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 atMarch 31, 2022 and for the three months endedMarch 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, theFinancial Accounting Standards Board , theSecurities and Exchange Commission and thePublic 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. -31- --------------------------------------------------------------------------------
first quarter
First Guaranty Bancshares is aLouisiana corporation and a financial holding company headquartered inHammond, Louisiana . Our wholly-owned subsidiary,First Guaranty Bank , aLouisiana -chartered commercial bank, provides personalized commercial banking services primarily toLouisiana andTexas customers through 36 banking facilities primarily located in the MSAs ofHammond ,Baton Rouge ,Lafayette ,Shreveport -Bossier City ,Lake Charles andAlexandria, Louisiana andDallas-Fort Worth -Arlington ,Waco, Texas and our new Mideast markets inKentucky andWest 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.
The financial highlights for the first quarter of 2022 are as follows:
•Total assets increased$32.0 million , or 1.1%, to$2.9 billion atMarch 31, 2022 when compared withDecember 31, 2021 . Total loans atMarch 31, 2022 were$2.2 billion , an increase of$71.8 million , or 3.3%, compared withDecember 31, 2021 . Total deposits were$2.6 billion atMarch 31, 2022 , an increase of$27.4 million , or 1.1%, compared withDecember 31, 2021 . Retained earnings were$61.9 million atMarch 31, 2022 , an increase of$5.3 million compared to$56.7 million atDecember 31, 2021 . Shareholders' equity was$221.8 million and$223.9 million atMarch 31, 2022 andDecember 31, 2021 , respectively.
• Net profit for the first quarter of 2022 and 2021 was
• Earnings per common share were
•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
•The provision for loan losses has been
• The first guarantee had
compared to
•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 endedMarch 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% atMarch 31, 2022 compared to 78.2% atMarch 31, 2021 . •Investment securities totaled$452.8 million atMarch 31, 2022 , an increase of$88.6 million when compared to$364.2 million atDecember 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. AtMarch 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 atDecember 31, 2021 . AtMarch 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 atDecember 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 fromDecember 31, 2021 . Total loans net of unearned income are reduced by the allowance for loan and lease losses which totaled$24.1 million atMarch 31, 2022 and$24.0 million atDecember 31, 2021 , respectively.
• Total impaired loans decreased
compared to
• Unexpected loans decreased
compared to
•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.
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•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 share dividends of
Recent Developments As disclosed in previous filings byFirst Guaranty Bancshares, Inc. , for approximately 15 yearsFirst Guaranty Bank , a subsidiary ofFirst Guaranty Bancshares, Inc. , utilized an "Employee Stock Grant Program" to incentivize and reward bank employees for performance. Each quarter, the Board of Directors ofFirst Guaranty Bank allocated a$75,000 payment to an attorney to be used to purchase, on the open market, shares ofFirst 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
In addition, the same process was utilized byFirst Guaranty Bancshares, Inc. at the conclusion of each year for the grant of stock bonuses to members of Management ofFirst Guaranty Bank , selected by the Board of Directors ofFirst Guaranty Bancshares, Inc. Those awards averaged approximately$275,000 or 12,500 shares per year.
the
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Financial condition
Changes in the financial situation of
Assets
Total assets atMarch 31, 2022 were$2.9 billion , an increase of$32.0 million , or 1.1%, fromDecember 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 atMarch 31, 2022 compared toDecember 31, 2021 .
Loans
Net loans increased$71.6 million , or 3.4%, to$2.2 billion atMarch 31, 2022 fromDecember 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 atMarch 31, 2022 compared to$35.4 million atDecember 31, 2021 . These totals are included in commercial and industrial loans. Round 1 SBA PPP loans decreased from$12.7 million atDecember 31, 2021 to$4.7 million atMarch 31, 2022 due to SBA loan forgiveness and payments received. Round 2 SBA PPP loans decreased from$22.6 million atDecember 31, 2021 to$15.6 million atMarch 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 atMarch 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 ourTexas markets atMarch 31, 2022 which was an increase of$7.5 million or 2.9% from$257.8 million atDecember 31, 2021 . First Guaranty continues to have significant loan growth associated with its Texas branches. We anticipate additional growth opportunities inTexas as it contains four major cities inAustin ,Dallas ,Houston , andSan Antonio , plus the continued growth and development of these areas is exceeding that of other areas of the country. Syndicated loans atMarch 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 atDecember 31, 2021 . As ofMarch 31, 2022 , 66.6% of our loan portfolio was secured by real estate. The largest portion of our loan portfolio, at 40.0% as ofMarch 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 ofMarch 31, 2022 . 75.6% of the loan portfolio is scheduled to mature within five years fromMarch 31, 2022 . First Guaranty had$46.4 million in loans that were priced off of the LIBOR index rate atMarch 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 atMarch 31, 2022 compared to$138.7 million atDecember 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 atMarch 31, 2022 and$24.0 million atDecember 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. -34-
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Investment securities atMarch 31, 2022 totaled$452.8 million , an increase of$88.6 million compared to$364.2 million atDecember 31, 2021 . The portfolio consists of both available for sale (AFS) and held to maturity securities (HTM) atMarch 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 ofU.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 ofU.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 portfolio of securities available for sale totals
Our held to maturity securities portfolio totaled$319.6 million atMarch 31, 2022 , an increase of$166.0 million , or 108.1%, compared to$153.5 million atDecember 31, 2021 . The increase was primarily due to the transfer of AFS securities to the HTM portfolio in the first quarter of 2022. AtMarch 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 atMarch 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 ofMarch 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 atMarch 31, 2022 .
There were no other than temporary credit-related impairments during the three months ended
Non-performing 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.
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The table below shows the amounts and categories of our non-performing assets as of 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 8,733Total 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 803Total 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 281Total Real Estate 831 1,203 Non-Real Estate: Agricultural - - Commercial and industrial 123 23 Commercial leases - - Consumer and other - 19Total 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 %
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-------------------------------------------------------------------------------- AtMarch 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 atDecember 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 atDecember 31, 2021 to$15.1 million atMarch 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. AtMarch 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 atDecember 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 atMarch 31, 2022 totaled$1.9 million , a decrease of$0.2 million compared to$2.1 million atDecember 31, 2021 . First Guaranty has a reserve for other real estate owned losses. This reserve totaled$0.7 million atMarch 31, 2022 compared to$0.5 million atDecember 31, 2021 . AtMarch 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 theUSDA Farm Service Agency . First Guaranty subsequently sold the loan note associated with the$3.4 million non-performing hotel loan afterMarch 31, 2022 .
Distressed 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.
Here is a summary of loans restructured in TDR at
December 31,
(in thousands) March 31, 2022 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 .
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Allowance for losses on loans and leases
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:
• overdue and non-performing assets;
•specific internal analysis of credits requiring particular attention;
•the current level of classified and criticized regulatory assets and the risk factors associated with each;
•changes in underwriting standards or lending procedures and policies;
• charging and collection practices;
•national and local economic and commercial conditions;
•the nature and volume of loans;
•the overall quality of the portfolio;
• the adequacy of loan guarantees;
•the quality of the loan review system and the degree of oversight by our Board of Directors;
•competition and legal and regulatory requirements imposed on borrowers;
•Federal and state regulator loan portfolio reviews and reviews; and
•Review by our in-house 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 provision for losses on loans and leases has been
Comparing
A provision for loan losses of$0.6 million was made during the three months endedMarch 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. -38- --------------------------------------------------------------------------------
Loan portfolio factors in the first three months of 2022 that primarily affected the allowance allocation 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 ofMarch 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.
• Multi-family loans increased in the first three months of 2022. The allowance related to this portfolio was increased due to the growth of the portfolio which increased by
•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 atDecember 31, 2021 to$257.3 million atMarch 31, 2022 .
• Consumer and other loans increased in the first three months of 2022. The increase in the related allowance for loan loss balance was primarily due to increased balances.
• First Guaranty continues to monitor acquired loans from the Union acquisition on
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: Three Months Ended Three Months Ended (in thousands) March 31, 2022 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 -39-
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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. FromDecember 31, 2021 toMarch 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 atMarch 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 atMarch 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 atMarch 31, 2022 , primarily related to increases in individual savings deposits. Time deposits decreased$23.6 million , or 4.0%, to$563.0 million atMarch 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 ofMarch 31, 2022 , the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to$250,000 was approximately$151.4 million . AtMarch 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. -40-
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The following table compares the categories of deposits for the periods indicated.
For the Three Months Ended
Total Deposits March 31 , For the Years Ended December 31,
2022 2021 2020
Weighted Weighted Weighted
(in thousands except for %) Average Balance Percent Average Rate Average Balance Percent Average Rate Average Balance Percent 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 %
For the Three Months Ended
Individual and Business Deposits March 31, For the Years Ended December 31,
2022 2021 2020
Weighted Weighted Weighted
(in thousands except for %) Average Balance Percent Average Rate Average Balance Percent Average Rate Average Balance Percent 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 %
For the Three Months Ended
Public Funds Deposits March 31, For the Years Ended December 31,
2022 2021 2020
Average Weighted Weighted Average
Weighted
(in thousands except for %) Balance Percent Average Rate Average Balance Percent Average Rate Balance Percent 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 % -41-
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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 shows the maturity of term deposits greater than or equal to
(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 term deposits greater than or equal to
AtMarch 31, 2022 , public funds deposits totaled$979.5 million compared to$957.9 million atDecember 31, 2021 . Public funds time deposits totaled$31.8 million atMarch 31, 2022 compared to$31.4 million atDecember 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, byLouisiana 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 atMarch 31, 2022 compared to$496.4 million atDecember 31, 2021 .
The following table presents public funds as a percentage of total deposits.
(in thousands except for %)March 31, 2022
December 31, 2018 Public Funds: Noninterest-bearing Demand$ 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 % -42-
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Loans
First Guaranty maintains borrowing relationships with other financial institutions as well as theFederal 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 atMarch 31, 2022 compared to$6.4 million atDecember 31, 2021 . The short-term borrowings atMarch 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 atDecember 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 atDecember 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 atMarch 31, 2022 . A net availability of$16.5 million remained.
First Guaranty had senior long-term debt totaling
First Guaranty also held subordinated subordinated debentures totaling
First Guaranty had$260.7 million inFederal Home Loan Bank letters of credit as ofMarch 31, 2022 compared to$250.7 million atDecember 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 atMarch 31, 2022 from$223.9 million atDecember 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 endedMarch 31, 2022 . The$5.3 million increase in retained earnings was due to net income of$7.6 million during the three months endedMarch 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. -43- --------------------------------------------------------------------------------
Operating results for the first quarter ended
Performance Summary
Three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Net income for the three months endedMarch 31, 2022 was$7.6 million , an increase of$2.6 million , or 51.0%, from$5.0 million for the three months endedMarch 31, 2021 . The increase in net income for the three months endedMarch 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 endedMarch 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 endedMarch 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 termTreasury rates such as one month and three monthTreasury bills, and longer termTreasury rates such as theU.S. ten yearTreasury 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 endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Net interest income for the three months endedMarch 31, 2022 and 2021 was$25.0 million and$19.6 million , respectively. The increase in net interest income for the three months endedMarch 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 endedMarch 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 endedMarch 31, 2022 from 4.20% for the three months endedMarch 31, 2021 due to an improved mix of higher yielding assets. For the three months endedMarch 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 endedMarch 31, 2022 from 1.21% for the three months endedMarch 31, 2021 . As a result, our net interest rate spread increased 35 basis points to 3.34% for the three months endedMarch 31, 2022 from 2.99% for the three months endedMarch 31, 2021 . Our net interest margin increased 34 basis points to 3.59% for the three months endedMarch 31, 2022 from 3.25% for the three months endedMarch 31, 2021 . -44- --------------------------------------------------------------------------------
interest income
Three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Interest income increased$5.1 million , or 20.3%, to$30.5 million for the three months endedMarch 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 endedMarch 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 endedMarch 31, 2022 compared to 4.20% for the three months endedMarch 31, 2021 . Interest income on securities increased$0.8 million to$2.3 million for the three months endedMarch 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 endedMarch 31, 2022 from$257.8 million for the three months endedMarch 31, 2021 primarily due to an increase in the average balance of ourU.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 endedMarch 31, 2022 compared to 2.40% for the three months endedMarch 31, 2021 due to the increase in lower yieldingTreasury securities. Interest income on loans increased$4.3 million , or 18.1%, to$28.0 million for the three months endedMarch 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 endedMarch 31, 2022 from$1.9 billion for the three months endedMarch 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 endedMarch 31, 2022 from 5.04% for the three months endedMarch 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 charges
Three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Interest expense decreased$0.2 million , or 4.2%, to$5.5 million for the three months endedMarch 31, 2022 from$5.7 million for the three months endedMarch 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 endedMarch 31, 2022 and 2021. The average rate of time deposits decreased 2 basis points during the three months endedMarch 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 endedMarch 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$48.4 million decrease in the average balance of borrowings. -45- -------------------------------------------------------------------------------- The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. The net interest income yield shown below in the average balance sheet is calculated by dividing net interest income by average interest-earning assets and is a measure of the efficiency of the earnings from balance sheet activities. It is affected by changes in the difference between interest on interest-earning assets and interest-bearing liabilities and the percentage of interest-earning assets funded by interest-bearing liabilities. Three Months Ended March 31, 2022 Three Months Ended March 31, 2021 (in thousands except for %) Average Balance Interest Yield/Rate (6) Average Balance Interest Yield/Rate (6) Assets Interest-earning assets: Interest-earning deposits with banks(1)$ 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 endedMarch 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 endedMarch 31, 2022 and 2021, respectively. (6)Annualized. (7)Includes loan fees of$2.1 million and$1.3 million for the above periods endedMarch 31, 2022 and 2021, respectively. PPP loan fee income of$0.6 million and$0.2 million was recognized for above periods endedMarch 31, 2022 and 2021, respectively. -46- --------------------------------------------------------------------------------
Allowance 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
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.
Non-interest 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 endedMarch 31, 2022 , a decrease of$0.4 million from$2.3 million for the three months endedMarch 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 endedMarch 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 endedMarch 31, 2022 and 2021. Net securities losses were$17,000 for the three months endedMarch 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 endedMarch 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 endedMarch 31, 2022 and 2021, respectively. -47- --------------------------------------------------------------------------------
Non-interest expenses
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 endedMarch 31, 2022 and$15.0 million for the three months endedMarch 31, 2021 . Salaries and benefits expense totaled$9.0 million for the three months endedMarch 31, 2022 and$7.5 million for the three months endedMarch 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 endedMarch 31, 2022 and$2.3 million for the same period in 2021. Other noninterest expense totaled$5.6 million for the three months endedMarch 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 endedMarch 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 endedMarch 31, 2022 and 2021. -48-
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Cash 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 atMarch 31, 2022 compared to$261.9 million atDecember 31, 2021 . Loans maturing within one year or less atMarch 31, 2022 totaled$399.1 million . AtMarch 31, 2022 , time deposits maturing within one year or less totaled$257.2 million compared to$267.0 million atDecember 31, 2021 . Time deposits maturing after one year through three years totaled$258.1 million atMarch 31, 2022 compared to$269.7 million atDecember 31, 2021 . Time deposits maturing after three years totaled$47.7 million atMarch 31, 2022 compared to$50.0 million atDecember 31, 2021 . First Guaranty's held to maturity ("HTM") securities portfolio atMarch 31, 2022 was$319.6 million , or 70.6% of the investment portfolio, compared to$153.5 million , or 42.2% atDecember 31, 2021 . First Guaranty's available for sale ("AFS") securities portfolio was$133.2 million , or 29.4% of the investment portfolio as ofMarch 31, 2022 compared to$210.6 million , or 57.8% of the investment portfolio atDecember 31, 2021 . The majority of the AFS portfolio was comprised ofU.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 theFederal Home Loan Bank totaling$451.2 million and$456.3 million atMarch 31, 2022 andDecember 31, 2021 , respectively with no FHLB advances outstanding atMarch 31, 2022 compared to$3.2 million atDecember 31, 2021 , respectively. The advance outstanding atDecember 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 theFederal 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 atMarch 31, 2022 . We also have a discount window line with theFederal Reserve Bank that totaled$16.1 million atMarch 31, 2022 . First Guaranty did not have any advances under this facility atMarch 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 atMarch 31, 2022 from$223.9 million atDecember 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 endedMarch 31, 2022 . The$5.3 million increase in retained earnings was due to net income of$7.6 million during the three months endedMarch 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. -49- --------------------------------------------------------------------------------
Risk-based capital regulations adopted by theFDIC 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 ofMarch 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, theFederal 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 ofSEC -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, effectiveAugust 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 untilJanuary 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 ofMarch 31, 2022 , the Bank did not elect to follow the Community Bank Leverage Ratio. AtMarch 31, 2022 , we satisfied the minimum regulatory capital requirements and were well capitalized within the meaning of federal regulatory requirements. As of December 31, "Well Capitalized Minimums" As of March 31, 2022 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 % -50-
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