 | % | | 692,441 | | | 84.3 | % | | 0.5 | % | | 441,846 | | | 67.5 | % | | 0.7 | % |
Savings | | 39,591 | | | 4.0 | % | | 0.3 | % | | 37,407 | | | 4.5 | % | | 0.2 | % | | 35,528 | | | 5.4 | % | | 0.4 | % |
Time | | 31,619 | | | 3.2 | % | | 0.8 | % | | 85,101 | | | 10.4 | % | | 0.8 | % | | 166,188 | | | 25.4 | % | | 1.1 | % |
Total Public Funds Deposits | | $ | 994,767 | | | 100.0 | % | | 0.5 | % | | $ | 821,380 | | | 100.0 | % | | 0.5 | % | | $ | 654,356 | | | 100.0 | % | | 0.8 | % |
The following table sets forth the distribution of our time deposit accounts.
| | | | | | | | |
(in thousands) | | March 31, 2022 |
Time deposits of less than $100,000 | | $ | 202,537 | |
Time deposits of $100,000 through $250,000 | | 209,046 | |
Time deposits of more than $250,000 | | 151,442 | |
Total Time Deposits | | $ | 563,025 | |
The following table sets forth the maturity of the time deposits greater than or equal to $250,000 at March 31, 2022.
| | | | | | | | |
(in thousands) | | March 31, 2022 |
Due in one year or less | | $ | 74,497 | |
Due after one year through three years | | 69,970 | |
Due after three years | | 6,975 | |
Total Time Deposits greater than or equal to $250,000 | | $ | 151,442 | |
At March 31, 2022, public funds deposits totaled $979.5 million compared to $957.9 million at December 31, 2021. Public funds time deposits totaled $31.8 million at March 31, 2022 compared to $31.4 million at December 31, 2021. Public funds deposits increased due to new balances from existing customers that was 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 increased to $546.6 million at March 31, 2022 compared to $496.4 million at December 31, 2021.
The following table sets forth public funds as a percent of total deposits.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands except for %) | | March 31, 2022 | | December 31, 2021 | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
Public Funds: | | | | | | | | | | |
Noninterest-bearing Demand | | $ | 6,162 | | | $ | 5,919 | | | $ | 5,109 | | | $ | 9,944 | | | $ | 6,930 | |
Interest-bearing Demand | | 901,194 | | | 882,156 | | | 514,416 | | | 424,732 | | | 364,692 | |
Savings | | 40,372 | | | 38,432 | | | 36,862 | | | 29,570 | | | 26,903 | |
Time | | 31,792 | | | 31,365 | | | 158,925 | | | 146,420 | | | 247,004 | |
Total Public Funds | | $ | 979,520 | | | $ | 957,872 | | | $ | 715,312 | | | $ | 610,666 | | | $ | 645,529 | |
Total Deposits | | $ | 2,623,935 | | | $ | 2,596,492 | | | $ | 2,166,318 | | | $ | 1,853,013 | | | $ | 1,629,622 | |
Total Public Funds as a percent of Total Deposits | | 37.3 | % | | 36.9 | % | | 33.0 | % | | 33.0 | % | | 39.6 | % |
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 $16.1 million in short-term borrowings outstanding at March 31, 2022 compared to $6.4 million at December 31, 2021. The short-term borrowings at March 31, 2022 were comprised of a line of credit of $20.0 million, with an outstanding balance of $10.0 million and repurchase agreements of $6.1 million. The advances outstanding at December 31, 2021 were comprised of repurchase agreements of $6.4 million. First Guaranty had a long-term FHLB advance that was acquired from the Union transaction that totaled $3.2 million at December 31, 2021. This advance was paid off during the first quarter of 2022. First Guaranty had available lines of credit of $26.5 million, with $10.0 million outstanding at March 31, 2022. A net availability of $16.5 million remained.
First Guaranty had senior long-term debt totaling $24.4 million as of March 31, 2022 and $25.2 million at December 31, 2021.
First Guaranty also had junior subordinated debentures totaling $14.8 million at March 31, 2022 and December 31, 2021.
First Guaranty had $260.7 million in Federal Home Loan Bank letters of credit as of March 31, 2022 compared to $250.7 million at December 31, 2021. Federal Home Loan Bank letters of credit are obtained primarily for collateralizing public deposits.
Total Shareholders' Equity
Total shareholders' equity decreased to $221.8 million at March 31, 2022 from $223.9 million at December 31, 2021. The decrease in shareholders' equity was principally the result of a decrease of $7.4 million in accumulated other comprehensive income, partially offset by an increase of $5.3 million in retained earnings. The decrease in accumulated other comprehensive income was primarily attributed to the increase in unrealized losses on available for sale securities during the three months ended March 31, 2022. The $5.3 million increase in retained earnings was due to net income of $7.6 million during the three months ended March 31, 2022, partially offset by $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.
Results of Operations for the First Quarter Ended March 31, 2022 and 2021
Performance Summary
Three months ended March 31, 2022 compared to the three months ended March 31, 2021. Net income for the three months ended March 31, 2022 was $7.6 million, an increase of $2.6 million, or 51.0%, from $5.0 million for the three months ended March 31, 2021. The increase in net income for the three months ended March 31, 2022 as compared to the prior year period was the result of several factors. First Guaranty experienced an increase in interest income and a decrease in interest expense. This was partially offset by an increase in the provision for loan losses, a decrease in noninterest income 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 from the origination of the SBA guaranteed PPP loans. Securities interest income increased due to an increase in the average balance of the investment portfolio. Interest expense declined due to declines in market interest rates and First Guaranty's plan to reduce interest expense by increasing lower cost deposits and repricing existing deposits lower. Factors that partially offset the increase in net income included an increase in the provision due to the growth in the loan portfolio. Noninterest income decreased primarily due to higher securities losses and a negative valuation adjustment to the SBA loan servicing asset. Noninterest expense increased primarily due to increased personnel expenses, software expense, legal fees, travel expense and higher regulatory assessments due to increased deposit balances. Earnings per common share for the three months ended March 31, 2022 was $0.65 per common share, an increase of 38.3% or $0.18 per common share from $0.47 per common share for the three months ended March 31, 2021. Earnings per share was affected by the increase in earnings.
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, 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, 2022 compared to the three months ended March 31, 2021. Net interest income for the three months ended March 31, 2022 and 2021 was $25.0 million and $19.6 million, respectively. The increase in net interest income for the three months ended March 31, 2022 as compared to the prior year period was primarily due to an increase in the average balance of our total interest-earning assets, an increase in the average yield of our total interest-earning assets, and a decrease in the average rate of our total interest-bearing liabilities, partially offset by an increase in the average balance of our total interest-bearing liabilities. For the three months ended March 31, 2022, the average balance of our total interest-earning assets increased by $375.0 million to $2.8 billion due to increased cash and due average balances, and strong growth in commercial leases and our other loan portfolios. The average yield of our interest-earning assets increased by 18 basis points to 4.38% for the three months ended March 31, 2022 from 4.20% for the three months ended March 31, 2021 due to an improved mix of higher yielding assets. For the three months ended March 31, 2022, the average balance of our total interest-bearing liabilities increased by $227.9 million to $2.2 billion due to the growth in low cost deposits and the average rate of our total interest-bearing liabilities decreased by 17 basis points to 1.04% for the three months ended March 31, 2022 from 1.21% for the three months ended March 31, 2021. As a result, our net interest rate spread increased 35 basis points to 3.34% for the three months ended March 31, 2022 from 2.99% for the three months ended March 31, 2021. Our net interest margin increased 34 basis points to 3.59% for the three months ended March 31, 2022 from 3.25% for the three months ended March 31, 2021.
Interest Income
Three months ended March 31, 2022 compared to the three months ended March 31, 2021. Interest income increased $5.1 million, or 20.3%, to $30.5 million for the three months ended March 31, 2022 as compared to the prior year period. First Guaranty's loan portfolio expanded during the first three months of 2022 due to growth associated with our loan originations, including commercial leases. 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 $375.0 million to $2.8 billion for the three months ended March 31, 2022 as compared to the prior year. The average yield of interest-earning assets increased by 18 basis points to 4.38% for the three months ended March 31, 2022 compared to 4.20% for the three months ended March 31, 2021.
Interest income on securities increased $0.8 million to $2.3 million for the three months ended March 31, 2022 as compared to the prior year period primarily as a result of an increase in average balances. The average balance of securities increased $176.7 million to $434.4 million for the three months ended March 31, 2022 from $257.8 million for the three months ended March 31, 2021 primarily due to an increase in the average balance of our U.S. Treasuries securities portfolio compared to the prior year. The average yield on securities decreased 22 basis points to 2.18% for the three months ended March 31, 2022 compared to 2.40% for the three months ended March 31, 2021 due to the increase in lower yielding Treasury securities.
Interest income on loans increased $4.3 million, or 18.1%, to $28.0 million for the three months ended March 31, 2022 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 $242.4 million to $2.2 billion for the three months ended March 31, 2022 from $1.9 billion for the three months ended March 31, 2021 as a result of new loan originations. The average yield on loans (excluding loans held for sale) increased by 24 basis points to 5.28% for the three months ended March 31, 2022 from 5.04% for the three months ended March 31, 2021 due to the improved mix of loans with an increase in higher yielding commercial leases as a percentage of the loan portfolio along with an increase in market interest rates.
Interest Expense
Three months ended March 31, 2022 compared to the three months ended March 31, 2021. Interest expense decreased $0.2 million, or 4.2%, to $5.5 million for the three months ended March 31, 2022 from $5.7 million for the three months ended March 31, 2021 due primarily to a decrease in market interest rates partially offset by an increase in the average balance of interest-bearing liabilities. The average rate of interest-bearing demand deposits was 0.70% for the three months ended March 31, 2022 and 2021. The average rate of time deposits decreased 2 basis points during the three months ended March 31, 2022 to 1.94% as compared to the prior year period. The decrease in the average rate of time deposits was due to First Guaranty's efforts to reprice maturing time deposits to more attractive and lower rates. Partially offsetting the decrease in interest expense was an increase in the average balance of interest-bearing liabilities, which increased by $227.9 million during the three months ended March 31, 2022 to $2.2 billion as compared to the prior year period. This increase was a result of a $399.6 million increase in the average balance of interest-bearing demand deposits and a $28.6 million increase in the average balance of savings deposits, which were partially offset by a $151.9 million decrease in the average balance of time deposits and a $48.4 million decrease in the average balance of borrowings.
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.
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| | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
(in thousands except for %) | | Average Balance | | Interest | | Yield/Rate (6) | | Average Balance | | Interest | | Yield/Rate (6) |
Assets | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | |
Interest-earning deposits with banks(1) | | $ | 231,556 | | | $ | 102 | | | 0.18 | % | | $ | 275,360 | | | $ | 66 | | | 0.10 | % |
Securities (including FHLB stock) | | 434,420 | | | 2,339 | | | 2.18 | % | | 257,763 | | | 1,525 | | | 2.40 | % |
Federal funds sold | | 232 | | | — | | | — | % | | 448 | | | — | | | — | % |
Loans held for sale | | — | | | — | | | — | % | | — | | | — | | | — | % |
Loans, net of unearned income(7) | | 2,154,264 | | | 28,038 | | | 5.28 | % | | 1,911,914 | | | 23,750 | | | 5.04 | % |
Total interest-earning assets | | 2,820,472 | | | $ | 30,479 | | | 4.38 | % | | 2,445,485 | | | $ | 25,341 | | | 4.20 | % |
| | | | | | | | | | | | |
Noninterest-earning assets: | | | | | | | | | | | | |
Cash and due from banks | | 18,481 | | | | | | | 11,656 | | | | | |
Premises and equipment, net | | 58,393 | | | | | | | 60,226 | | | | | |
Other assets | | 28,589 | | | | | | | 25,141 | | | | | |
Total Assets | | $ | 2,925,935 | | | | | | | $ | 2,542,508 | | | | | |
| | | | | | | | | | | | |
Liabilities and Shareholders' Equity | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Demand deposits | | $ | 1,323,532 | | | $ | 2,276 | | | 0.70 | % | | $ | 923,925 | | | $ | 1,595 | | | 0.70 | % |
Savings deposits | | 204,008 | | | 61 | | | 0.12 | % | | 175,396 | | | 52 | | | 0.12 | % |
Time deposits | | 576,199 | | | 2,755 | | | 1.94 | % | | 728,112 | | | 3,520 | | | 1.96 | % |
Borrowings | | 47,886 | | | 404 | | | 3.42 | % | | 96,257 | | | 572 | | | 2.41 | % |
Total interest-bearing liabilities | | 2,151,625 | | | $ | 5,496 | | | 1.04 | % | | 1,923,690 | | | $ | 5,739 | | | 1.21 | % |
| | | | | | | | | | | | |
Noninterest-bearing liabilities: | | | | | | | | | | | | |
Demand deposits | | 545,013 | | | | | | | 428,310 | | | | | |
Other | | 6,839 | | | | | | | 10,460 | | | | | |
Total Liabilities | | 2,703,477 | | | | | | | 2,362,460 | | | | | |
| | | | | | | | | | | | |
Shareholders' equity | | 222,458 | | | | | | | 180,048 | | | | | |
Total Liabilities and Shareholders' Equity | | $ | 2,925,935 | | | | | | | $ | 2,542,508 | | | | | |
Net interest income | | | | $ | 24,983 | | | | | | | $ | 19,602 | | | |
| | | | | | | | | | | | |
Net interest rate spread (2) | | | | | | 3.34 | % | | | | | | 2.99 | % |
Net interest-earning assets (3) | | $ | 668,847 | | | | | | | $ | 521,795 | | | | | |
Net interest margin (4), (5) | | | | | | 3.59 | % | | | | | | 3.25 | % |
| | | | | | | | | | | | |
Average interest-earning assets to interest-bearing liabilities | | | | | | 131.09 | % | | | | | | 127.12 | % |
(1)Includes Federal Reserve balances reporting in cash and due from banks on the consolidated balance sheets.
(2)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average total interest-earning assets.
(5)The tax adjusted net interest margin was 3.60% and 3.26% for the above periods ended March 31, 2022 and 2021, 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, 2022 and 2021, respectively.
(6)Annualized.
(7)Includes loan fees of $2.1 million and $1.3 million for the above periods ended March 31, 2022 and 2021, respectively. PPP loan fee income of $0.6 million and $0.2 million was recognized for above periods ended March 31, 2022 and 2021, respectively.
Provision for Loan Losses
A provision for loan losses is a charge to income in an amount that management believes is necessary to maintain an adequate allowance for loan and lease 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.
We recorded a $0.6 million provision for loan losses for the three months ended March 31, 2022 and 2021. Total charge-offs were $0.8 million for the three months ended March 31, 2022 and $0.4 million for the same period in 2021.
We believe that the allowance is adequate to cover potential 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 loan and lease 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 $2.0 million for the three months ended March 31, 2022, a decrease of $0.4 million from $2.3 million for the three months ended March 31, 2021. The decrease was primarily due to increased losses on securities sales and a negative valuation adjustment to the SBA loan servicing asset. Service charges, commissions and fees totaled $0.8 million for the three months ended March 31, 2022 and $0.7 million for the same period in 2021. ATM and debit card fees totaled $0.8 million for the three months ended March 31, 2022 and 2021. Net securities losses were $17,000 for the three months ended March 31, 2022 compared to gains of $0.1 million for the same period in 2021. The losses on securities sales primarily occurred as First Guaranty sold investment securities in order to fund loan growth and manage interest rate risk. Net losses on the sale of loans were $1,000 for the three months ended March 31, 2022 and compared to gains of $34,000 for the same period in 2021. Other noninterest income totaled $0.4 million and $0.6 million for the three months ended March 31, 2022 and 2021, respectively.
Noninterest Expense
Noninterest expense includes salaries and employee benefits, occupancy and equipment expense and other types of expenses. Noninterest expense totaled $16.8 million for the three months ended March 31, 2022 and $15.0 million for the three months ended March 31, 2021. Salaries and benefits expense totaled $9.0 million for the three months ended March 31, 2022 and $7.5 million for the three months ended March 31, 2021. 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, 2022 and $2.3 million for the same period in 2021. Other noninterest expense totaled $5.6 million for the three months ended March 31, 2022 and $5.1 million for the same period in 2021.
The following table presents, for the periods indicated, the major categories of other noninterest expense:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(in thousands) | | | | | | 2022 | | 2021 |
Other noninterest expense: | | | | | | | | |
Legal and professional fees | | | | | | $ | 855 | | | $ | 666 | |
Data processing | | | | | | 229 | | | 540 | |
ATM fees | | | | | | 412 | | | 422 | |
Marketing and public relations | | | | | | 377 | | | 433 | |
Taxes - sales, capital, and franchise | | | | | | 362 | | | 343 | |
Operating supplies | | | | | | 156 | | | 225 | |
Software expense and amortization | | | | | | 926 | | | 665 | |
Travel and lodging | | | | | | 245 | | | 142 | |
Telephone | | | | | | 114 | | | 119 | |
Amortization of core deposit intangibles | | | | | | 174 | | | 208 | |
Donations | | | | | | 156 | | | 122 | |
Net costs from other real estate and repossessions | | | | | | 94 | | | 110 | |
Regulatory assessment | | | | | | 552 | | | 465 | |
Other | | | | | | 918 | | | 672 | |
Total other noninterest expense | | | | | | $ | 5,570 | | | $ | 5,132 | |
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, 2022 and 2021 was $2.0 million and $1.3 million, respectively. The provision for income taxes increased due to an increase in income before income taxes. First Guaranty's statutory tax rate was 21.0% for the three months ended March 31, 2022 and 2021.
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 $132.7 million at March 31, 2022 compared to $261.9 million at December 31, 2021. Loans maturing within one year or less at March 31, 2022 totaled $399.1 million. At March 31, 2022, time deposits maturing within one year or less totaled $257.2 million compared to $267.0 million at December 31, 2021. Time deposits maturing after one year through three years totaled $258.1 million at March 31, 2022 compared to $269.7 million at December 31, 2021. Time deposits maturing after three years totaled $47.7 million at March 31, 2022 compared to $50.0 million at December 31, 2021. First Guaranty's held to maturity ("HTM") securities portfolio at March 31, 2022 was $319.6 million, or 70.6% of the investment portfolio, compared to $153.5 million, or 42.2% at December 31, 2021. First Guaranty's available for sale ("AFS") securities portfolio was $133.2 million, or 29.4% of the investment portfolio as of March 31, 2022 compared to $210.6 million, or 57.8% of the investment portfolio at December 31, 2021. The majority of the AFS portfolio was comprised of U.S. Government Treasuries, municipal bonds and investment grade corporate bonds. 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 $451.2 million and $456.3 million at March 31, 2022 and December 31, 2021, respectively with no FHLB advances outstanding at March 31, 2022 compared to $3.2 million at December 31, 2021, respectively. The advance outstanding at December 31, 2021 was comprised of a long-term advance that totaled $3.2 million. First Guaranty paid off the $3.2 million long-term advance acquired from the Union acquisition in the first quarter of 2022. 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 and two revolving lines of credit totaling $26.5 million secured by a pledge of the Bank's common stock, with an outstanding balance of $10.0 million at March 31, 2022. We also have a discount window line with the Federal Reserve Bank that totaled $16.1 million at March 31, 2022. First Guaranty did not have any advances under this facility at March 31, 2022. 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 $221.8 million at March 31, 2022 from $223.9 million at December 31, 2021. The decrease in shareholders' equity was principally the result of a decrease of $7.4 million in accumulated other comprehensive income, partially offset by an increase of $5.3 million in retained earnings. The decrease in accumulated other comprehensive income was primarily attributed to the increase in unrealized losses on available for sale securities during the three months ended March 31, 2022. The $5.3 million increase in retained earnings was due to net income of $7.6 million during the three months ended March 31, 2022, partially offset by $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.
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, 2022, the Bank's capital conservation buffer was 3.38% 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, 2022, the Bank did not elect to follow the Community Bank Leverage Ratio.
At March 31, 2022, 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, 2022 | | As of December 31, 2021 |
Bank: | | | | | | |
Tier 1 Leverage Ratio | | 5.00 | % | | 8.80 | % | | 8.71 | % |
Tier 1 Risk-based Capital Ratio | | 8.00 | % | | 10.40 | % | | 10.22 | % |
Total Risk-based Capital Ratio | | 10.00 | % | | 11.38 | % | | 11.22 | % |
Common Equity Tier One Capital Ratio | | 6.50 | % | | 10.40 | % | | 10.22 | % |