UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2017
Commission File Number: 001-37621
FIRST GUARANTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
| Louisiana | 26-0513559 | |
| (State or other jurisdiction incorporation or organization) | (I.R.S. Employer Identification Number) | |
| 400 East Thomas Street | ||
| Hammond, Louisiana | 70401 | |
| (Address of principal executive offices) | (Zip Code) | |
| (985) 345-7685 | ||
| (Registrant's telephone number, including area code) | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filers," "accelerated filers," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
As of May 11, 2017 the registrant had 7,609,194 shares of $1 par value common stock outstanding.
-1-
Table of Contents
| Page | ||
| Part I. | Financial Information | |
| Item 1. | 3 | |
| 3 | ||
| 4 | ||
| 5 | ||
| 6 | ||
| 7 | ||
| 8 | ||
| Item 2. | 26 | |
| Item 3. | 46 | |
| Item 4. | 49 | |
| Part II. | 49 | |
| Item 1. | 49 | |
| Item 1A. | 49 | |
| Item 6. | 50 | |
| Signatures | 51 | |
-2-
| Item 1. | Consolidated Financial Statements |
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
| (in thousands, except share data) | March 31, 2017 | December 31, 2016 | ||||||
| Assets | ||||||||
| Cash and cash equivalents: | ||||||||
| Cash and due from banks | $ | 17,802 | $ | 17,840 | ||||
| Federal funds sold | 291 | 271 | ||||||
| Cash and cash equivalents | 18,093 | 18,111 | ||||||
| Investment securities: | ||||||||
| Available for sale, at fair value | 425,994 | 397,473 | ||||||
| Held to maturity, at cost (estimated fair value of $97,100 and $99,906 respectively) | 98,847 | 101,863 | ||||||
| Investment securities | 524,841 | 499,336 | ||||||
| Federal Home Loan Bank stock, at cost | 1,819 | 1,816 | ||||||
| Loans, net of unearned income | 994,439 | 948,921 | ||||||
| Less: allowance for loan losses | 11,647 | 11,114 | ||||||
| Net loans | 982,792 | 937,807 | ||||||
| Premises and equipment, net | 25,156 | 23,519 | ||||||
| Goodwill | 1,999 | 1,999 | ||||||
| Intangible assets, net | 974 | 1,056 | ||||||
| Other real estate, net | 239 | 359 | ||||||
| Accrued interest receivable | 6,954 | 7,039 | ||||||
| Other assets | 9,464 | 9,904 | ||||||
| Total Assets | $ | 1,572,331 | $ | 1,500,946 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing demand | $ | 234,469 | $ | 231,094 | ||||
| Interest-bearing demand | 545,619 | 479,810 | ||||||
| Savings | 100,256 | 97,280 | ||||||
| Time | 521,924 | 517,997 | ||||||
| Total deposits | 1,402,268 | 1,326,181 | ||||||
| �� | ||||||||
| Short-term borrowings | 2,000 | 6,500 | ||||||
| Accrued interest payable | 1,962 | 1,931 | ||||||
| Senior long-term debt | 21,326 | 22,100 | ||||||
| Junior subordinated debentures | 14,638 | 14,630 | ||||||
| Other liabilities | 3,232 | 5,255 | ||||||
| Total Liabilities | 1,445,426 | 1,376,597 | ||||||
| Shareholders' Equity | ||||||||
| Common stock: | ||||||||
| $1 par value - authorized 100,600,000 shares; issued 7,609,194 shares | 7,609 | 7,609 | ||||||
| Surplus | 61,584 | 61,584 | ||||||
| Retained earnings | 61,189 | 59,155 | ||||||
| Accumulated other comprehensive income (loss) | (3,477 | ) | (3,999 | ) | ||||
| Total Shareholders' Equity | 126,905 | 124,349 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 1,572,331 | $ | 1,500,946 | ||||
See Notes to Consolidated Financial Statements
-3-
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
| Three Months Ended March 31, | ||||||||
| (in thousands, except share data) | 2017 | 2016 | ||||||
| Interest Income: | ||||||||
| Loans (including fees) | $ | 12,200 | $ | 10,801 | ||||
| Deposits with other banks | 19 | 30 | ||||||
| Securities (including FHLB stock) | 3,403 | 3,589 | ||||||
| Total Interest Income | 15,622 | 14,420 | ||||||
| Interest Expense: | ||||||||
| Demand deposits | 1,082 | 614 | ||||||
| Savings deposits | 36 | 18 | ||||||
| Time deposits | 1,444 | 1,564 | ||||||
| Borrowings | 366 | 392 | ||||||
| Total Interest Expense | 2,928 | 2,588 | ||||||
| Net Interest Income | 12,694 | 11,832 | ||||||
| Less: Provision for loan losses | 711 | 843 | ||||||
| Net Interest Income after Provision for Loan Losses | 11,983 | 10,989 | ||||||
| Noninterest Income: | ||||||||
| Service charges, commissions and fees | 562 | 657 | ||||||
| ATM and debit card fees | 474 | 444 | ||||||
| Net gains on securities | 530 | 354 | ||||||
| Net gain on sale of loans | 5 | - | ||||||
| Other | 385 | 379 | ||||||
| Total Noninterest Income | 1,956 | 1,834 | ||||||
| Noninterest Expense: | ||||||||
| Salaries and employee benefits | 4,826 | 4,097 | ||||||
| Occupancy and equipment expense | 1,031 | 972 | ||||||
| Other | 3,137 | 3,030 | ||||||
| Total Noninterest Expense | 8,994 | 8,099 | ||||||
| Income Before Income Taxes | 4,945 | 4,724 | ||||||
| Less: Provision for income taxes | 1,694 | 1,573 | ||||||
| Net Income | $ | 3,251 | $ | 3,151 | ||||
| Per Common Share: | ||||||||
| Earnings | $ | 0.43 | $ | 0.41 | ||||
| Cash dividends paid | $ | 0.16 | $ | 0.16 | ||||
| Weighted Average Common Shares Outstanding | 7,609,194 | 7,609,194 | ||||||
See Notes to Consolidated Financial Statements
-4-
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
| Three Months Ended March 31, | ||||||||
| (in thousands) | 2017 | 2016 | ||||||
| Net Income | $ | 3,251 | $ | 3,151 | ||||
| Other comprehensive income: | ||||||||
| Unrealized gains on securities: | ||||||||
| Unrealized holding gains arising during the period | 1,320 | 5,119 | ||||||
| Reclassification adjustments for gains included in net income | (530 | ) | (354 | ) | ||||
| Change in unrealized gains on securities | 790 | 4,765 | ||||||
| Tax impact | (268 | ) | (1,620 | ) | ||||
| Other comprehensive income | 522 | 3,145 | ||||||
| Comprehensive Income | $ | 3,773 | $ | 6,296 | ||||
See Notes to Consolidated Financial Statements
-5-
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
Common Stock $1 Par | Surplus | Retained Earnings | Accumulated Other Comprehensive Income/(Loss) | Total | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
| Balance December 31, 2015 | $ | 7,609 | $ | 61,584 | $ | 49,932 | $ | (901 | ) | $ | 118,224 | |||||||||
| Net income | - | - | 3,151 | - | 3,151 | |||||||||||||||
| Other comprehensive income | - | - | - | 3,145 | 3,145 | |||||||||||||||
| Cash dividends on common stock ($0.16 per share) | - | - | (1,217 | ) | - | (1,217 | ) | |||||||||||||
| Balance March 31, 2016 (unaudited) | $ | 7,609 | $ | 61,584 | $ | 51,866 | $ | 2,244 | $ | 123,303 | ||||||||||
| Balance December 31, 2016 | $ | 7,609 | $ | 61,584 | $ | 59,155 | $ | (3,999 | ) | $ | 124,349 | |||||||||
| Net income | - | - | 3,251 | - | 3,251 | |||||||||||||||
| Other comprehensive income | - | - | - | 522 | 522 | |||||||||||||||
| Cash dividends on common stock ($0.16 per share) | - | - | (1,217 | ) | - | (1,217 | ) | |||||||||||||
| Balance March 31, 2017 (unaudited) | $ | 7,609 | $ | 61,584 | $ | 61,189 | $ | (3,477 | ) | $ | 126,905 | |||||||||
See Notes to Consolidated Financial Statements
-6-
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
| Three Months Ended March 31, | ||||||||
| (in thousands) | 2017 | 2016 | ||||||
| Cash Flows From Operating Activities | ||||||||
| Net income | $ | 3,251 | $ | 3,151 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Provision for loan losses | 711 | 843 | ||||||
| Depreciation and amortization | 554 | 530 | ||||||
| Amortization/Accretion of investments | 447 | 529 | ||||||
| Gain on sale/call of securities | (530 | ) | (354 | ) | ||||
| Gain on sale of assets | (5 | ) | (60 | ) | ||||
| Repossed asset write downs, gains and losses on dispositions | 45 | 34 | ||||||
| FHLB stock dividends | (3 | ) | (1 | ) | ||||
| Change in other assets and liabilities, net | (1,783 | ) | 2,766 | |||||
| Net Cash Provided By Operating Activities | 2,687 | 7,438 | ||||||
| Cash Flows From Investing Activities | ||||||||
| Proceeds from maturities, calls and sales of certificates of deposit | - | 250 | ||||||
| Proceeds from maturities and calls of HTM securities | 2,880 | 20,428 | ||||||
| Proceeds from maturities, calls and sales of AFS securities | 222,511 | 224,142 | ||||||
| Funds Invested in AFS securities | (250,022 | ) | (250,617 | ) | ||||
| Funds invested in Federal Home Loan Bank stock | - | (368 | ) | |||||
| Net increase in loans | (45,696 | ) | (14,036 | ) | ||||
| Purchase of premises and equipment | (2,063 | ) | (1,020 | ) | ||||
| Proceeds from sales of premises and equipment | - | 950 | ||||||
| Proceeds from sales of other real estate owned | 90 | 317 | ||||||
| Net Cash Used In Investing Activities | (72,300 | ) | (19,954 | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Net increase in deposits | 76,087 | 4,857 | ||||||
| Net decrease in federal funds purchased and short-term borrowings | (4,500 | ) | (1,800 | ) | ||||
| Repayment of long-term borrowings | (775 | ) | (775 | ) | ||||
| Dividends paid | (1,217 | ) | (1,217 | ) | ||||
| Net Cash Provided By Financing Activities | 69,595 | 1,065 | ||||||
| Net Decrease In Cash and Cash Equivalents | (18 | ) | (11,451 | ) | ||||
| Cash and Cash Equivalents at the Beginning of the Period | 18,111 | 37,272 | ||||||
| Cash and Cash Equivalents at the End of the Period | $ | 18,093 | $ | 25,821 | ||||
| Noncash Activities: | ||||||||
| Loans transferred to foreclosed assets | $ | - | $ | - | ||||
| Cash Paid During The Period: | ||||||||
| Interest on deposits and borrowed funds | $ | 2,897 | $ | 2,013 | ||||
| Income taxes | $ | 4,200 | $ | - | ||||
See Notes to the Consolidated Financial Statements.
-7-
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements and the footnotes of First Guaranty Bancshares, Inc. ("First Guaranty") thereto should be read in conjunction with the audited financial statements and note disclosures for First Guaranty previously filed with the Securities and Exchange Commission in First Guaranty's Annual Report filed on Form 10-K for the year ended December 31, 2016.
The consolidated financial statements include the accounts of First Guaranty Bancshares, Inc. and its wholly owned subsidiary First Guaranty Bank (the "Bank"). All significant intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the consolidated financial statements. Those adjustments are of a normal recurring nature. The results of operations at March 31, 2017 and for the three months periods ended March 31, 2017 and 2016 are not necessarily indicative of the results expected for the full year or any other interim period. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the valuation of investment securities.
-8-
Note 2. Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, "Conforming Amendments Related to Leases". This ASU amends the codification regarding leases in order to increase transparency and comparability. The ASU requires companies to recognize lease assets and liabilities on the statement of condition and disclose key information about leasing arrangements. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. The ASU is effective for annual and interim periods beginning after December 15, 2018. The adoption of this ASU is not expected to have a material effect on First Guaranty's Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments". This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The ASU amendments require the measurement of all expected credit losses for financial assets held at the reporting date be based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU requires assets held at cost basis to reflect the First Guaranty's current estimate of all expected credit losses. For available for sale debt securities, credit losses should be presented as an allowance rather than as a write-down. In addition, this ASU amends the accounting for purchased financial assets with credit deterioration. This ASU is effective for annual and interim periods beginning after December 15, 2019. We are currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment". This ASU amends the guidance on impairment testing. The ASU eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU is effective for annual and interim periods beginning after December 15, 2019. We are currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations: Clarifying the Definition of a Business". This ASU clarifies the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This ASU is intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual and interim periods beginning December 15, 2017. The adoption of this ASU is not expected to have a material effect on the Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-08, "Receivables- Nonrefundable Fees and Other Costs, Premium Amortization on Purchased Callable Debt Securities". This ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, this ASU requires the premium to be amortized to the earliest call date. This ASU does not require an accounting change for securities held at a discount, the discount continues to be amortized to maturity. This ASU is effective for annual and interim periods beginning after December 15, 2018. We are currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
-9-
Note 3. Securities
A summary comparison of securities by type at March 31, 2017 and December 31, 2016 is shown below.
| March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
| (in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||
| Available-for-sale: | ||||||||||||||||||||||||||||||||
| U.S Treasuries | $ | 23,597 | $ | - | $ | - | $ | 23,597 | $ | 29,994 | $ | - | $ | - | $ | 29,994 | ||||||||||||||||
| U.S. Government Agencies | 227,522 | 21 | (4,421 | ) | 223,122 | 183,152 | - | (4,820 | ) | 178,332 | ||||||||||||||||||||||
| Corporate debt securities | 119,083 | 1,383 | (1,572 | ) | 118,894 | 132,448 | 1,624 | (2,100 | ) | 131,972 | ||||||||||||||||||||||
| Mutual funds or other equity securities | 500 | - | (7 | ) | 493 | 580 | - | (7 | ) | 573 | ||||||||||||||||||||||
| Municipal bonds | 27,306 | 103 | (255 | ) | 27,154 | 28,177 | 100 | (320 | ) | 27,957 | ||||||||||||||||||||||
| Mortgage-backed securities | 33,255 | - | (521 | ) | 32,734 | 29,181 | - | (536 | ) | 28,645 | ||||||||||||||||||||||
| Total available-for-sale securities | $ | 431,263 | $ | 1,507 | $ | (6,776 | ) | $ | 425,994 | $ | 403,532 | $ | 1,724 | $ | (7,783 | ) | $ | 397,473 | ||||||||||||||
| Held-to-maturity: | ||||||||||||||||||||||||||||||||
| U.S. Government Agencies | $ | 18,167 | $ | - | $ | (623 | ) | $ | 17,544 | $ | 18,167 | $ | - | $ | (655 | ) | $ | 17,512 | ||||||||||||||
| Mortgage-backed securities | 80,680 | - | (1,124 | ) | 79,556 | 83,696 | - | (1,302 | ) | 82,394 | ||||||||||||||||||||||
| Total held-to-maturity securities | $ | 98,847 | $ | - | $ | (1,747 | ) | $ | 97,100 | $ | 101,863 | $ | - | $ | (1,957 | ) | $ | 99,906 | ||||||||||||||
The scheduled maturities of securities at March 31, 2017, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to call or prepayments. Mortgage-backed securities are not due at a single maturity because of amortization and potential prepayment of the underlying mortgages. For this reason they are presented separately in the maturity table below.
| March 31, 2017 | ||||||||
| (in thousands) | Amortized Cost | Fair Value | ||||||
| Available For Sale: | ||||||||
| Due in one year or less | $ | 32,686 | $ | 32,763 | ||||
| Due after one year through five years | 80,432 | 80,821 | ||||||
| Due after five years through 10 years | 259,680 | 255,142 | ||||||
| Over 10 years | 25,210 | 24,534 | ||||||
| Subtotal | 398,008 | 393,260 | ||||||
| Mortgage-backed Securities | 33,255 | 32,734 | ||||||
| Total available-for-sale securities | $ | 431,263 | $ | 425,994 | ||||
| Held to Maturity: | ||||||||
| Due in one year or less | $ | - | $ | - | ||||
| Due after one year through five years | 4,998 | 4,955 | ||||||
| Due after five years through 10 years | 13,169 | 12,589 | ||||||
| Over 10 years | - | - | ||||||
| Subtotal | 18,167 | 17,544 | ||||||
| Mortgage-backed Securities | 80,680 | 79,556 | ||||||
| Total held to maturity securities | $ | 98,847 | $ | 97,100 | ||||
At March 31, 2017, $399.9 million of First Guaranty's securities were pledged to secure public fund deposits and borrowings. The pledged securities had a market value of $398.2 million as of March 31, 2017.
-10-
The following is a summary of the fair value of securities with gross unrealized losses and an aging of those gross unrealized losses at March 31, 2017.
| At March 31, 2017 | ||||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
| (in thousands) | Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||||||
| U.S. Treasuries | 5 | $ | 23,597 | $ | - | - | $ | - | $ | - | 5 | $ | 23,597 | $ | - | |||||||||||||||||||||
| U.S. Government agencies | 68 | 204,904 | (4,421 | ) | - | - | - | 68 | 204,904 | (4,421 | ) | |||||||||||||||||||||||||
| Corporate debt securities | 156 | 51,438 | (1,203 | ) | 22 | 5,953 | (369 | ) | 178 | 57,391 | (1,572 | ) | ||||||||||||||||||||||||
| Mutual funds or other equity securities | 1 | 493 | (7 | ) | - | - | - | 1 | 493 | (7 | ) | |||||||||||||||||||||||||
| Municipal bonds | 12 | 9,901 | (255 | ) | - | - | - | 12 | 9,901 | (255 | ) | |||||||||||||||||||||||||
| Mortgage-backed securities | 21 | 32,734 | (521 | ) | - | - | - | 21 | 32,734 | (521 | ) | |||||||||||||||||||||||||
| Total available-for-sale | 263 | $ | 323,067 | $ | (6,407 | ) | 22 | $ | 5,953 | $ | (369 | ) | 285 | $ | 329,020 | $ | (6,776 | ) | ||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||||||||||||||
| U.S. Government agencies | 10 | 17,544 | (623 | ) | - | - | - | 10 | 17,544 | (623 | ) | |||||||||||||||||||||||||
| Mortgage-backed securities | 46 | 76,979 | (1,124 | ) | - | - | - | 46 | 76,979 | (1,124 | ) | |||||||||||||||||||||||||
| Total held to maturity | 56 | $ | 94,523 | $ | (1,747 | ) | - | $ | - | $ | - | 56 | $ | 94,523 | $ | (1,747 | ) | |||||||||||||||||||
The following is a summary of the fair value of securities with gross unrealized losses and an aging of those gross unrealized losses at December 31, 2016.
| At December 31, 2016 | ||||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
| (in thousands) | Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||||||
| U.S. Treasuries | 3 | $ | 10,997 | $ | - | - | $ | - | $ | - | 3 | $ | 10,997 | $ | - | |||||||||||||||||||||
| U.S. Government agencies | 54 | 178,331 | (4,820 | ) | - | - | - | 54 | 178,331 | (4,820 | ) | |||||||||||||||||||||||||
| Corporate debt securities | 185 | 61,669 | (1,613 | ) | 26 | 6,440 | (487 | ) | 211 | 68,109 | (2,100 | ) | ||||||||||||||||||||||||
| Mutual funds or other equity securities | 1 | 493 | (7 | ) | - | - | - | 1 | 493 | (7 | ) | |||||||||||||||||||||||||
| Municipal bonds | 14 | 10,210 | (320 | ) | - | - | - | 14 | 10,210 | (320 | ) | |||||||||||||||||||||||||
| Mortgage-backed securities | 16 | 28,645 | (536 | ) | - | - | - | 16 | 28,645 | (536 | ) | |||||||||||||||||||||||||
| Total available for sale | 273 | $ | 290,345 | $ | (7,296 | ) | 26 | $ | 6,440 | $ | (487 | ) | 299 | $ | 296,785 | $ | (7,783 | ) | ||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||||||||||||||
| U.S. Government agencies | 10 | $ | 17,512 | $ | (655 | ) | - | $ | - | $ | - | 10 | $ | 17,512 | $ | (655 | ) | |||||||||||||||||||
| Mortgage-backed securities | 48 | 82,394 | (1,302 | ) | - | - | - | 48 | 82,394 | (1,302 | ) | |||||||||||||||||||||||||
| Total held to maturity | 58 | $ | 99,906 | $ | (1,957 | ) | - | $ | - | $ | - | 58 | $ | 99,906 | $ | (1,957 | ) | |||||||||||||||||||
As of March 31, 2017, 341 of First Guaranty's debt securities had unrealized losses totaling 2.0% of the individual securities' amortized cost basis and 1.6% of First Guaranty's total amortized cost basis of the investment securities portfolio. 22 of the 341 securities had been in a continuous loss position for over 12 months at such date. The 22 securities had an aggregate amortized cost basis of $6.3 million and an unrealized loss of $0.4 million at March 31, 2017. Management has the intent and ability to hold these debt securities until maturity or until anticipated recovery.
-11-
Securities are evaluated for other-than-temporary impairment at least quarterly and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the recovery of contractual principal and interest and (iv) the intent and ability of First Guaranty to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Investment securities issued by the U.S. Government and Government sponsored enterprises with unrealized losses and the amount of unrealized losses on those investment securities are the result of changes in market interest rates will not be other-than-temporarily impaired. First Guaranty has the ability and intent to hold these securities until recovery, which may not be until maturity.
Corporate debt securities in a loss position consist primarily of corporate bonds issued by businesses in the financial, insurance, utility, manufacturing, industrial, consumer products and oil and gas industries. Two securities with an other-than-temporary impairment loss were held at March 31, 2017. First Guaranty believes that the remaining issuers will be able to fulfill the obligations of these securities based on evaluations described above. First Guaranty has the ability and intent to hold these securities until they recover, which could be at their maturity dates.
There were no other-than-temporary impairment losses recognized on securities during the first three months ended March 31, 2017 and 2016.
The following table presents a roll-forward of the amount of credit losses on debt securities held by First Guaranty for which a portion of OTTI was recognized in other comprehensive income for the quarters ended March 31, 2017 and 2016:
| (in thousands) | Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | ||||||
| Beginning balance of credit losses at end of prior year | $ | 60 | $ | 175 | ||||
| Other-than-temporary impairment credit losses on securities not previously OTTI | - | - | ||||||
| Increases for additional credit losses on securities previously determined to be OTTI | - | - | ||||||
| Reduction for increases in cash flows | - | - | ||||||
| Reduction due to credit impaired securities sold or fully settled | - | - | ||||||
| Ending balance of cumulative credit losses recognized in earnings at end of period | $ | 60 | $ | 175 | ||||
In the first quarter of 2017 there were no other-than-temporary impairment credit losses on securities for which we had previously recognized OTTI. For securities that have indications of credit related impairment, management analyzes future expected cash flows to determine if any credit related impairment is evident. Estimated cash flows are determined using management's best estimate of future cash flows based on specific assumptions. The assumptions used to determine the cash flows were based on estimates of loss severity and credit default probabilities. Management reviews reports from credit rating agencies and public filings of issuers.
At March 31, 2017, First Guaranty's exposure to bond issuers that exceeded 10% of shareholders' equity is below:
| At March 31, 2017 | ||||||||
| (in thousands) | Amortized Cost | Fair Value | ||||||
| U.S. Government Treasuries (U.S.) | $ | 23,597 | $ | 23,597 | ||||
| Federal Home Loan Bank (FHLB) | 53,341 | 52,238 | ||||||
| Federal Home Loan Mortgage Corporation (Freddie Mac-FHLMC) | 59,637 | 59,057 | ||||||
| Federal National Mortgage Association (Fannie Mae-FNMA) | 106,483 | 104,024 | ||||||
| Federal Farm Credit Bank (FFCB) | 140,163 | 137,637 | ||||||
| Total | $ | 383,221 | $ | 376,553 | ||||
-12-
Note 4. Loans
The following table summarizes the components of First Guaranty's loan portfolio as of March 31, 2017 and December 31, 2016:
| March 31, 2017 | December 31, 2016 | |||||||||||||||
| (in thousands except for %) | Balance | As % of Category | Balance | As % of Category | ||||||||||||
| Real Estate: | ||||||||||||||||
| Construction & land development | $ | 86,376 | 8.7 | % | $ | 84,239 | 8.9 | % | ||||||||
| Farmland | 23,348 | 2.3 | % | 21,138 | 2.2 | % | ||||||||||
| 1- 4 Family | 139,665 | 14.0 | % | 135,211 | 14.2 | % | ||||||||||
| Multifamily | 12,440 | 1.3 | % | 12,450 | 1.3 | % | ||||||||||
| Non-farm non-residential | 436,217 | 43.8 | % | 417,014 | 43.9 | % | ||||||||||
| Total Real Estate | 698,046 | 70.1 | % | 670,052 | 70.5 | % | ||||||||||
| Non-Real Estate: | ||||||||||||||||
| Agricultural | 23,178 | 2.3 | % | 23,783 | 2.5 | % | ||||||||||
| Commercial and industrial | 206,158 | 20.7 | % | 193,969 | 20.4 | % | ||||||||||
| Consumer and other | 69,090 | 6.9 | % | 63,011 | 6.6 | % | ||||||||||
| Total Non-Real Estate | 298,426 | 29.9 | % | 280,763 | 29.5 | % | ||||||||||
| Total loans before unearned income | 996,472 | 100.0 | % | 950,815 | 100.0 | % | ||||||||||
| Unearned income | (2,033 | ) | (1,894 | ) | ||||||||||||
| Total loans net of unearned income | $ | 994,439 | $ | 948,921 | ||||||||||||
The following table summarizes fixed and floating rate loans by contractual maturity, excluding nonaccrual loans, as of March 31, 2017 and December 31, 2016 unadjusted for scheduled principal payments, prepayments, or repricing opportunities. The average life of the loan portfolio may be substantially less than the contractual terms when these adjustments are considered.
| March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
| (in thousands) | Fixed | Floating | Total | Fixed | Floating | Total | ||||||||||||||||||
| One year or less | $ | 96,257 | $ | 58,391 | $ | 154,648 | $ | 97,713 | $ | 51,965 | $ | 149,678 | ||||||||||||
| More Than One to five years | 375,962 | 209,099 | 585,061 | 352,000 | 206,676 | 558,676 | ||||||||||||||||||
| More Than Five to 15 years | 126,803 | 44,474 | 171,277 | 115,691 | 46,116 | 161,807 | ||||||||||||||||||
| Over 15 years | 58,076 | 6,431 | 64,507 | 53,150 | 5,830 | 58,980 | ||||||||||||||||||
| Subtotal | $ | 657,098 | $ | 318,395 | 975,493 | $ | 618,554 | $ | 310,587 | 929,141 | ||||||||||||||
| Nonaccrual loans | 20,979 | 21,674 | ||||||||||||||||||||||
| Total loans before unearned income | 996,472 | 950,815 | ||||||||||||||||||||||
| Unearned income | (2,033 | ) | (1,894 | ) | ||||||||||||||||||||
| Total loans net of unearned income | $ | 994,439 | $ | 948,921 | ||||||||||||||||||||
As of March 31, 2017, $100.9 million of floating rate loans were at their interest rate floor. At December 31, 2016, $127.7 million of floating rate loans were at the floor rate. Nonaccrual loans have been excluded from these totals.
-13-
The following tables present the age analysis of past due loans at March 31, 2017 and December 31, 2016:
| As of March 31, 2017 | ||||||||||||||||||||||||
| (in thousands) | 30-89 Days Past Due | 90 Days or Greater | Total Past Due | Current | Total Loans | Recorded Investment 90 Days Accruing | ||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||
| Construction & land development | $ | 352 | $ | 399 | $ | 751 | $ | 85,625 | $ | 86,376 | $ | - | ||||||||||||
| Farmland | 623 | 97 | 720 | 22,628 | 23,348 | - | ||||||||||||||||||
| 1 - 4 family | 2,537 | 2,446 | 4,983 | 134,682 | 139,665 | 50 | ||||||||||||||||||
| Multifamily | - | 5,058 | 5,058 | 7,382 | 12,440 | - | ||||||||||||||||||
| Non-farm non-residential | 642 | 2,600 | 3,242 | 432,975 | 436,217 | - | ||||||||||||||||||
| Total Real Estate | 4,154 | 10,600 | 14,754 | 683,292 | 698,046 | 50 | ||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||
| Agricultural | 1,546 | 1,630 | 3,176 | 20,002 | 23,178 | - | ||||||||||||||||||
| Commercial and industrial | 1,395 | 8,078 | 9,473 | 196,685 | 206,158 | - | ||||||||||||||||||
| Consumer and other | 120 | 721 | 841 | 68,249 | 69,090 | - | ||||||||||||||||||
| Total Non-Real Estate | 3,061 | 10,429 | 13,490 | 284,936 | 298,426 | - | ||||||||||||||||||
| Total loans before unearned income | $ | 7,215 | $ | 21,029 | $ | 28,244 | $ | 968,228 | $ | 996,472 | $ | 50 | ||||||||||||
| Unearned income | (2,033 | ) | ||||||||||||||||||||||
| Total loans net of unearned income | $ | 994,439 | ||||||||||||||||||||||
| As of December 31, 2016 | ||||||||||||||||||||||||
| (in thousands) | 30-89 Days Past Due | 90 Days or Greater | Total Past Due | Current | Total Loans | Recorded Investment 90 Days Accruing | ||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||
| Construction & land development | $ | 173 | $ | 585 | $ | 758 | $ | 83,481 | $ | 84,239 | $ | 34 | ||||||||||||
| Farmland | 234 | 105 | 339 | 20,799 | 21,138 | - | ||||||||||||||||||
| 1 - 4 family | 1,108 | 2,387 | 3,495 | 131,716 | 135,211 | 145 | ||||||||||||||||||
| Multifamily | - | 5,014 | 5,014 | 7,436 | 12,450 | - | ||||||||||||||||||
| Non-farm non-residential | 1,618 | 2,753 | 4,371 | 412,643 | 417,014 | - | ||||||||||||||||||
| Total Real Estate | 3,133 | 10,844 | 13,977 | 656,075 | 670,052 | 179 | ||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||
| Agricultural | 64 | 1,958 | 2,022 | 21,761 | 23,783 | - | ||||||||||||||||||
| Commercial and industrial | 552 | 8,070 | 8,622 | 185,347 | 193,969 | - | ||||||||||||||||||
| Consumer and other | 182 | 981 | 1,163 | 61,848 | 63,011 | - | ||||||||||||||||||
| Total Non-Real Estate | 798 | 11,009 | 11,807 | 268,956 | 280,763 | - | ||||||||||||||||||
| Total loans before unearned income | $ | 3,931 | $ | 21,853 | $ | 25,784 | $ | 925,031 | $ | 950,815 | $ | 179 | ||||||||||||
| Unearned income | (1,894 | ) | ||||||||||||||||||||||
| Total loans net of unearned income | $ | 948,921 | ||||||||||||||||||||||
The tables above include $21.0 million and $21.7 million of nonaccrual loans at March 31, 2017 and December 31, 2016, respectively. See the tables below for more detail on nonaccrual loans.
-14-
The following is a summary of nonaccrual loans by class at the dates indicated:
| (in thousands) | As of March 31, 2017 | As of December 31, 2016 | ||||||
| Real Estate: | ||||||||
| Construction & land development | $ | 399 | $ | 551 | ||||
| Farmland | 97 | 105 | ||||||
| 1 - 4 family | 2,396 | 2,242 | ||||||
| Multifamily | 5,058 | 5,014 | ||||||
| Non-farm non-residential | 2,600 | 2,753 | ||||||
| Total Real Estate | 10,550 | 10,665 | ||||||
| Non-Real Estate: | ||||||||
| Agricultural | 1,630 | 1,958 | ||||||
| Commercial and industrial | 8,078 | 8,070 | ||||||
| Consumer and other | 721 | 981 | ||||||
| Total Non-Real Estate | 10,429 | 11,009 | ||||||
| Total Nonaccrual Loans | $ | 20,979 | $ | 21,674 | ||||
-15-
The following table identifies the credit exposure of the loan portfolio by specific credit ratings as of the dates indicated:
| As of March 31, 2017 | As of December 31, 2016 | |||||||||||||||||||||||||||||||||||||||
| (in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||||||||||||||||||
| Construction & land development | $ | 81,495 | $ | 1,482 | $ | 3,399 | $ | - | $ | 86,376 | $ | 79,069 | $ | 1,162 | $ | 4,008 | $ | - | $ | 84,239 | ||||||||||||||||||||
| Farmland | 22,686 | 565 | 97 | - | 23,348 | 20,652 | 381 | 105 | - | 21,138 | ||||||||||||||||||||||||||||||
| 1 - 4 family | 127,583 | 5,220 | 6,862 | - | 139,665 | 123,191 | 5,460 | 6,560 | - | 135,211 | ||||||||||||||||||||||||||||||
| Multifamily | 4,237 | 1,109 | 7,094 | - | 12,440 | 4,268 | 1,132 | 7,050 | - | 12,450 | ||||||||||||||||||||||||||||||
| Non-farm non-residential | 413,390 | 5,342 | 17,485 | - | 436,217 | 392,355 | 6,406 | 18,253 | - | 417,014 | ||||||||||||||||||||||||||||||
| Total Real Estate | 649,391 | 13,718 | 34,937 | - | 698,046 | 619,535 | 14,541 | 35,976 | - | 670,052 | ||||||||||||||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||||||||||||||||||
| Agricultural | 20,993 | 540 | 1,645 | - | 23,178 | 20,890 | 920 | 1,973 | - | 23,783 | ||||||||||||||||||||||||||||||
| Commercial and industrial | 192,019 | 3,408 | 3,001 | 7,730 | 206,158 | 182,381 | 850 | 3,008 | 7,730 | 193,969 | ||||||||||||||||||||||||||||||
| Consumer and other | 67,047 | 1,265 | 778 | - | 69,090 | 60,582 | 1,394 | 1,035 | - | 63,011 | ||||||||||||||||||||||||||||||
| Total Non-Real Estate | 280,059 | 5,213 | 5,424 | 7,730 | 298,426 | 263,853 | 3,164 | 6,016 | 7,730 | 280,763 | ||||||||||||||||||||||||||||||
| Total loans before unearned income | $ | 929,450 | $ | 18,931 | $ | 40,361 | $ | 7,730 | $ | 996,472 | $ | 883,388 | $ | 17,705 | $ | 41,992 | $ | 7,730 | $ | 950,815 | ||||||||||||||||||||
| Unearned income | (2,033 | ) | (1,894 | ) | ||||||||||||||||||||||||||||||||||||
| Total loans net of unearned income | $ | 994,439 | $ | 948,921 | ||||||||||||||||||||||||||||||||||||
-16-
Note 5. Allowance for Loan Losses
A summary of changes in the allowance for loan losses, by portfolio type, for the three months ended March 31, 2017 and 2016 are as follows:
| For the Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||
| (in thousands) | Beginning Allowance (12/31/2016) | Charge-offs | Recoveries | Provision | Ending Allowance (3/31/2017) | Beginning Allowance (12/31/2015) | Charge-offs | Recoveries | Provision | Ending Allowance (3/31/2016) | ||||||||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||||||||||||||||||
| Construction & land development | $ | 1,232 | $ | - | $ | 1 | $ | (92 | ) | $ | 1,141 | $ | 962 | $ | - | $ | 1 | $ | 199 | $ | 1,162 | |||||||||||||||||||
| Farmland | 19 | - | - | (13 | ) | 6 | 54 | - | - | (33 | ) | 21 | ||||||||||||||||||||||||||||
| 1 - 4 family | 1,204 | - | 14 | (154 | ) | 1,064 | 1,771 | (59 | ) | 8 | (528 | ) | 1,192 | |||||||||||||||||||||||||||
| Multifamily | 591 | - | 10 | 8 | 609 | 557 | - | 361 | (606 | ) | 312 | |||||||||||||||||||||||||||||
| Non-farm non-residential | 3,451 | - | 2 | 367 | 3,820 | 3,298 | (641 | ) | - | 399 | 3,056 | |||||||||||||||||||||||||||||
| Total real estate | 6,497 | - | 27 | 116 | 6,640 | 6,642 | (700 | ) | 370 | (569 | ) | 5,743 | ||||||||||||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||||||||||||||||||
| Agricultural | 74 | (33 | ) | 8 | 13 | 62 | 16 | - | - | (7 | ) | 9 | ||||||||||||||||||||||||||||
| Commercial and industrial | 3,543 | (45 | ) | 5 | 625 | 4,128 | 2,527 | (241 | ) | 4 | 1,049 | 3,339 | ||||||||||||||||||||||||||||
| Consumer and other | 972 | (206 | ) | 66 | (15 | ) | 817 | 230 | (332 | ) | 56 | 370 | 324 | |||||||||||||||||||||||||||
| Unallocated | 28 | - | - | (28 | ) | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Total Non-Real Estate | 4,617 | (284 | ) | 79 | 595 | 5,007 | 2,773 | (573 | ) | 60 | 1,412 | 3,672 | ||||||||||||||||||||||||||||
| Total | $ | 11,114 | $ | (284 | ) | $ | 106 | $ | 711 | $ | 11,647 | $ | 9,415 | $ | (1,273 | ) | $ | 430 | $ | 843 | $ | 9,415 | ||||||||||||||||||
Negative provisions are caused by changes in the composition and credit quality of the loan portfolio. The result is an allocation of the loan loss reserve from one category to another.
-17-
A summary of the allowance and loans individually and collectively evaluated for impairment are as follows:
| As of March 31, 2017 | ||||||||||||||||||||||||
| (in thousands) | Allowance Individually Evaluated for Impairment | Allowance Collectively Evaluated for Impairment | Total Allowance for Credit Losses | Loans Individually Evaluated for Impairment | Loans Collectively Evaluated for Impairment | Total Loans before Unearned Income | ||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||
| Construction & land development | $ | - | $ | 1,141 | $ | 1,141 | $ | 358 | $ | 86,018 | $ | 86,376 | ||||||||||||
| Farmland | - | 6 | 6 | - | 23,348 | 23,348 | ||||||||||||||||||
| 1 - 4 family | 2 | 1,062 | 1,064 | 1,116 | 138,549 | 139,665 | ||||||||||||||||||
| Multifamily | 208 | 401 | 609 | 5,058 | 7,382 | 12,440 | ||||||||||||||||||
| Non-farm non-residential | 858 | 2,962 | 3,820 | 11,225 | 424,992 | 436,217 | ||||||||||||||||||
| Total Real Estate | 1,068 | 5,572 | 6,640 | 17,757 | 680,289 | 698,046 | ||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||
| Agricultural | 3 | 59 | 62 | 1,399 | 21,779 | 23,178 | ||||||||||||||||||
| Commercial and industrial | 2,369 | 1,759 | 4,128 | 9,192 | 196,966 | 206,158 | ||||||||||||||||||
| Consumer and other | - | 817 | 817 | 686 | 68,404 | 69,090 | ||||||||||||||||||
| Unallocated | - | - | - | - | - | - | ||||||||||||||||||
| Total Non-Real Estate | 2,372 | 2,635 | 5,007 | 11,277 | 287,149 | 298,426 | ||||||||||||||||||
| Total | $ | 3,440 | $ | 8,207 | $ | 11,647 | $ | 29,034 | $ | 967,438 | $ | 996,472 | ||||||||||||
| Unearned Income | (2,033 | ) | ||||||||||||||||||||||
| Total loans net of unearned income | $ | 994,439 | ||||||||||||||||||||||
| As of December 31, 2016 | ||||||||||||||||||||||||
| (in thousands) | Allowance Individually Evaluated For Impairment | Allowance Collectively Evaluated for Impairment | Total Allowance for Credit Losses | Loans Individually Evaluated For Impairment | Loans Collectively Evaluated for Impairment | Total Loans before Unearned Income | ||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||
| Construction & land development | $ | - | $ | 1,232 | $ | 1,232 | $ | 361 | $ | 83,878 | $ | 84,239 | ||||||||||||
| Farmland | - | 19 | 19 | - | 21,138 | 21,138 | ||||||||||||||||||
| 1 - 4 family | 8 | 1,196 | 1,204 | 1,130 | 134,081 | 135,211 | ||||||||||||||||||
| Multifamily | 164 | 427 | 591 | 5,014 | 7,436 | 12,450 | ||||||||||||||||||
| Non-farm non-residential | 247 | 3,204 | 3,451 | 10,803 | 406,211 | 417,014 | ||||||||||||||||||
| Total Real Estate | 419 | 6,078 | 6,497 | 17,308 | 652,744 | 670,052 | ||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||
| Agricultural | 11 | 63 | 74 | 1,614 | 22,169 | 23,783 | ||||||||||||||||||
| Commercial and industrial | 2,375 | 1,168 | 3,543 | 8,965 | 185,004 | 193,969 | ||||||||||||||||||
| Consumer and other | 193 | 779 | 972 | 924 | 62,087 | 63,011 | ||||||||||||||||||
| Unallocated | - | 28 | 28 | - | - | - | ||||||||||||||||||
| Total Non-Real Estate | 2,579 | 2,038 | 4,617 | 11,503 | 269,260 | 280,763 | ||||||||||||||||||
| Total | $ | 2,998 | $ | 8,116 | $ | 11,114 | $ | 28,811 | $ | 922,004 | $ | 950,815 | ||||||||||||
| Unearned Income | (1,894 | ) | ||||||||||||||||||||||
| Total loans net of unearned income | $ | 948,921 | ||||||||||||||||||||||
A loan is considered impaired when, based on current information and events, it is probable that First Guaranty will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Payment status, collateral value and the probability of collecting scheduled principal and interest payments when due are considered in evaluating loan impairment. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
-18-
The following is a summary of impaired loans by class as of the date indicated:
| As of March 31, 2017 | ||||||||||||||||||||||||
| (in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | Interest Income Cash Basis | ||||||||||||||||||
| Impaired Loans with no related allowance: | ||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||
| Construction & land development | $ | 358 | $ | 823 | $ | - | $ | 360 | $ | - | $ | - | ||||||||||||
| Farmland | - | - | - | - | - | - | ||||||||||||||||||
| 1 - 4 family | 856 | 1,195 | - | 914 | 12 | 9 | ||||||||||||||||||
| Multifamily | - | - | - | - | - | - | ||||||||||||||||||
| Non-farm non-residential | 7,632 | 8,571 | - | 8,204 | 67 | 68 | ||||||||||||||||||
| Total Real Estate | 8,846 | 10,589 | - | 9,478 | 79 | 77 | ||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||
| Agricultural | 1,121 | 1,415 | - | 1,239 | - | - | ||||||||||||||||||
| Commercial and industrial | 255 | 255 | - | 258 | - | - | ||||||||||||||||||
| Consumer and other | 686 | 686 | - | 686 | - | - | ||||||||||||||||||
| Total Non-Real Estate | 2,062 | 2,356 | - | 2,183 | - | - | ||||||||||||||||||
| Total Impaired Loans with no related allowance | 10,908 | 12,945 | - | 11,661 | 79 | 77 | ||||||||||||||||||
| Impaired Loans with an allowance recorded: | ||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||
| Construction & land development | - | - | - | - | - | - | ||||||||||||||||||
| Farmland | - | - | - | - | - | - | ||||||||||||||||||
| 1 - 4 family | 260 | 299 | 2 | 264 | - | - | ||||||||||||||||||
| Multifamily | 5,058 | 5,414 | �� | 208 | 5,001 | - | - | |||||||||||||||||
| Non-farm non-residential | 3,593 | 3,593 | 858 | 3,593 | 45 | 37 | ||||||||||||||||||
| Total Real Estate | 8,911 | 9,306 | 1,068 | 8,858 | 45 | 37 | ||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||
| Agricultural | 277 | 377 | 3 | 277 | - | - | ||||||||||||||||||
| Commercial and industrial | 8,938 | 9,099 | 2,369 | 8,947 | 17 | 17 | ||||||||||||||||||
| Consumer and other | - | - | - | - | - | - | ||||||||||||||||||
| Total Non-Real Estate | 9,215 | 9,476 | 2,372 | 9,224 | 17 | 17 | ||||||||||||||||||
| Total Impaired Loans with an allowance recorded | 18,126 | 18,782 | 3,440 | 18,082 | 62 | 54 | ||||||||||||||||||
| Total Impaired Loans | $ | 29,034 | $ | 31,727 | $ | 3,440 | $ | 29,743 | $ | 141 | $ | 131 | ||||||||||||
-19-
The following is a summary of impaired loans by class as of the date indicated:
| As of December 31, 2016 | ||||||||||||||||||||||||
| (in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | Interest Income Cash Basis | ||||||||||||||||||
| Impaired Loans with no related allowance: | ||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||
| Construction & land development | $ | 361 | $ | 823 | $ | - | $ | 363 | $ | - | $ | - | ||||||||||||
| Farmland | - | - | - | - | - | - | ||||||||||||||||||
| 1 - 4 family | 863 | 1,196 | - | 1,044 | 49 | 48 | ||||||||||||||||||
| Multifamily | - | - | - | - | - | - | ||||||||||||||||||
| Non-farm non-residential | 8,501 | 9,430 | - | 8,949 | 196 | 175 | ||||||||||||||||||
| Total Real Estate | 9,725 | 11,449 | - | 10,356 | 245 | 223 | ||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||
| Agricultural | 1,603 | 1,742 | - | 1,377 | 30 | - | ||||||||||||||||||
| Commercial and industrial | - | - | - | - | - | - | ||||||||||||||||||
| Consumer and other | 686 | 685 | - | 724 | 18 | 12 | ||||||||||||||||||
| Total Non-Real Estate | 2,289 | 2,427 | - | 2,101 | 48 | 12 | ||||||||||||||||||
| Total Impaired Loans with no related allowance | 12,014 | 13,876 | - | 12,457 | 293 | 235 | ||||||||||||||||||
| Impaired Loans with an allowance recorded: | ||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||
| Construction & land development | - | - | - | - | - | - | ||||||||||||||||||
| Farmland | - | - | - | - | - | - | ||||||||||||||||||
| 1 - 4 family | 267 | 303 | 8 | 279 | - | - | ||||||||||||||||||
| Multifamily | 5,014 | 5,305 | 164 | 5,169 | - | - | ||||||||||||||||||
| Non-farm non-residential | 2,302 | 2,296 | 247 | 2,334 | 119 | 113 | ||||||||||||||||||
| Total Real Estate | 7,583 | 7,904 | 419 | 7,782 | 119 | 113 | ||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||
| Agricultural | 11 | 11 | 11 | 11 | - | - | ||||||||||||||||||
| Commercial and industrial | 8,965 | 9,117 | 2,375 | 9,379 | 72 | 72 | ||||||||||||||||||
| Consumer and other | 238 | 244 | 193 | 289 | 8 | 7 | ||||||||||||||||||
| Total Non-Real Estate | 9,214 | 9,372 | 2,579 | 9,679 | 80 | 79 | ||||||||||||||||||
| Total Impaired Loans with an allowance recorded | 16,797 | 17,276 | 2,998 | 17,461 | 199 | 192 | ||||||||||||||||||
| Total Impaired Loans | $ | 28,811 | $ | 31,152 | $ | 2,998 | $ | 29,918 | $ | 492 | $ | 427 | ||||||||||||
-20-
Troubled Debt Restructurings
A troubled debt restructuring ("TDR") is considered such if the lender for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. The modifications to First Guaranty's TDRs were concessions on either the interest rate charged or the amortization. The effect of the modifications to First Guaranty was a reduction in interest income. These loans have an allocated reserve in First Guaranty's allowance for loan losses. First Guaranty has not restructured any loans that are considered troubled debt restructurings in the three months ended March 31, 2017.
The following table identifies the troubled debt restructurings as of March 31, 2017 and December 31, 2016:
| March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
| Accruing Loans | Accruing Loans | |||||||||||||||||||||||||||||||
| (in thousands) | Current | 30-89 Days Past Due | Nonaccrual | Total TDRs | Current | 30-89 Days Past Due | Nonaccrual | Total TDRs | ||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||||||||||
| Construction & land development | $ | - | $ | - | $ | 358 | $ | 358 | $ | - | $ | - | $ | 361 | $ | 361 | ||||||||||||||||
| Farmland | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| 1-4 Family | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Multifamily | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Non-farm non residential | 2,138 | - | 100 | 2,238 | 2,987 | - | 100 | 3,087 | ||||||||||||||||||||||||
| Total Real Estate | 2,138 | - | 458 | 2,596 | 2,987 | - | 461 | 3,448 | ||||||||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||||||||||
| Agricultural | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Commercial and industrial | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Consumer and other | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total Non-Real Estate | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total | $ | 2,138 | $ | - | $ | 458 | $ | 2,596 | $ | 2,987 | $ | - | $ | 461 | $ | 3,448 | ||||||||||||||||
The following table discloses TDR activity for the three months ended March 31, 2017.
Troubled Debt Restructured Loans Activity Three Months Ended March 31, 2017 | ||||||||||||||||||||||||||||||||||||
| (in thousands) | Beginning balance December 31, 2016 | New TDRs | Charge-offs post-modification | Transferred to ORE | Paydowns | Construction to permanent financing | Restructured to market terms | Other adjustments | Ending balance March 31, 2017 | |||||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||||||||||||||
| Construction & land development | $ | 361 | $ | - | $ | - | $ | - | $ | (3 | ) | $ | - | $ | - | $ | - | $ | 358 | |||||||||||||||||
| Farmland | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| 1 - 4 family | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Multifamily | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Non-farm non-residential | 3,087 | - | - | - | (849 | ) | - | - | - | 2,238 | ||||||||||||||||||||||||||
| Total Real Estate | 3,448 | - | - | - | (852 | ) | - | - | - | 2,596 | ||||||||||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||||||||||||||
| Agricultural | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Commercial and industrial | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Consumer and other | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Total Non-Real Estate | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Total | $ | 3,448 | $ | - | $ | - | $ | - | $ | (852 | ) | $ | - | $ | - | - | $ | 2,596 | ||||||||||||||||||
There were no commitments to lend additional funds to debtors whose terms have been modified in a troubled debt restructuring at March 31, 2017.
-21-
Note 6. Goodwill and Other Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to impairment testing. Other intangible assets continue to be amortized over their useful lives. First Guaranty's goodwill is the difference in purchase price over the fair value of net assets acquired from its acquisition of Homestead Bancorp in 2007. Goodwill totaled $2.0 million at March 31, 2017 and December 31, 2016. No impairment charges have been recognized on First Guaranty's intangible assets. Mortgage servicing rights decreased $2,000 to $76,000 at March 31, 2017 compared to December 31, 2016. Other intangible assets recorded include core deposit intangibles, which are subject to amortization. The weighted-average amortization period remaining for First Guaranty's core deposit intangibles is 3.4 years at March 31, 2017. The core deposits intangible reflect the value of deposit relationships, including the beneficial rates, which arose from acquisitions.
Note 7. Other Real Estate (ORE)
Other real estate owned consists of the following at the dates indicated:
| (in thousands) | March 31, 2017 | December 31, 2016 | ||||||
| Real Estate Owned Acquired by Foreclosure: | ||||||||
| Residential | $ | 43 | $ | 71 | ||||
| Construction & land development | - | - | ||||||
| Non-farm non-residential | 196 | 288 | ||||||
| Total Other Real Estate Owned and Foreclosed Property | $ | 239 | $ | 359 | ||||
Loans secured by one-to-four family residential properties in the process of foreclosure totaled $0.7 million as of March 31, 2017.
Note 8. Commitments and Contingencies
Off-balance sheet commitments
First Guaranty is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement in particular classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual notional amount of those instruments. The same credit policies are used in making commitments and conditional obligations as it does for balance sheet instruments. Unless otherwise noted, collateral or other security is not required to support financial instruments with credit risk.
Below is a summary of the notional amounts of the financial instruments with off-balance sheet risk at March 31, 2017 and December 31, 2016:
Contract Amount
| (in thousands) | March 31, 2017 | December 31, 2016 | ||||||
| Commitments to Extend Credit | $ | 49,344 | $ | 56,910 | ||||
| Unfunded Commitments under lines of credit | $ | 117,740 | $ | 128,428 | ||||
| Commercial and Standby letters of credit | $ | 6,880 | $ | 6,602 | ||||
Litigation
The nature of First Guaranty's business ordinarily results in a certain amount of claims, litigation and legal and administrative cases, all of which are considered incidental to the normal conduct of business. When First Guaranty determines it has defenses to the claims asserted, it defends itself. First Guaranty will consider settlement of cases when it is in the best interests of both First Guaranty and its shareholders.
While the final outcome of legal proceedings is inherently uncertain, based on information currently available as of March 31, 2017, any incremental liability arising from First Guaranty's legal proceedings will not have a material adverse effect on First Guaranty's financial position.
-22-
Note 9. Fair Value Measurements
The fair value of a financial instrument is the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Valuation techniques use certain inputs to arrive at fair value. Inputs to valuation techniques are the assumptions that market participants would use in pricing the asset or liability. They may be observable or unobservable. First Guaranty uses a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs – Unadjusted quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds or credit risks) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value follows, as well as the classification of such instruments within the valuation hierarchy.
Securities available for sale. Securities are classified within Level 1 where quoted market prices are available in an active market. Inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are unavailable, fair value is estimated using quoted prices of securities with similar characteristics, at which point the securities would be classified within Level 2 of the hierarchy. Securities classified within Level 3 in First Guaranty's portfolio as of March 31, 2017 include municipal bonds and an equity security.
Impaired loans. Loans are measured for impairment using the methods permitted by ASC Topic 310. Fair value of impaired loans is measured by either the fair value of the collateral if the loan is collateral dependent (Level 2 or Level 3), or the present value of expected future cash flows, discounted at the loan's effective interest rate (Level 3). Fair value of the collateral is determined by appraisals or by independent valuation.
Other real estate owned. Properties are recorded at the balance of the loan or at estimated fair value less estimated selling costs, whichever is less, at the date acquired. Fair values of other real estate owned ("OREO") are determined by sales agreement or appraisal, and costs to sell are based on estimation per the terms and conditions of the sales agreement or amounts commonly used in real estate transactions. Inputs include appraisal values or recent sales activity for similar assets in the property's market; thus OREO measured at fair value would be classified within either Level 2 or Level 3 of the hierarchy.
Certain non-financial assets and non-financial liabilities are measured at fair value on a non-recurring basis including assets and liabilities related to reporting units measured at fair value in the testing of goodwill impairment, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.
The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| (in thousands) | March 31, 2017 | December 31, 2016 | ||||||
| Available for Sale Securities Fair Value Measurements Using: | ||||||||
| Level 1: Quoted Prices in Active Markets For Identical Assets | $ | 24,091 | $ | 30,487 | ||||
| Level 2: Significant Other Observable Inputs | 383,293 | 347,586 | ||||||
| Level 3: Significant Unobservable Inputs | 18,610 | 19,400 | ||||||
| Securities available for sale measured at fair value | $ | 425,994 | $ | 397,473 | ||||
First Guaranty's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While the methodologies used are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value.
The change in Level 1 securities available for sale from December 31, 2016 to March 31, 2017 was due principally to a net decrease in Treasury bills of $6.4 million. The change in Level 2 securities available for sale from December 31, 2016 to March 31, 2017 was due principally to the purchase of government agency securities offset by the sale of corporate bond securities.
-23-
The following table measures financial assets and financial liabilities measured at fair value on a non-recurring basis as of March 31, 2017 and December 31, 2016, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
| (in thousands) | At March 31, 2017 | At December 31, 2016 | ||||||
| Impaired Loans - Fair Value Measurements Using: | ||||||||
| Level 1: Quoted Prices in Active Markets For Identical Assets | $ | - | $ | - | ||||
| Level 2: Significant Other Observable Inputs | 259 | 259 | ||||||
| Level 3: Significant Unobservable Inputs | 19,219 | 18,559 | ||||||
| Impaired loans measured at fair value | $ | 19,478 | $ | 18,818 | ||||
| Other Real Estate Owned - Fair Value Measurements Using: | ||||||||
| Level 1: Quoted Prices in Active Markets For Identical Assets | $ | - | $ | - | ||||
| Level 2: Significant Other Observable Inputs | 122 | 226 | ||||||
| Level 3: Significant Unobservable Inputs | 117 | 133 | ||||||
| Other real estate owned measured at fair value | $ | 239 | $ | 359 | ||||
ASC 825-10 provides First Guaranty with an option to report selected financial assets and liabilities at fair value. The fair value option established by this statement permits First Guaranty to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each reporting date subsequent to implementation.
First Guaranty has chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States.
-24-
Note 10. Financial Instruments
Fair value estimates are generally subjective in nature and are dependent upon a number of significant assumptions associated with each instrument or group of similar instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows and relevant available market information. Fair value information is intended to represent an estimate of an amount at which a financial instrument could be exchanged in a current transaction between a willing buyer and seller engaging in an exchange transaction. However, since there are no established trading markets for a significant portion of First Guaranty's financial instruments, First Guaranty may not be able to immediately settle financial instruments; as such, the fair values are not necessarily indicative of the amounts that could be realized through immediate settlement. In addition, the majority of the financial instruments, such as loans and deposits, are held to maturity and are realized or paid according to the contractual agreement with the customer.
Quoted market prices are used to estimate fair values when available. However, due to the nature of the financial instruments, in many instances quoted market prices are not available. Accordingly, estimated fair values have been estimated based on other valuation techniques, such as discounting estimated future cash flows using a rate commensurate with the risks involved or other acceptable methods. Fair values are estimated without regard to any premium or discount that may result from concentrations of ownership of financial instruments, possible income tax ramifications or estimated transaction costs. The fair value estimates are subjective in nature and involve matters of significant judgment and, therefore, cannot be determined with precision. Fair values are also estimated at a specific point in time and are based on interest rates and other assumptions at that date. As events change the assumptions underlying these estimates, the fair values of financial instruments will change.
Disclosure of fair values is not required for certain items such as lease financing, investments accounted for under the equity method of accounting, obligations of pension and other postretirement benefits, premises and equipment, other real estate, prepaid expenses, the value of long-term relationships with depositors (core deposit intangibles) and other customer relationships, other intangible assets and income tax assets and liabilities. Fair value estimates are presented for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses have not been considered in the estimates. Accordingly, the aggregate fair value amounts presented do not purport to represent and should not be considered representative of the underlying market or franchise value of First Guaranty.
Because the standard permits many alternative calculation techniques and because numerous assumptions have been used to estimate the fair values, reasonable comparison of the fair value information with other financial institutions' fair value information cannot necessarily be made. The methods and assumptions used to estimate the fair values of financial instruments are as follows:
Cash and due from banks, interest-bearing deposits with banks, federal funds sold and federal funds purchased.
These items are generally short-term and the carrying amounts reported in the consolidated balance sheets are a reasonable estimation of the fair values.
Investment Securities.
Fair values are principally based on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or the use of discounted cash flow analyses.
Loans Held for Sale.
Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices. These loans are classified within level 3 of the fair value hierarchy.
Loans, net.
Market values are computed present values using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. These loans are classified within level 3 of the fair value hierarchy.
Impaired loans.
Fair value of impaired loans is measured by either the fair value of the collateral if the loan is collateral dependent (Level 2 or Level 3), or the present value of expected future cash flows, discounted at the loan's effective interest rate (Level 3). Fair value of the collateral is determined by appraisals or by independent valuation.
-25-
Accrued interest receivable.
The carrying amount of accrued interest receivable approximates its fair value.
Deposits.
The fair value of demand deposits, savings and interest-bearing demand deposits is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are classified within level 3 of the fair value hierarchy.
Accrued interest payable.
The carrying amount of accrued interest payable approximates its fair value.
Borrowings.
The carrying amount of federal funds purchased and other short-term borrowings approximate their fair values. The fair value of First Guaranty's long-term borrowings is computed using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. Borrowings are classified within level 3 of the fair value hierarchy.
Other Unrecognized Financial Instruments.
The fair value of commitments to extend credit is estimated using the fees charged to enter into similar legally binding agreements, taking into account the remaining terms of the agreements and customers' credit ratings. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Noninterest-bearing deposits are held at cost. The fair values of letters of credit are based on fees charged for similar agreements or on estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At March 31, 2017 and December 31, 2016 the fair value of guarantees under commercial and standby letters of credit was not material.
The estimated fair values and carrying values of the financial instruments at March 31, 2017 and December 31, 2016 are presented in the following table:
| March 31, 2017 | December 31, 2016 | |||||||||||||||
| (in thousands) | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||
| Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 18,093 | $ | 18,093 | $ | 18,111 | $ | 18,111 | ||||||||
| Securities, available for sale | 425,994 | 425,994 | 397,473 | 397,473 | ||||||||||||
| Securities, held to maturity | 98,847 | 97,100 | 101,863 | 99,906 | ||||||||||||
| Federal Home Loan Bank stock | 1,819 | 1,819 | 1,816 | 1,816 | ||||||||||||
| Loans, net | 982,792 | 981,824 | 937,807 | 937,495 | ||||||||||||
| Accrued interest receivable | 6,954 | 6,954 | 7,039 | 7,039 | ||||||||||||
| Liabilities | ||||||||||||||||
| Deposits | $ | 1,402,268 | $ | 1,402,561 | $ | 1,326,181 | $ | 1,325,972 | ||||||||
| Borrowings | 23,326 | 23,350 | 28,600 | 28,625 | ||||||||||||
| Junior subordinated debentures | 14,638 | 14,119 | 14,630 | 13,909 | ||||||||||||
| Accrued interest payable | 1,962 | 1,962 | 1,931 | 1,931 | ||||||||||||
There is no material difference between the contract amount and the estimated fair value of off-balance sheet items that are primarily comprised of short-term unfunded loan commitments that are generally at market prices.
-26-
Note 11. Merger Transaction
On January 30, 2017, First Guaranty entered into an Agreement and Plan of Merger (the "Merger Agreement") with Premier Bancshares, Inc., a Texas corporation ("Premier"), pursuant to which Premier will merge with and into First Guaranty (the "Merger"). Following the consummation of the Merger, and following the consummation of a merger of Premier's wholly-owned subsidiary, Premier Delaware Bancshares, Inc. ("Premier Delaware"), with and into First Guaranty, Synergy Bank, S.S.B., a Texas-state chartered savings bank and wholly-owned subsidiary of Premier Delaware ("Synergy Bank"), will merge with and into First Guaranty Bank, a Louisiana-state chartered commercial bank and wholly-owned subsidiary of First Guaranty, with First Guaranty Bank continuing as the surviving entity. The Merger Agreement was unanimously approved by the Board of Directors of each of First Guaranty and Premier.
On May 10, 2017, the shareholders of Premier approved and adopted the Merger Agreement. The Merger is expected to close in the second or third quarter of 2017 following receipt of all remaining regulatory approvals.
-27-
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 Quarterly report on 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, 2017 and for the three months ended March 31, 2017 and 2016 have been derived from unaudited consolidated financial statements and include, in the opinion of management, all adjustments (consisting of normal recurring accruals and provisions) necessary to present fairly First Guaranty's financial position and results of operations for such periods.
Special Note Regarding Forward-Looking Statements
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company's anticipated future financial performance. This act provides a safe harbor for such disclosure, which protects us from unwarranted litigation, if actual results are different from management expectations. This discussion and analysis contains forward-looking statements and reflects management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "may," "should," "expect," "anticipate," "intend," "plan," "continue," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of factors and uncertainties, including, changes in general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities, if any; 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; 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.
-28-
First Quarter Ended 2017 Financial Overview
First Guaranty Bancshares, Inc. is a Louisiana corporation and a bank holding company headquartered in Hammond, Louisiana. First Guaranty Bank, the wholly-owned subsidiary of First Guaranty Bancshares, Inc., is a Louisiana chartered commercial bank that provides personalized commercial banking services primarily to Louisiana customers through 21 banking facilities primary located throughout Southeast, Southwest and North Louisiana. We emphasize personal relationships and localized decision making to ensure that products and services are matched to customer needs. First Guaranty competes 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 ended March 31, 2017 are as follows:
| ● | Total assets were $1.6 billion at March 31, 2017 and $1.5 billion at December 31, 2016. Total deposits were $1.4 billion at March 31, 2017 and $1.3 billion at December 31, 2016. Total loans were $994.4 million at March 31, 2017, an increase of $45.5 million, or 4.8%, compared with December 31, 2016. Shareholders' equity was $126.9 million and $124.3 million at March 31, 2017 and December 31, 2016, respectively. |
| ● | Net income for the first quarter of 2017 and 2016 was $3.3 million and $3.2 million, respectively. |
| ● | Earnings per common share were $0.43 and $0.41 for the first quarter of 2017 and 2016, respectively. |
| ● | Net interest income for the first quarter of 2017 was $12.7 million compared to $11.8 million for the same period in 2016. |
| ● | The provision for loan losses for the first quarter of 2017 was $0.7 million compared to $0.8 million for the same period in 2016. |
| ● | Noninterest expense for the first quarter of 2017 and 2016 was $9.0 million and $8.1 million, respectively. This increase in the first quarter of 2017 as compared to the prior year period included non-recurring expenses consisting of $281,000 in pre-tax expenses related to the pending acquisition/merger with Premier Bancshares, Inc./Synergy Bank headquartered in McKinney, Texas and $26,000 in pre-tax expenses related to the August 2016 flood in South Louisiana. |
| ● | The net interest margin for the three months ended March 31, 2017 was 3.35% which was an increase of five basis points from the net interest margin of 3.30% for the same period in 2016. First Guaranty attributed the improvement in the net interest margin to the continued shift in interest earning asset balances from lower yielding securities to higher yielding loans. Loans as a percentage of average interest earning assets increased to 64% at March 31, 2017 compared to 58% at March 31, 2016. |
| ● | Investment securities totaled $524.8 million at March 31, 2017, an increase of $25.5 million when compared to $499.3 million at December 31, 2016. At March 31, 2017, available for sale securities, at fair value, totaled $426.0 million, an increase of $28.5 million when compared to $397.5 million at December 31, 2016. At March 31, 2017, held to maturity securities, at amortized cost, totaled $98.8 million, a decrease of $3.0 million when compared to $101.9 million at December 31, 2016. The increase in investment securities was primarily associated with the purchase of government agency securities. |
| ● | Total loans net of unearned income was $994.4 million at March 31, 2017 compared to $948.9 million at December 31, 2016. The net loan portfolio at March 31, 2017 totaled $982.8 million, a net increase of $45.0 million from the December 31, 2016 net loan portfolio balance of $937.8 million. Total loans net of unearned income are reduced by the allowance for loan losses which totaled $11.6 million at March 31, 2017 and $11.1 million at December 31, 2016, respectively. |
| ● | Total impaired loans increased $0.2 million to $29.0 million at March 31, 2017 compared to $28.8 million at December 31, 2016. |
| ● | Nonaccrual loans decreased $0.7 million to $21.0 million at March 31, 2017 compared to $21.7 million at December 31, 2016. |
| ● | Return on average assets for the three months ended March 31, 2017 and 2016 was 0.84% and 0.86%, respectively. Return on average common equity for the three months ended March 31, 2017 and 2016 was 10.45% and 10.46%, respectively. Return on average assets is calculated by dividing annualized net income by average assets. Return on average common equity is calculated by dividing net income by average common equity. |
| ● | Book value per common share was $16.68 as of March 31, 2017 compared to $16.20 as of March 31, 2016. The increase in book value was due to the changes in accumulated other comprehensive income/loss ("AOCI") and an increase in retained earnings. Our AOCI is comprised of unrealized gains and losses on available for sale securities. |
| ● | First Guaranty's Board of Directors declared cash dividends of $0.16 per common share in the first quarter of 2017 and 2016. First Guaranty has paid 95 consecutive quarterly dividends as of March 31, 2017. |
-29-
Financial Condition
Changes in Financial Condition from December 31, 2016 to March 31, 2017
General
Total assets at March 31, 2017 were $1.6 billion, an increase of $71.4 million, or 4.8%, from December 31, 2016. Assets increased primarily due to increases in net loans of $45.0 million and in investment securities of $25.5 million during the three months ended March 31, 2017.
Loans
Net loans increased $45.0 million, or 4.8%, to $982.8 million at March 31, 2017 from $937.8 million at December 31, 2016. Net loans increased during the first three months of 2017 primarily due to a $19.2 million increase in non-farm non-residential loans, a $12.2 million increase in commercial and industrial loans, a $6.1 million increase in consumer and other loans, a $4.5 million increase in one-to-four family residential loans, a $2.2 million increase in farmland loans and a $2.1 million increase in construction and land development loans, partially offset by a decrease of $0.6 million in agriculture loans. Non-farm non-residential loan balances increased primarily due to local originations. Commercial and industrial loans increased primarily due to growth in our syndicated loans portfolio. Consumer and other loans increased due to the continued growth in our commercial lease originations. One-to four-family residential loans increased primarily due to the continued growth in local loan originations. Farmland loans increased due to seasonal fundings on agricultural loan commitments. Construction and land development loans increased principally due to the funding of unfunded commitments on various construction projects. Agricultural loans decreased primarily due to seasonal activity. First Guaranty had approximately 2.7% of funded and 0.5% of unfunded commitments in our loan portfolio to businesses engaged in support or service activities for oil and gas operations. Syndicated loans at March 31, 2017 were $95.6 million, all of which where shared national credits. Syndicated loans increased $12.8 million from $82.8 million at December 31, 2016.
As of March 31, 2017, 70.1% of our loan portfolio was secured primarily by real estate. There are no significant concentrations of credit to any individual borrower. The largest portion of our loan portfolio, at 43.8% as of March 31, 2017, was non-farm non-residential loans secured by real estate. Approximately 32.6% of the loan portfolio is based on a floating rate tied to the prime rate or LIBOR as of March 31, 2017. 75.8% of the loan portfolio is scheduled to mature within five years from March 31, 2017.
Net loans are reduced by the allowance for loan losses which totaled $11.6 million at March 31, 2017 and $11.1 million at December 31, 2016. Loan charge-offs decreased to $0.3 million during the first three months of 2017 from $1.3 million during the same period in 2016. Recoveries totaled $0.1 million during the first three months of 2017 and $0.4 million during the same period in 2016. See Note 4 of the Notes to Consolidated Financial Statements for more information on loans and Note 5 for information on the allowance for loan losses.
-30-
Investment Securities
Investment securities at March 31, 2017 totaled $524.8 million, an increase of $25.5 million compared to $499.3 million at December 31, 2016. The increase was primarily attributed to purchases of U.S. government agencies used to collateralize public funds deposits. The investment portfolio consisted of available-for-sale securities at fair market value for a total of $426.0 million at March 31, 2017 and held-to-maturity securities at amortized cost of $98.8 million at March 31, 2017.
Our investment securities portfolio is comprised of both available-for-sale securities and securities that we intend to hold to maturity. 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 to meet pledging requirements for public funds and borrowings.
The securities portfolio consists 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, FFCB, Freddie Mac, and Fannie Mae obligations. The mortgage backed securities that we purchased were issued by Freddie Mac and Fannie Mae. The securities portfolio provides First Guaranty with a balance to credit risk when compared to other categories of assets. Management monitors the securities portfolio for both credit and interest rate risk. First Guaranty generally limits 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. Municipal securities usually have maturities of 15 years or less. 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 $426.0 million at March 31, 2017, an increase of $28.5 million, or 7.2%, compared to $397.5 million at December 31, 2016. The increase was primarily due to purchases of U.S. Government agency securities used to collateralize public funds deposits. Our public funds deposits have a seasonal increase due to tax collections at the end of the year and the first quarter. Partially offsetting this increase was the sale of $17.1 million in corporate securities and $36.3 million of agency securities in the first quarter of 2017 for which the proceeds were used to fund loan growth.
Our held-to-maturity securities portfolio had an amortized cost of $98.8 million at March 31, 2017, a decrease of $3.0 million, or 3.0%, compared to $101.9 million at December 31, 2016. The decrease was due to the early payoffs of existing securities, the continued amortization of our mortgage-backed securities and the decision to keep a higher level of securities in our available-for-sale portfolio in order to manage liquidity and fund loan growth.
At March 31, 2017, $32.8 million, or 6.2%, of the securities portfolio was scheduled to mature in less than one year. $85.8 million, or 16.4%, of the securities portfolio is scheduled to mature between one and five years. Securities, not including mortgage-backed securities, with contractual maturity dates over 10 years totaled $24.5 million, or 4.7%, of the total portfolio at March 31, 2017. 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, 2017, management believes that the securities portfolio has a forecasted weighted average life of approximately 5.8 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 6.3 years. The portfolio had an estimated effective duration of 4.2 years at March 31, 2017.
There was no credit related other-than-temporary impairment of securities losses recognized in the three months ended March 31, 2017 or March 31, 2016.
-31-
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.
-32-
The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
| (in thousands) | March 31, 2017 | December 31, 2016 | ||||||
| Nonaccrual loans: | ||||||||
| Real Estate: | ||||||||
| Construction and land development | $ | 399 | $ | 551 | ||||
| Farmland | 97 | 105 | ||||||
| 1 - 4 family residential | 2,396 | 2,242 | ||||||
| Multifamily | 5,058 | 5,014 | ||||||
| Non-farm non-residential | 2,600 | 2,753 | ||||||
| Total Real Estate | 10,550 | 10,665 | ||||||
| Non-Real Estate: | ||||||||
| Agricultural | 1,630 | 1,958 | ||||||
| Commercial and industrial | 8,078 | 8,070 | ||||||
| Consumer and other | 721 | 981 | ||||||
| Total Non-Real Estate | 10,429 | 11,009 | ||||||
| Total nonaccrual loans | 20,979 | 21,674 | ||||||
| Loans 90 days and greater delinquent & accruing: | ||||||||
| Real Estate: | ||||||||
| Construction and land development | - | 34 | ||||||
| Farmland | - | - | ||||||
| 1 - 4 family residential | 50 | 145 | ||||||
| Multifamily | - | - | ||||||
| Non-farm non-residential | - | - | ||||||
| Total Real Estate | 50 | 179 | ||||||
| Non-Real Estate: | ||||||||
| Agricultural | - | - | ||||||
| Commercial and industrial | - | - | ||||||
| Consumer and other | - | - | ||||||
| Total Non-Real Estate | - | - | ||||||
| Total loans 90 days and greater delinquent & accruing | 50 | 179 | ||||||
| Total non-performing loans | 21,029 | 21,853 | ||||||
| Real Estate Owned: | ||||||||
| Real Estate Loans: | ||||||||
| Construction and land development | - | - | ||||||
| Farmland | - | - | ||||||
| 1 - 4 family residential | 43 | 71 | ||||||
| Multifamily | - | - | ||||||
| Non-farm non-residential | 196 | 288 | ||||||
| Total Real Estate | 239 | 359 | ||||||
| Non-Real Estate Loans: | ||||||||
| Agricultural | - | - | ||||||
| Commercial and industrial | - | - | ||||||
| Consumer and other | - | - | ||||||
| Total Non-Real Estate | - | - | ||||||
| Total Real Estate Owned | 239 | 359 | ||||||
| Total non-performing assets | $ | 21,268 | $ | 22,212 | ||||
| Non-performing assets to total loans | 2.14 | % | 2.34 | % | ||||
| Non-performing assets to total assets | 1.35 | % | 1.48 | % | ||||
| Non-performing loans to total loans | 2.11 | % | 2.30 | % | ||||
-33-
At March 31, 2017, nonperforming assets totaled $21.3 million, or 1.35% of total assets, compared to $22.2 million, or 1.48%, of total assets at December 31, 2016, which represented a decrease of $0.9 million, or 4.2%. The decrease in non-performing assets occurred primarily as a result of a decrease in non-accrual loans from $21.7 million at December 31, 2016 to $21.0 million at March 31, 2017. The decrease in non-accrual loans was concentrated primarily in agriculture loans and consumer and other loans.
At March 31, 2017, nonaccrual loans totaled $21.0 million, a decrease of $0.7 million, or 3.2%, compared to nonaccrual loans of $21.7 million at December 31, 2016. The primary reduction in non-accrual loans occurred due to principal reductions on government guaranteed agricultural loans due to the receipt of guarantee proceeds. Nonaccrual loans were concentrated in three loan relationships that totaled $14.0 million or 66.9% of nonaccrual loans at March 31, 2017.
At March 31, 2017, loans 90 days or greater delinquent and still accruing totaled $0.1 million, a decrease of $0.1 million, or 72.1%, compared to $0.2 million at December 31, 2016. These loans were all one-to four-family residential loans at March 31, 2017.
Other real estate owned at March 31, 2017 totaled $0.2 million, a decrease of $0.1 million from $0.4 million at December 31, 2016. The decrease in other real estate owned was due to write-downs of $30,000 and sales of $0.1 million, primarily related to residential properties.
At March 31, 2017, our largest non-performing assets were comprised of the following non-accrual loans: (1) a commercial and industrial loan that totaled $7.7 million that is a shared national credit involved in oil and gas support and service activity; (2) a multi-family real estate loan with a balance of $5.1 million secured by an apartment complex; and (3) a non-farm non-residential loan that totaled $1.2 million.
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.
The following is a summary of loans restructured as TDRs at March 31, 2017 and December 31, 2016:
| (in thousands) | March 31, 2017 | December 31, 2016 | ||||||
| Restructured Loans: | ||||||||
| In Compliance with Modified Terms | $ | 2,138 | $ | 2,987 | ||||
| Past Due 30 through 89 days and still accruing | - | - | ||||||
| Past Due 90 days and greater and still accruing | - | - | ||||||
| Nonaccrual | 358 | 361 | ||||||
| Restructured Loans that subsequently defaulted | 100 | 100 | ||||||
| Total Restructured Loans | $ | 2,596 | $ | 3,448 | ||||
At March 31, 2017, we had three outstanding TDRs: (1) a $2.1 million non-farm non-residential loan secured by commercial real estate, which is performing in accordance with its modified terms; (2) a $0.4 million construction and land development loan secured by raw land that is on non-accrual; (3) a $0.1 million loan secured by commercial real estate that subsequently defaulted and is on non-accrual. The restructuring of these loans was related to interest rate or amortization concessions. The decline in TDRs occurred primarily due to paydowns on the $2.1 million TDR that is in compliance with its modified terms.
-34-
Allowance for Loan Losses
The allowance for loan 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. Also, a specific reserve is allocated for our syndicated loans, including shared national credits. 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 losses is principally influenced by the provision for loan losses 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 losses was $11.6 million or 1.17% of total loans and 55.4% of nonperforming loans at March 31, 2017.
Comparing March 31, 2017 to December 31, 2016, the increase in the allowance was primarily attributed to growth in the loan portfolio. There were changes within the specific components of the allowance balance. The primary change was an increase in the balance associated with commercial and industrial loans. Special mention loans increased by $1.2 million during the first three months of 2017. Substandard loans declined by $1.6 million during the first three months of 2017, due primarily to payoffs and sales of loans. Doubtful loans remained relatively constant from December 31, 2016 to March 31, 2017.
First Guaranty charged off $0.3 million in loan balances during the first three months of 2017. The charged-off loan balances were concentrated in one loan relationship which totaled $0.1 million or 40.8% of the total charged off amount. The details of the $0.3 million in charged off loans were as follows:
| 1. | First Guaranty charged off $0.1 million on a non-real estate commercial lease in the first quarter of 2017. This loan had a remaining principal balance of $0.1 million at March 31, 2017. |
| 2. | $0.2 million of charge-offs for the first three months of 2017 were comprised of smaller loans and overdrawn deposit accounts. |
The provision for loan losses decreased to $0.7 million in the first three months of 2017 from $0.8 million for the same period in 2016. The provision made in the first three months of 2017 was taken to provide for current loan and deposit losses and to maintain the allowance proportionate to risks inherent in the loan portfolio. Total charge-offs were $0.3 million for the first three months of 2017 as compared to $1.3 million for the same period in 2016. Recoveries totaled $0.1 million during the first three months of 2017 and $0.4 million during the first three months of 2016. For more information, see Note 5 to Consolidated Financial Statements.
-35-
Other information related to the allowance for loan losses are as follows:
| (in thousands) | Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | ||||||
| Loans: | ||||||||
| Average outstanding balance | $ | 976,855 | $ | 835,950 | ||||
| Balance at end of period | $ | 994,439 | $ | 854,776 | ||||
| Allowance for Loan Losses: | ||||||||
| Balance at beginning of year | $ | 11,114 | $ | 9,415 | ||||
| Charge-offs | (284 | ) | (1,273 | ) | ||||
| Recoveries | 106 | 430 | ||||||
| Provision | 711 | 843 | ||||||
| Balance at end of period | $ | 11,647 | $ | 9,415 | ||||
-36-
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, 2016 to March 31, 2017, total deposits increased $76.1 million, or 5.7%, to $1.4 billion. Noninterest-bearing demand deposits increased $3.4 million during the first three months of 2017 to $234.5 million at March 31, 2017. Interest-bearing demand deposits increased $65.8 million, or 13.7%, to $545.6 million at March 31, 2017. Interest-bearing demand deposits increased primarily due to an increase in public funds deposits. Time deposits increased $3.9 million to $521.9 million at March 31, 2017 compared to $518.0 million at December 31, 2016. At March 31, 2017, we had $93.2 million in brokered deposits. As we seek to strengthen our net interest margin and improve our earnings, attracting noninterest-bearing deposits will be a primary emphasis. Management will continue to evaluate and update our product mix 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.
As of March 31, 2017, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $373.5 million. At March 31, 2017, approximately $173.9 million of First Guaranty's certificates of deposit 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, | ||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||
| (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 | $ | 231,588 | 16.5 | % | 0.0 | % | $ | 221,634 | 17.2 | % | 0.0 | % | $ | 211,584 | 15.9 | % | 0.0 | % | ||||||||||||||||||
| Interest-bearing Demand | 534,509 | 38.1 | % | 0.8 | % | 415,410 | 32.3 | % | 0.6 | % | 401,617 | 30.2 | % | 0.4 | % | |||||||||||||||||||||
| Savings | 97,767 | 7.0 | % | 0.1 | % | 89,279 | 7.0 | % | 0.1 | % | 77,726 | 5.8 | % | 0.0 | % | |||||||||||||||||||||
| Time | 539,965 | 38.4 | % | 1.1 | % | 558,982 | 43.5 | % | 1.1 | % | 640,134 | 48.1 | % | 1.1 | % | |||||||||||||||||||||
| Total Deposits | $ | 1,403,829 | 100.0 | % | 0.7 | % | $ | 1,285,305 | 100.0 | % | 0.7 | % | $ | 1,331,061 | 100.0 | % | 0.6 | % | ||||||||||||||||||
| Individual and Business Deposits | For the Three Months Ended March 31, | For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||
| (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 | $ | 226,930 | 28.9 | % | 0.0 | % | $ | 217,245 | 30.1 | % | 0.0 | % | $ | 207,334 | 27.6 | % | 0.0 | % | ||||||||||||||||||
| Interest-bearing Demand | 161,312 | 20.5 | % | 0.5 | % | 117,221 | 16.2 | % | 0.3 | % | 112,864 | 15.0 | % | 0.2 | % | |||||||||||||||||||||
| Savings | 77,890 | 9.9 | % | 0.1 | % | 72,647 | 10.0 | % | 0.1 | % | 65,775 | 8.7 | % | 0.1 | % | |||||||||||||||||||||
| Time | 319,654 | 40.7 | % | 1.2 | % | 316,191 | 43.7 | % | 1.3 | % | 366,244 | 48.7 | % | 1.4 | % | |||||||||||||||||||||
| Total Individual and Business Deposits | $ | 785,786 | 100.0 | % | 0.6 | % | $ | 723,304 | 100.0 | % | 0.6 | % | $ | 752,217 | 100.0 | % | 0.7 | % | ||||||||||||||||||
| Public Fund Deposits | For the Three Months Ended March 31, | For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||
| (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 | $ | 4,658 | 0.8 | % | 0.0 | % | $ | 4,389 | 0.8 | % | 0.0 | % | $ | 4,250 | 0.7 | % | 0.0 | % | ||||||||||||||||||
| Interest-bearing Demand | 373,197 | 60.4 | % | 1.0 | % | 298,189 | 53.0 | % | 0.8 | % | 288,753 | 49.9 | % | 0.4 | % | |||||||||||||||||||||
| Savings | 19,877 | 3.2 | % | 0.5 | % | 16,632 | 3.0 | % | 0.3 | % | 11,951 | 2.1 | % | 0.0 | % | |||||||||||||||||||||
| Time | 220,311 | 35.6 | % | 0.9 | % | 242,791 | 43.2 | % | 0.8 | % | 273,890 | 47.3 | % | 0.7 | % | |||||||||||||||||||||
Total Public Fund Deposits | $ | 618,043 | 100.0 | % | 0.9 | % | $ | 562,001 | 100.0 | % | 0.8 | % | $ | 578,844 | 100.0 | % | 0.5 | % | ||||||||||||||||||
The following table sets forth the distribution of our time deposit accounts.
| (in thousands) | March 31, 2017 | |||
| Time deposits of less than $100,000 | $ | 148,418 | ||
| Time deposits of $100,000 through $250,000 | 124,224 | |||
| Time deposits of more than $250,000 | 249,282 | |||
| Total Time Deposits | $ | 521,924 | ||
-37-
At March 31, 2017, public funds deposits totaled $619.5 million compared to $556.9 million at December 31, 2016. Public fund time deposits totaled $216.2 million at March 31, 2017 compared to $208.3 million at December 31, 2016. We have developed a program for the retention and management of public funds deposits. Since 2012, we have maintained public funds deposits in excess of $400.0 million. These deposits are from public entities entities such as school districts, hospital districts, sheriff departments and municipalities. $502.7 million, or 81%, of these accounts at March 31, 2017, 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. Three of these relationships account for approximately 40% of public fund deposits that are under fiscal agency agreements. 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. Public funds deposit accounts are collateralized by FHLB letters of credit, 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. We invest the majority of these public deposits in our investment portfolio, but have increasingly invested more public funds into loans during the last three years.
The following table sets forth public funds as a percent of total deposits.
| (in thousands except for %) | March 31, 2017 | December 31, 2016 | December 31, 2015 | December 31, 2014 | December 31, 2013 | |||||||||||||||
| Public Funds: | ||||||||||||||||||||
| Noninterest-bearing Demand | $ | 3,907 | $ | 4,114 | $ | 4,906 | $ | 3,241 | $ | 3,016 | ||||||||||
| Interest-bearing Demand | 379,366 | 324,356 | 296,416 | 321,382 | 296,739 | |||||||||||||||
| Savings | 20,039 | 20,116 | 14,667 | 10,142 | 7,209 | |||||||||||||||
| Time | 216,170 | 208,330 | 252,688 | 266,743 | 208,614 | |||||||||||||||
| Total Public Funds | $ | 619,482 | $ | 556,916 | $ | 568,677 | $ | 601,508 | $ | 515,578 | ||||||||||
| Total Deposits | $ | 1,402,268 | $ | 1,326,181 | $ | 1,295,870 | $ | 1,371,839 | $ | 1,303,099 | ||||||||||
| Total Public Funds as a percent of Total Deposits | 44.2 | % | 42.0 | % | 43.9 | % | 43.9 | % | 39.6 | % | ||||||||||
-38-
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. Short-term borrowings totaled $2.0 million at March 31, 2017 and $6.5 million at December 31, 2016. Short-term borrowings consisted of a line of credit of $2.5 million, with no outstanding balance at March 31, 2017 and collateralized short-term borrowings from the Federal Home Loan Bank totaling $2.0 million at March 31, 2017. First Guaranty had senior long-term debt totaling $21.3 million as of March 31, 2017 and $22.1 million at December 31, 2016.
First Guaranty also had junior subordinated debentures totaling $14.6 million at March 31, 2017 and December 31, 2016.
First Guaranty had $266.1 million in Federal Home Loan Bank letters of credit as of March 31, 2017. Federal Home Loan Bank letters of credit totaled $226.1 million and $195.0 million as of December 31, 2016 and December 31, 2015, respectively. Federal Home Loan Bank letters of credit outstanding are obtained primarily for collateralizing public deposits. The increase in Federal Home Loan Bank letters of credit reflects First Guaranty's ability to transition public funds deposits into loans.
Total Shareholders' Equity
Total shareholders' equity increased to $126.9 million at March 31, 2017 from $124.3 million at December 31, 2016. The increase in shareholders' equity was principally the result of a $2.0 million increase in retained earnings and an increase of $0.5 million in accumulated other comprehensive income. The increase in accumulated other comprehensive income was primarily attributed to the increase in unrealized gains on available-for-sale securities during the period. The $2.0 million increase in retained earnings was due to net income of $3.3 million during the three month period ended March 31, 2017, partially offset by $1.2 million in cash dividends paid on our common stock.
-39-
Results of Operations for the First Quarter Ended March 31, 2017 and 2016
Performance Summary
Net income for the three months ended March 31, 2017 was $3.3 million, an increase of $0.1 million, or 3.2%, from $3.2 million for the three months ended March 31, 2016. The increase in net income for the three months ended March 31, 2017 as compared to the prior year period was primarily the result of increased interest income associated with loans and an increase in noninterest income, partially offset by increased interest and noninterest expense. Earnings per common share for the three months ended March 31, 2017 was $0.43 per common share, an increase of 4.9% or $0.02 per common share from $0.41 per common share for the three months ended March 31, 2016. The increase in earnings per share was caused by an increase in net income.
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. Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing 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 low interest rate environment in recent years and our interest sensitivity position is discussed below.
Net interest income for the three months ended March 31, 2017 and 2016 was $12.7 million and $11.8 million, respectively. The increase in net interest income for the three months ended March 31, 2017 was primarily due to an increase in the average balance of our total interest-earning assets and an increase in the average yield of our total interest-earning assets, partially offset by the increase in the average balance of our total interest-bearing liabilities and an increase in the average rate of our total interest-bearing liabilities. For the three months ended March 31, 2017, the average balance of our total interest-earning assets increased by $96.6 million to $1.5 billion, and the average yield of interest-earning assets increased by ten basis points to 4.12% from 4.02% for the three months ended March 31, 2016. The average rate of our total interest-bearing liabilities increased by seven basis points to 0.98% for the three months ended March 31, 2017 compared to 0.91% for the three months ended March 31, 2016. As a result, our net interest rate spread increased three basis points to 3.14% for the three months ended March 31, 2017 from 3.11% for the three months ended March 31, 2016. Our net interest margin also increased five basis points to 3.35% for the three months ended March 31, 2017 from 3.30% for the three months ended March 31, 2016.
Interest Income
Interest income increased $1.2 million, or 8.3%, to $15.6 million for the three months ended March 31, 2017. First Guaranty continues to transition assets from lower yielding securities to higher yielding loans in order to increase interest income. The increase in interest income resulted primarily from an increase in the the average balance of our total interest-earning assets along with an increase in the average yield of interest-earning assets. The average balance of interest-earning assets increased $96.6 million to $1.5 billion for the three months ended March 31, 2017 as compared to the prior year period. The average yield of interest-earning assets increased by ten basis points to 4.12% for the three months ended March 31, 2017 compared to 4.02% for the three months ended March 31, 2016.
Interest income on securities decreased $0.2 million, or 5.2%, to $3.4 million for the three months ended March 31, 2017 primarily as a result of a decrease in the average balance of securities. This reflects First Guaranty's strategy of moving assets from lower yielding securities into loans. The average balance of securities decreased $33.6 million to $542.9 million for the three months ended March 31, 2017 from $576.4 million for the three months ended March 31, 2016 due to a decrease in the average balance of our agency securities. The average yield on securities increased by four basis points to 2.54% for the three months ended March 31, 2017 from 2.50% for the three months ended March 31, 2016.
Interest income on loans increased $1.4 million, or 13.0%, to $12.2 million for the three months ended March 31, 2017 as a result of an increase in the average balance of loans. The average balance of loans increased by $140.9 million to $976.9 million for the three months ended March 31, 2017 from $836.0 million for the three months ended March 31, 2016 as a result of new loan originations, the majority of which were one-to-four family residential loans, the origination of commercial leases, commercial real estate loans and commercial and industrial loans. Partially offsetting the increase in the average balance of loans was a decrease in the average yield on loans, which decreased by 14 basis points to 5.06% for the three months ended March 31, 2017 from 5.20% for the three months ended March 31, 2016.
Interest Expense
Interest expense increased $0.3 million, or 13.1%, to $2.9 million for the three months ended March 31, 2017 from $2.6 million for the three months ended March 31, 2016 due to an increase in the average balance of interest-bearing deposits along with an increase in the average rate on interest-bearing deposits. The average balance of interest-bearing deposits increased by $70.6 million during the three months ended March 31, 2017 to $1.2 billion as a result of a $122.7 million increase in the average balance of interest-bearing demand and savings deposits. The increase was partially offset by a $52.0 million decrease in the average balance of time deposits during the same time period. The average rate of interest-bearing demand deposits increased by 24 basis points during the three months ended March 31, 2017 to 0.82%.
-40-
The following table sets 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 table as loans carrying a zero yield. Loans, net of unearned income, include loans held for sale. 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, 2017 | Three Months Ended March 31, 2016 | |||||||||||||||||||||||
| (in thousands except for %) | Average Balance | Interest | Yield/Rate (5) | Average Balance | Interest | Yield/Rate (5) | ||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Interest-earning deposits with banks | $ | 18,643 | $ | 19 | 0.41 | % | $ | 29,339 | $ | 30 | 0.41 | % | ||||||||||||
| Securities (including FHLB stock) | 542,860 | 3,403 | 2.54 | % | 576,423 | 3,589 | 2.50 | % | ||||||||||||||||
| Federal funds sold | 244 | - | 0.00 | % | 247 | - | 0.00 | % | ||||||||||||||||
| Loans held for sale | - | - | 0.00 | % | - | - | 0.00 | % | ||||||||||||||||
| Loans, net of unearned income | 976,855 | 12,200 | 5.06 | % | 835,950 | 10,801 | 5.20 | % | ||||||||||||||||
| Total interest-earning assets | 1,538,602 | $ | 15,622 | 4.12 | % | 1,441,959 | $ | 14,420 | 4.02 | % | ||||||||||||||
| Noninterest-earning assets: | ||||||||||||||||||||||||
| Cash and due from banks | 7,757 | 7,997 | ||||||||||||||||||||||
| Premises and equipment, net | 24,475 | 22,240 | ||||||||||||||||||||||
| Other assets | 4,885 | 4,797 | ||||||||||||||||||||||
| Total Assets | $ | 1,575,719 | $ | 1,476,993 | ||||||||||||||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||||||||||||
| Interest-bearing liabilities: | �� | |||||||||||||||||||||||
| Demand deposits | $ | 534,509 | $ | 1,082 | 0.82 | % | $ | 425,283 | $ | 614 | 0.58 | % | ||||||||||||
| Savings deposits | 97,767 | 36 | 0.15 | % | 84,341 | 18 | 0.09 | % | ||||||||||||||||
| Time deposits | 539,965 | 1,444 | 1.08 | % | 591,981 | 1,564 | 1.06 | % | ||||||||||||||||
| Borrowings | 41,256 | 366 | 3.60 | % | 41,638 | 392 | 3.79 | % | ||||||||||||||||
| Total interest-bearing liabilities | 1,213,497 | $ | 2,928 | 0.98 | % | 1,143,243 | $ | 2,588 | 0.91 | % | ||||||||||||||
| Noninterest-bearing liabilities: | ||||||||||||||||||||||||
| Demand deposits | 231,588 | 208,963 | ||||||||||||||||||||||
| Other | 4,478 | 3,588 | ||||||||||||||||||||||
| Total Liabilities | 1,449,563 | 1,355,794 | ||||||||||||||||||||||
| Shareholders' equity | 126,156 | 121,199 | ||||||||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 1,575,719 | $ | 1,476,993 | ||||||||||||||||||||
| Net interest income | $ | 12,694 | $ | 11,832 | ||||||||||||||||||||
| Net interest rate spread (1) | 3.14 | % | 3.11 | % | ||||||||||||||||||||
| Net interest-earning assets (2) | $ | 325,105 | $ | 298,716 | ||||||||||||||||||||
| Net interest margin (3), (4) | 3.35 | % | 3.30 | % | ||||||||||||||||||||
| Average interest-earning assets to interest-bearing liabilities | 126.79 | % | 126.13 | % | ||||||||||||||||||||
| (1) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
| (2) | Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. |
| (3) | Net interest margin represents net interest income divided by average total interest-earning assets. |
| (4) | The tax adjusted net interest margin was 3.37% and 3.34% for the above periods ended March 31, 2017 and 2016 respectively. A 35% tax rate was used to calculate the effect on securities income from tax exempt securities. |
| (5) | Annualized. |
-41-
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 losses. The provision is based on management's regular evaluation of current economic conditions in our specific markets as well as regionally and nationally, changes in the character and size of the loan portfolio, underlying collateral values securing loans, and other factors which deserve recognition in estimating loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.
For the three months ended March 31, 2017, the provision for loan losses was $0.7 million compared to $0.8 million for the same period in 2016. The allowance for loan losses at March 31, 2017 was $11.6 million and was 1.17% of total loans. The decrease in the provision was attributed to the improvement in credit quality of the loan portfolio. Total charge-offs were $0.3 million for the first three months of 2017 as compared to $1.3 million for the same period in 2016.
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.
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 available-for-sale securities and loans 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, 2017, an increase of $0.1 million from $1.8 million for the three months ended March 31, 2016. The increase was primarily due to higher gains on securities sales. Net securities gains were $0.5 million for the three months ended March 31, 2017 as compared to $0.4 million for the same period in 2016. The gains on securities sales occurred as First Guaranty sold investment securities in order to fund loan growth. We also continued to have gains from bonds that were called and paid off before their contractual maturity. Service charges, commissions and fees totaled $0.6 million for the three months ended March 31, 2017 and $0.7 million for the same period in 2016. ATM and debit card fees totaled $0.5 million for the three months ended March 31, 2017 as compared to $0.4 million for the same period in 2016. Other noninterest income totaled $0.4 million for the three months ended March 31, 2017 and 2016.
-42-
Noninterest Expense
Noninterest expense includes salaries and employee benefits, occupancy and equipment expense and other types of expenses. Noninterest expense totaled $9.0 million for the three months ended March 31, 2017 and $8.1 million for the three months ended March 31, 2016. Salaries and benefits expense totaled $4.8 million for the three months ended March 31, 2017 and $4.1 million for the three months ended March 31, 2016. Occupancy and equipment expense totaled $1.0 million for the three months ended March 31, 2017 and 2016. Other noninterest expense totaled $3.1 million for the three months ended March 31, 2017 and $3.0 million for the three months ended March 31, 2016. The largest increase in other noninterest expense occurred due to increased legal and professional fees. Included in non-interest expense were non-recurring expenses related to the pending acquisition/merger with Premier Bancshares, Inc./Synergy Bank headquartered in McKinney, Texas of approximately $0.3 million along with $26,000 in expenses related to the August 2016 flood that were incurred during the first quarter of 2017.
The following table presents, for the periods indicated, the major categories of other noninterest expense:
| Three Months Ended March 31, | ||||||||
| (in thousands) | 2017 | 2016 | ||||||
| Other noninterest expense: | ||||||||
| Legal and professional fees | $ | 631 | $ | 530 | ||||
| Data processing | 307 | 324 | ||||||
| ATM fees | 277 | 249 | ||||||
| Marketing and public relations | 299 | 245 | ||||||
| Taxes - sales, capital, and franchise | 197 | 186 | ||||||
| Operating supplies | 100 | 120 | ||||||
| Software expense and amortization | 209 | 199 | ||||||
| Travel and lodging | 204 | 154 | ||||||
| Telephone | 40 | 44 | ||||||
| Amortization of core deposits | 80 | 80 | ||||||
| Donations | 90 | 89 | ||||||
| Net costs from other real estate and repossessions | 77 | 96 | ||||||
| Regulatory assessment | 197 | 277 | ||||||
| Other | 429 | 437 | ||||||
| Total other noninterest expense | $ | 3,137 | $ | 3,030 | ||||
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. The provision for income taxes for the three months ended March 31, 2017 and 2016 was $1.7 million and $1.6 million, respectively. The provision for income taxes increased due to the increase in income before taxes. First Guaranty's statutory tax rate was 35.0% for the three months ended March 31, 2017, which was unchanged from the first quarter of 2016.
-43-
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.
Loans maturing within one year or less at March 31, 2017 totaled $154.6 million. At March 31, 2017, time deposits maturing within one year or less totaled $348.0 million. First Guaranty's held-to-maturity ("HTM") portfolio at March 31, 2017 was $98.8 million or 18.8% of the investment portfolio compared to $101.9 million or 20.4% at December 31, 2016. The securities in the HTM portfolio are used to collateralize public funds deposits and may also be used to secure borrowings with the Federal Home Loan Bank or Federal Reserve Bank. The agency securities in the HTM portfolio have maturities of 10 years or less. The mortgage backed securities have stated final maturities of 15 to 20 years at March 31, 2017. The HTM portfolio had a forecasted weighted average life of approximately 5.57 years based on current interest rates. Management regularly monitors the size and composition of the HTM portfolio to evaluate its effect on First Guaranty's liquidity. First Guaranty's available-for-sale ("AFS") portfolio was $426.0 million or 81.2% of the investment portfolio as of March 31, 2017. The majority of the AFS portfolio was comprised of U.S. Government Agencies, 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 $28.1 million and $45.8 million at March 31, 2017 and December 31, 2016, respectively. 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 also has a discount window line with the Federal Reserve Bank. We also maintain federal funds lines of credit at various correspondent banks with borrowing capacity of $95.5 million and a revolving line of credit for $2.5 million with an availability of $2.5 million as of March 31, 2017. 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 increased to $126.9 million at March 31, 2017 from $124.3 million at December 31, 2016. The increase in total shareholders' equity was principally the result of an increase in retained earnings of $2.0 million and a $0.5 million increase in the balance of accumulated other comprehensive income from a $4.0 million loss at December 31, 2016 to a $3.5 million loss at March 31, 2017. The $2.0 million increase in retained earnings was due to net income of $3.3 million during the three month period ended March 31, 2017, partially offset by $1.2 million in cash dividends paid on our common stock.
-44-
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 $1.0 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, 2017, the Bank's capital conservation buffer was 4.79% exceeding the minimum of 1.25% for 2017. As of March 31, 2017, the First Guaranty's capital conservation buffer was 4.49% exceeding the minimum of 1.25% for 2017.
At March 31, 2017, 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, 2017 | As of December 31, 2016 | ||||||
| Tier 1 Leverage Ratio | ||||||||
| Consolidated | 5.00% | 8.08% | 8.68% | |||||
| Bank | 5.00% | 9.11% | 9.88% | |||||
| Tier 1 Risk-based Capital Ratio | ||||||||
| Consolidated | 8.00% | 10.49% | 10.59% | |||||
| Bank | 8.00% | 11.83% | 12.05% | |||||
| Total Risk-based Capital Ratio | ||||||||
| Consolidated | 10.00% | 12.68% | 12.79% | |||||
| Bank | 10.00% | 12.79% | 12.99% | |||||
| Common Equity Tier One Capital Ratio | ||||||||
| Consolidated | 6.50% | 10.49% | 10.59% | |||||
| Bank | 6.50% | 11.83% | 12.05% | |||||
-45-
Asset/Liability Management and Market Risk
Our asset/liability management (ALM) process consists of quantifying, analyzing and controlling interest rate risk (IRR) to maintain reasonably stable net interest income levels under various interest rate environments. The principal objective of ALM is to maximize net interest income while operating within acceptable limits established for interest rate risk and to maintain adequate levels of liquidity.
The majority of our assets and liabilities are monetary in nature. Consequently, one of our most significant forms of market risk is interest rate risk, which is inherent in our lending and deposit-taking activities. Our assets, consisting primarily of loans secured by real estate and fixed rate securities in our investment portfolio, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. The board of directors of First Guaranty Bank has established two committees, the management asset liability committee and the board investment committee, to oversee the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. The management asset liability committee is comprised of senior officers of the Bank and meets as needed to review our asset liability policies and interest rate risk position. The board ALCO investment committee is comprised of certain members of the board of directors of the Bank and meets monthly. The management asset liability committee provides a monthly report to the board ALCO investment committee.
The need for interest sensitivity gap management is most critical in times of rapid changes in overall interest rates. We generally seek to limit our exposure to interest rate fluctuations by maintaining a relatively balanced mix of rate sensitive assets and liabilities on a one-year time horizon and greater than one-year time horizon. Because of the significant impact on net interest margin from mismatches in repricing opportunities, we monitor the asset-liability mix periodically depending upon the management asset liability committee's assessment of current business conditions and the interest rate outlook. We maintain exposure to interest rate fluctuations within prudent levels using varying investment strategies. These strategies include, but are not limited to, frequent internal modeling of asset and liability values and behavior due to changes in interest rates. We monitor cash flow forecasts closely and evaluate the impact of both prepayments and extension risk.
The following interest sensitivity analysis is one measurement of interest rate risk. This analysis reflects the contractual maturity characteristics of assets and liabilities over various time periods. This analysis does not factor in prepayments or interest rate floors on loans which may significantly change the report. This table includes nonaccrual loans in their respective maturity periods. The gap indicates whether more assets or liabilities are subject to repricing over a given time period. The interest sensitivity analysis at March 31, 2017 illustrated below reflects a liability-sensitive position with a negative cumulative gap on a one-year basis.
The interest spread and liability funding discussed below are directly related to changes in asset and liability mixes, volumes, maturities and repricing opportunities for interest-earning assets and interest-bearing liabilities. Interest-sensitive assets and liabilities are those which are subject to repricing in the near term, including both floating or adjustable rate instruments and instruments approaching maturity. The interest sensitivity gap is the difference between total interest-sensitive assets and total interest-sensitive liabilities. Interest rates on our various asset and liability categories do not respond uniformly to changing market conditions. Interest rate risk is the degree to which interest rate fluctuations in the marketplace can affect net interest income.
-46-
| March 31, 2017 | ||||||||||||||||||||
| Interest Sensitivity Within | ||||||||||||||||||||
| (in thousands except for %) | 3 Months Or Less | Over 3 Months thru 12 Months | Total One Year | Over One Year | Total | |||||||||||||||
| Earning Assets: | ||||||||||||||||||||
| Loans (including loans held for sale) | $ | 372,836 | $ | 51,130 | $ | 423,966 | $ | 570,473 | $ | 994,439 | ||||||||||
| Securities (including FHLB stock) | 28,381 | 6,201 | 34,582 | 492,078 | 526,660 | |||||||||||||||
| Federal Funds Sold | 291 | - | 291 | - | 291 | |||||||||||||||
| Other earning assets | 10,243 | - | 10,243 | - | 10,243 | |||||||||||||||
| Total earning assets | $ | 411,751 | $ | 57,331 | $ | 469,082 | $ | 1,062,551 | $ | 1,531,633 | ||||||||||
| Source of Funds: | ||||||||||||||||||||
| Interest-bearing accounts: | ||||||||||||||||||||
| Demand deposits | $ | 545,619 | $ | - | $ | 545,619 | $ | - | $ | 545,619 | ||||||||||
| Savings deposits | 100,256 | - | 100,256 | - | 100,256 | |||||||||||||||
| Time deposits | 198,900 | 149,101 | 348,001 | 173,923 | 521,924 | |||||||||||||||
| Short-term borrowings | 2,000 | - | 2,000 | - | 2,000 | |||||||||||||||
| Senior long-term debt | 21,326 | - | 21,326 | - | 21,326 | |||||||||||||||
| Junior subordinated debt | - | - | - | 14,638 | 14,638 | |||||||||||||||
| Noninterest-bearing, net | - | - | - | 325,870 | 325,870 | |||||||||||||||
| Total source of funds | $ | 868,101 | $ | 149,101 | $ | 1,017,202 | $ | 514,431 | $ | 1,531,633 | ||||||||||
| Period gap | $ | (456,350 | ) | $ | (91,770 | ) | $ | (548,120 | ) | $ | 548,120 | |||||||||
| Cumulative gap | $ | (456,350 | ) | $ | (548,120 | ) | $ | (548,120 | ) | $ | - | |||||||||
| Cumulative gap as a percent of earning assets | -29.8 | % | -35.8 | % | -35.8 | % | ||||||||||||||
-47-
Net interest income at risk measures the risk of a decline in earnings due to changes in interest rates. The first table below presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from an instantaneous and sustained parallel shift in the yield curve over a 12-month horizon at March 31, 2017. Shifts are measured in 100 basis point increments (+400 through -100 basis points) from base case. We do not present shifts less than 100 basis points because of the current low interest rate environment. The base case scenario encompasses key assumptions for asset/liability mix, loan and deposit growth, pricing, prepayment speeds, deposit decay rates, securities portfolio cash flows and reinvestment strategy and the market value of certain assets under the various interest rate scenarios. The base case scenario assumes that the current interest rate environment is held constant throughout the forecast period for a static balance sheet and the instantaneous shocks are performed against that yield curve. The second table presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from a gradual shift in the yield curve over a 12 month horizon.
| Instantaneous Changes in Interest Rates (In Basis Points) | Percent Change In Net Interest Income |
| +400 | (18.04)% |
| +300 | (13.32)% |
| +200 | (8.74)% |
| +100 | (4.10)% |
| Base | -% |
| -100 | 2.94% |
| Gradual Change in Interest Rates (In Basis Points) | Percent Change In Net Interest Income |
| +400 | (9.25)% |
| +300 | (6.84)% |
| +200 | (4.60)% |
| +100 | (2.12)% |
| Base | -% |
| -100 | 3.21% |
These scenarios above are both instantaneous shocks and gradual interest rate ramps that assume balance sheet management will mirror the base case. Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as anticipated. Additionally, a change in the U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the U.S. Treasury yield curve would cause significantly different changes to net interest income than indicated above. Strategic management of our balance sheet would be adjusted to accommodate these movements. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Also, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring exposure to interest rate risk.
-48-
Evaluation of Disclosure Controls and Procedures
As defined by the Securities and Exchange Commission in Exchange Act Rules 13a-15(e) and 15d-15(e), a Company's "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within time periods specified in the Commission's rules and forms. First Guaranty maintains such controls designed to ensure this material information is communicated to Management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decision regarding required disclosure.
Management, with the participation of the CEO and CFO, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, the CEO and CFO have concluded that the disclosure controls and procedures as of the end of the period covered by this quarterly report are effective. There were no changes in First Guaranty's internal control over financial reporting during the last fiscal quarter in the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, First Guaranty's internal control over financial reporting.
At March 31, 2017, First Guaranty is subject to various legal proceedings in the normal course of business and otherwise. It is our belief that the ultimate resolution of such claims will not have a material adverse effect on First Guaranty's financial position or results of operations.
There have been no material changes to our risk factors as disclosed in First Guaranty's Annual Report on Form 10-K.
-49-
The following exhibits are either filed as part of this report or are incorporated herein by reference.
| Exhibit Number | Exhibit |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.SCH | XBRL Taxonomy Extension Schema. |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. |
| 101.INS | XBRL Instance Document. |
-50-
Pursuant to the requirements of the Securities Exchange Act of 1934, First Guaranty has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST GUARANTY BANCSHARES, INC.
| Date: May 12, 2017 | By: /s/ Alton B. Lewis | |
| Alton B. Lewis | ||
| Principal Executive Officer | ||
| Date: May 12, 2017 | By: /s/ Eric J. Dosch | |
| Eric J. Dosch | ||
| Principal Financial Officer | ||
| Secretary and Treasurer |
-51-