First Guaranty Bancshares, Inc. - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10- K
(Mark
One)
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T
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
fiscal ended December 31, 2007.
or
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*
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from ______________ to ______________.
Commission
file number: 000-52748
FIRST
GUARANTY BANCSHARES, INC.
(Exact
name of registrant as specified in its charter)
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Louisiana
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26-0513559
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(State
or other jurisdiction
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
Number)
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400
East Thomas Street
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Hammond,
Louisiana
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70401
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(Address
of principal executive offices)
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(Zip
Code)
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(985)
345-7685
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(Registrant’s
telephone number, including area code)
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Not
Applicable
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(Former
name or former address, if changed since last report)
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Securities
registered pursuant to Section 12(b) of the
Act: None
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Securities
registered pursuant to Section 12(g) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, $1 par value per share
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None
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Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. YES * NO T
Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. YES * NO T
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 T NO *
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. *
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer * Accelerated
filer * Non-accelerated
filer * Smaller
reporting company T
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES * NO T
The
Company did not have public float at June 30, 2007. First Guaranty
Bancshares, Inc. was formed on July 30, 2007. The common stock is not
quoted or traded on an exchange. There is no established or liquid market for
the common stock.
As of March 27, 2008,
there were issued and outstanding 5,559,644 shares of the Registrant’s Common
Stock.
DOCUMENTS
INCORPORATED BY REFERENCE:
(1) Proxy
Statement for the 2008 Annual Meeting of Stockholders of the Registrant (Part
III).
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Page
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Part
I.
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Item
1
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3
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Item
1A
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11
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Item
1B
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Item
2
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Item
3
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Item
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Part
II.
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Item
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Item
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Item
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Item
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Item
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Item
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64
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Item
9a(T)
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Item
9B
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65
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Part
III.
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Item
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Item
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Item
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Item
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Item
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Part
IV.
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Item
15
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66
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- 2
-
(references to “our,” “we” or similar terms under this subheading
refer to First Guaranty Bancshares, Inc.)
Background
First
Guaranty Bancshares, Inc. (the “Company”) is a Louisiana corporation. On July
27, 2007, First Guaranty Bancshares, Inc. became the holding company for First
Guaranty Bank pursuant to an Agreement and Plan of Exchange dated as of July 27,
2007 (the “Agreement”). Pursuant to the Agreement, on the Effective Date, each
issued and outstanding share of the Bank’s common stock, par value $1.00 per
share, automatically was converted into and exchanged for one share of the
Company’s common stock, par value $1.00 per share. No stockholders exercised
dissenters’ rights of appraisal. On the Effective Date, the Bank
became a wholly owned subsidiary of the Company and the stockholders of the Bank
became stockholders of the Company. No additional shares were offered or sold in
connection with the Reorganization. The Company owns all of the outstanding
shares of common stock of First Guaranty Bank. The Company’s executive office is
located at 400 East Thomas Street, Hammond, Louisiana 70401. The telephone
number is (985) 345-7685. The Company is subject to extensive regulation by the
Federal Reserve Bank (“FRB”).
First
Guaranty Bank (“Bank”) is a state chartered commercial bank with 18 full service
banking facilities located in southeast, southwest and north Louisiana. The Bank
was organized under Louisiana law under the name Guaranty Bank and Trust Company
in 1934 and changed its name to First Guaranty Bank in 1971. Deposits are
insured up to the maximum legal limits by the FDIC. The Bank is not a member of
the Federal Reserve System. As of December 31, 2007, the Bank was the fifth
largest Louisiana-based bank and the fourth largest Louisiana bank not
headquartered in New Orleans, as measured by total
assets.
Business
Objective
The
Company’s business objective is to be a bank holding company of a
customer-driven financial institution focused on providing value to customers by
delivering products and services matched to customer needs. We emphasize
personal relationships and localized decision making. The Board of Directors and
senior Management have extensive experience and contacts in our marketplace and
are an important source of new business
opportunities.
The
Company’s business plan emphasizes both growth and profitability. From December
31, 2003 to December 31, 2007, assets have grown from $484.7 million to $807.3
million. During this period, the number of full-service banking center locations
increased from 15 locations to 18 locations. As a result of our acquisition of
Homestead Bancorp in July 2007, we acquired two branch offices. Upon completion
of our acquisition of First Community Bank, we will acquire two new branches,
one in Hammond, Louisiana and the other in Mandeville, Louisiana. The
acquisition is subject to customary conditions, including the approval of the
shareholders of First Community Holding Company and the approval of certain
financial institution regulatory authorities.
Market
Areas
Our
focus is on the bedroom communities of metropolitan markets, small cities and
rural areas in southeast, southwest and north Louisiana. In southeast Louisiana,
eight branches are located in Tangipahoa Parish in the towns of Amite, Hammond
(2), Independence, Kentwood and Ponchatoula (3). Two branches are located in
Livingston Parish, one branch in Denham Springs and the other in Walker. In
southwest Louisiana, we have branches in Abbeville in Vermillion Parish and in
Jennings in Jefferson Davis Parish. The remaining six branches are located in
north Louisiana, in Haynesville and Homer, which are both in Claiborne Parish;
in Oil City and Vivian, both in Caddo Parish; in Dubach in Lincoln Parish
and Benton, in Bossier Parish. Our core market remains in the home parish of
Tangipahoa where approximately 51.0% of deposits and 50.6% of net loans were
based in 2007.
Our
southeast Louisiana market is strategically located near the intersection of
Interstates 12 and 55, which places it at a crossroads of commercial activity
for the southeastern United States. In addition, this market area is largely
populated by the work force of several nearby petrochemical refineries and other
industrial plants and is a bedroom community for the urban centers of New
Orleans and Baton Rouge, which are approximately 45 miles and 60 miles,
respectively, from Hammond, where the main office is located. Hammond is home to
one of the largest medical centers in the state of Louisiana and the third
largest state university in Louisiana.
Our
southwest Louisiana market benefits from a profitable casino gaming industry and
substantial tourism revenue derived from the Louisiana Acadian culture. It also
has a concentration of oilfield and oilfield services activity and is a thriving
agricultural center for rice, sugarcane and crawfish.
Timber
cultivation and its related industries, including milling and logging, are key
commercial activities in the north Louisiana market. It is also an agrarian
center in which corn, cotton and soybeans are the primary crops. The poultry
industry, including independent poultry grower farms that contract with national
poultry processing companies, are also very important to the local
economy.
Banking
Products and Services
The
Company offers personalized commercial banking services to businesses,
professionals and individuals. We offer a variety of deposit products including
personal and business checking and savings accounts, time deposits, money market
accounts and NOW accounts. Other services provided include personal and
commercial credit cards, remote deposit capture, safe deposit boxes, money
orders, travelers’ checks and lockbox services. Also offered is 24-hour banking
through internet banking, voice response and 25 automated teller machines.
Although full trust powers have been granted, we do not actively operate or have
any present intentions to activate a trust
department.
Loans
The
Bank is engaged in a diversity of lending activities to serve the credit needs
of its customer base including commercial loans, commercial real estate loans,
real estate construction loans, mortgage loans, agricultural loans, home equity
lines of credit, equipment loans, inventory financing and student loans. In
addition, the Bank provides consumer loans for a variety of reasons such as the
purchase of automobiles, recreational vehicles or boats, investments or other
consumer needs. The Bank issues MasterCard and Visa credit cards and provides
merchant processing services to commercial customers. The loan portfolio is
divided, for regulatory purposes, into four broad classifications: (i) real
estate loans, which include all loans secured in whole or part by real estate;
(ii) agricultural loans, comprised of all farm loans; (iii) commercial and
industrial loans, which include all commercial and industrial loans that are not
secured by real estate; and (iv) consumer loans.
Competition
The
banking business in Louisiana is extremely competitive. We compete for deposits
and loans with existing Louisiana and out-of-state financial institutions that
have longer operating histories, larger capital reserves and more established
customer bases. The competition includes large financial services companies and
other entities in addition to traditional banking institutions such as savings
and loan associations, savings banks, commercial banks and credit
unions.
Many of
our larger competitors have a greater ability to finance wide-ranging
advertising campaigns through their greater capital resources. Marketing efforts
depend heavily upon referrals from officers, directors and shareholders,
selective advertising in local media and direct mail solicitations. We compete
for business principally on the basis of personal service to customers, customer
access to officers and directors and competitive interest rates and
fees.
In the
financial services industry, intense market demands, technological and
regulatory changes and economic pressures have eroded industry classifications
in recent years that were once clearly defined. Financial institutions have been
forced to diversify their services, increase rates paid on deposits and become
more cost effective, as a result of competition with one another and with new
types of financial services companies, including non-banking competitors. Some
of the results of these market dynamics in the financial services industry have
been a number of new bank and non-bank competitors, increased merger activity,
and increased customer awareness of product and service differences among
competitors. These factors could affect business prospects.
Employees
At
December 31, 2007, we had 204 full-time and 36 part-time employees. None of our
employees are represented by a collective bargaining group. The Company has
a good relationship with its employees.
Data
Processing
Since
November 2001, customer information has been housed on equipment owned by
Financial Information Service Corporation or FISC. FISC is a cooperative jointly
owned by a number of Louisiana and Mississippi state banks that are
currently serviced by FISC. The 2007 annual cost of this service was $696,000.
The current arrangements are adequate and are expected to be able to accommodate
our needs for the foreseeable future.
Information
Technology Infrastructure
Our
wide area network links more than 25 remote sites using a fully meshed multiple
protocol layered switch network with virtual private networking throughout to
authenticate to a Novell-Citrix hybrid server ecosystem. We have over 350
embedded devices that can be remotely administered in a secure manner from any
other location. The employees are not limited to their branch location, but
instead can access the network and authenticate securely from any branch. We
have a redundant back-up site located at the far northwestern corner of the
state in Homer, Louisiana.
Subsidiaries
The
Company is a one-bank holding company with First Guaranty Bank as its
subsidiary. The Company also acquired a non-bank subsidiary during the Homestead
Bank merger. See Note 3 to the Consolidated Financial Statements. Homestead
Bancorp Trust I is a trust established for the sole purpose of issuing trust
preferred securities and using the proceeds to purchase junior subordinated
debentures issued by Homestead Bancorp. These securities were assumed by the
Company in connection with the acquisition of Homestead
Bancorp.
Regulatory
Compliance
First
Guaranty Bank is a Federal Deposit Insurance Corporation (“FDIC”) insured,
non-member Louisiana state bank. Regulation of financial institutions is
intended primarily to protect depositors, the deposit insurance funds of the
FDIC and the banking system as a whole, and generally is not intended to protect
stockholders or other investors.
The
Bank is subject to regulation and supervision by both the Louisiana Office of
Financial Institutions and the FDIC. In addition, the Bank is subject to various
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that are made and the interest that is charged on those
loans, and limitations on the types of investments that are made and the types
of services that are offered. Various consumer laws and regulations also affect
operations. See “Regulation and Supervision.”
Regulation
and Supervision
Banking
is a complex, highly regulated industry. Consequently, the growth and earnings
performance of First Guaranty Bancshares, Inc. and its subsidiary bank can be
affected not only by Management decisions and general and local economic
conditions, but also by the statutes administered by, and the regulations and
policies of, various governmental regulatory authorities. These authorities
include, but are not limited to, the FRB, the FDIC, the Louisiana Office of
Financial Institutions (“OFI”) the U.S. Internal Revenue Service and state
taxing authorities. The effect of these statutes, regulations and policies and
any changes to any of them can be significant and cannot be
predicted.
The
primary goals of the regulatory scheme are to maintain a safe and sound banking
system and to facilitate the conduct of sound monetary policy. In furtherance of
these goals, Congress has created several largely autonomous regulatory agencies
and enacted numerous laws that govern banks, bank holding companies and the
banking industry. The system of supervision and regulation applicable to First
Guaranty Bancshares, Inc. establishes a comprehensive framework for their
respective operations and is intended primarily for the protection of the FDIC’s
deposit insurance funds, depositors and the public, rather than the shareholders
and creditors. The following is an attempt to summarize some of the relevant
laws, rules and regulations governing banks and bank holding companies, but does
not purport to be a complete summary of all such applicable laws, rules and
regulations. The descriptions are qualified in their entirety by reference to
the specific statutes and regulations discussed.
First
Guaranty Bancshares, Inc.
General.
First Guaranty Bancshares, Inc. is a bank holding company registered with, and
subject to regulation by, the FRB under the Bank Holding Company Act of 1956, as
amended (the “Bank Holding Company Act”). The Bank Holding Company Act and other
federal laws subject bank holding companies to particular restrictions on the
types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for
violations of laws and regulations.
In
accordance with FRB policy, a bank holding company, such as First Guaranty
Bancshares, Inc., is expected to act as a source of financial strength to its
subsidiary banks and commit resources to support its banks. This support may be
required under circumstances when we might not be inclined to do so absent this
FRB policy.
Certain
Acquisitions. Federal law requires every bank holding company to obtain
the prior approval of the FRB before (i) acquiring more than five percent of the
voting stock of any bank or other bank holding company, (ii) acquiring all or
substantially all of the assets of any bank or bank holding company, or (iii)
merging or consolidating with any other bank holding
company.
Additionally,
federal law provides that the FRB may not approve any of these transactions if
it would result in or tend to create a monopoly or substantially lessen
competition or otherwise function as a restraint of trade, unless the
anti-competitive effects of the proposed transaction are clearly outweighed by
the public interest in meeting the convenience and needs of the community to be
served. The FRB is also required to consider the financial and managerial
resources and future prospects of the bank holding companies and banks concerned
and the convenience and needs of the community to be served. Further, the FRB is
required to consider the record of a bank holding company and its subsidiary
bank(s) in combating money laundering activities in its evaluation of bank
holding company merger or acquisition transactions.
Under
the Bank Holding Company Act, if adequately capitalized and adequately managed,
any bank holding company located in Louisiana may purchase a bank located
outside of Louisiana. However, as discussed below, restrictions currently exist
on the acquisition of a bank that has only been in existence for a limited
amount of time or will result in specified concentrations of
deposits.
Change
in Bank Control. The Bank Holding Company Act and the Change in Bank
Control Act of 1978, as amended, generally require FRB approval prior to any
person or company acquiring control of a bank holding company. Control is
conclusively presumed to exist if an individual or company acquires 25% or more
of any class of voting securities of the bank holding company. Control is
rebuttably presumed to exist if a person or company acquires 10% or more, but
less than 25%, of any class of voting securities.
Permitted
Activities. Generally, bank holding companies are prohibited by federal
law from engaging in or acquiring direct or indirect control of more than 5% of
the voting shares of any company engaged in any activity other than (i) banking
or managing or controlling banks or (ii) an activity that the FRB determines to
be so closely related to banking as to be a proper incident to the business of
banking.
Activities
that the FRB has found to be so closely related to banking as to be a proper
incident to the business of banking include:
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factoring
accounts receivable;
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making,
acquiring, brokering or servicing loans and usual related
activities;
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leasing
personal or real property;
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operating
a non-bank depository institution, such as a savings
association;
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trust
company functions;
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financial
and investment advisory activities;
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conducting
discount securities brokerage
activities;
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underwriting
and dealing in government obligations and money market
instruments;
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providing
specified Management consulting and counseling
activities;
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performing
selected data processing services and support
services;
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acting
as agent or broker in selling credit life insurance and other types of
insurance in connection with credit transactions;
and
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performing
selected insurance underwriting
activities.
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Despite
prior approval, the FRB has the authority to require a bank holding company to
terminate an activity or terminate control of or liquidate or divest certain
subsidiaries or affiliates when the FRB believes the activity or the control of
the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. A bank
holding company that qualifies and elects to become a financial holding company
is permitted to engage in additional activities that are financial in nature or
incidental or complementary to financial activity. The Bank Holding Company Act
expressly lists the following activities as financial in
nature:
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lending,
exchanging, transferring, investing for others, or safeguarding money or
securities;
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insuring,
guaranteeing or indemnifying against loss or harm, or providing and
issuing annuities, and acting as principal, agent or broker for these
purposes, in any state;
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providing
financial, investment or advisory
services;
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issuing
or selling instruments representing interests in pools of assets
permissible for a bank to hold
directly;
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underwriting,
dealing in or making a market in
securities;
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other
activities that the FRB may determine to be so closely related to banking
or managing or controlling banks as to be a proper incident to managing or
controlling banks;
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foreign
activities permitted outside of the United States if the FRB has
determined them to be usual in connection with banking operations
abroad;
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merchant
banking through securities or insurance affiliates;
and
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insurance
company portfolio investments.
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To
qualify to become a financial holding company, First Guaranty Bancshares, Inc.
and its subsidiary bank must be well-capitalized and well managed and must have
a Community Reinvestment Act rating of at least satisfactory. Additionally,
First Guaranty Bancshares, Inc. would be required to file an election with the
FRB to become a financial holding company and to provide the FRB with 30 days’
written notice prior to engaging in a permitted financial activity. A bank
holding company that falls out of compliance with these requirements may be
required to cease engaging in some of its activities. First Guaranty Bancshares,
Inc. currently has no plans to make a financial holding company
election.
Anti-tying
Restrictions. Bank holding companies and affiliates are prohibited from
tying the provision of services, such as extensions of credit, to other services
offered by a holding company or its affiliates.
Deposit
Insurance Assessments. Banks must pay assessments to the FDIC for federal
deposit insurance protection. The FDIC has adopted a risk-based assessment
system. Under this system, FDIC-insured depository institutions pay insurance
premiums at rates based on their risk classification. Institutions assigned to
higher risk classifications (that is, institutions that pose a higher risk of
loss to their respective deposit insurance funds) pay assessments at higher
rates than institutions that pose a lower risk. An institution’s risk
classification is assigned based on its capital levels and the level of
supervisory concern the institution poses to the regulators. In addition, the
FDIC can impose special assessments in certain instances. The FDIC may terminate
its insurance of deposits if it finds that the institution has engaged in unsafe
and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC. A bank’s deposit insurance assessments may
increase or decrease depending on the risk assessment classification to which we
are assigned by the FDIC. Any increase in insurance assessments could have an
adverse effect on First Guaranty’s earnings.
Other
Regulations. Interest and other charges collected or contracted is
subject to state usury laws and federal laws concerning interest rates. Loan
operations are also subject to federal laws applicable to credit transactions,
such as:
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the
federal “Truth-In-Lending Act,” governing disclosures of credit terms to
consumer borrowers;
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the
“Home Mortgage Disclosure Act of 1975,” requiring financial institutions
to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it
serves;
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the
“Equal Credit Opportunity Act,” prohibiting discrimination on the basis of
race, creed or other prohibited factors in extending
credit;
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the
“Fair Credit Reporting Act of 1978,” governing the use and provision of
information to credit reporting
agencies;
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the
“Real Estate Settlement Procedures
Act”
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the
“Fair Debt Collection Act,” governing the manner in which consumer debts
may be collected by collection agencies;
and
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the
rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal
laws.
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The
deposit operations are subject to:
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the
“Right to Financial Privacy Act,” which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial
records;
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the
“Electronic Funds Transfer Act” and Regulation E issued by the FRB to
implement that act, which govern automatic deposits to and withdrawals
from deposit accounts and customers’ rights and liabilities arising from
the use of automated teller machines and other electronic banking
services;
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the
“Truth-In Savings Act” and
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the
“Expedited Funds Availability Act”.
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Dividends.
The Company is a legal entity separate and distinct from its subsidiary, First
Guaranty Bank. The majority of the Company’s revenue is from dividends paid to
the Company by the Bank. First Guaranty Bank may not pay dividends or distribute
capital assets if it is in default on any assessment due to the FDIC. The FRB
has indicated generally that it may be an unsafe or unsound practice for a bank
holding company to pay dividends unless the bank holding company’s net income
over the preceding year is sufficient to fund the dividends and the expected
rate of earnings retention is consistent with the organization’s capital needs,
asset quality and overall financial condition.
First
Guaranty Bank is also subject to regulations that impose minimum regulatory
capital and minimum state law earnings requirements that affect the amount of
cash available for distribution. In addition, under the Louisiana Banking Law,
dividends may not be paid if it would reduce the unimpaired surplus below 50% of
outstanding capital stock in any year. The Company does not expect that these
laws, regulations or policies will materially affect the ability of the Bank to
pay dividends.
Capital
Adequacy. The FRB monitors the capital adequacy of bank holding
companies, such as First Guaranty Bancshares, Inc., and the OFI and FDIC monitor
the capital adequacy of First Guaranty Bank. The federal bank regulators use a
combination of risk-based guidelines and leverage ratios to evaluate capital
adequacy and consider these capital levels when taking action on various types
of applications and when conducting supervisory activities related to safety and
soundness. The risk-based guidelines apply on a consolidated basis to bank
holding companies with consolidated assets of $500 million or more and,
generally, on a bank-only basis for bank holding companies with less than $500
million in consolidated assets. Each insured depository subsidiary of a bank
holding company with less than $500 million in consolidated assets is expected
to be “well-capitalized.”
The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and
their holding companies, to account for off-balance sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance sheet
items, such as letters of credit and unfunded loan commitments, are assigned to
broad risk categories, each with appropriate risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
The
minimum guideline for the ratio of total capital to risk-weighted assets is 8%.
Total capital consists of two components, Tier 1 Capital and Tier 2 Capital.
Tier 1 Capital generally consists of common stock, minority interests in the
equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock and a limited amount of qualifying cumulative perpetual preferred stock,
less goodwill and other specified intangible assets. Tier 1 Capital must equal
at least 4% of risk-weighted assets. Tier 2 Capital generally consists of
subordinated debt, preferred stock (other than that which is included in Tier I
Capital), and a limited amount of loan loss reserves. The total amount of Tier 2
Capital is limited to 100% of Tier 1 Capital.
In
addition, the FRB has established minimum leverage ratio guidelines for bank
holding companies with assets of $500 million or more. These guidelines provide
for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other
specified intangible assets, of 3% for bank holding companies that meet
specified criteria, including having the highest regulatory rating and
implementing the FRB’s risk-based capital measure for market risk. All other
bank holding companies with assets of $500 million or more generally are
required to maintain a leverage ratio of at least 4%. The guidelines also
provide that bank holding companies of such size experiencing internal growth or
making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without reliance on
intangible assets. The FRB considers the leverage ratio and other indicators of
capital strength in evaluating proposals for expansion or new activities. The
FRB and the FDIC recently adopted amendments to their risk-based capital
regulations to provide for the consideration of interest rate risk in the
agencies’ determination of a banking institution’s capital
adequacy.
Failure
to meet capital guidelines could subject a bank or bank holding company to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of federal deposit insurance, a prohibition on accepting brokered
deposits and other restrictions on its business.
Concentrated
Commercial Real Estate Lending Regulations. The FRB and FDIC have
recently promulgated guidance governing financial institutions with
concentrations in commercial real estate lending. The guidance provides that a
company has a concentration in commercial real estate lending if (i) total
reported loans for construction, land development, and other land represent 100%
or more of total capital or (ii) total reported loans secured by multifamily and
non-farm residential properties and loans for construction, land development,
and other land represent 300% or more of total capital and the outstanding
balance of such loans has increased 50% or more during the prior 36 months. If a
concentration is present, Management must employ heightened risk Management
practices including board and Management oversight and strategic planning,
development of underwriting standards, risk assessment and monitoring through
market analysis and stress testing, and increasing capital requirements. The
Company is subject to these regulations.
Prompt
Corrective Action Regulations. Under the prompt corrective action
regulations, bank regulators are required and authorized to take supervisory
actions against undercapitalized banks. For this purpose, a bank is placed in
one of the following five categories based on its
capital:
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well-capitalized
(at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total
risk-based capital);
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adequately
capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital
and 8% total risk-based capital);
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undercapitalized
(less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3%
leverage capital);
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significantly
undercapitalized (less than 6% total risk-based capital, 3% Tier 1
risk-based capital or 3% leverage capital);
and
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critically
undercapitalized (less than 2% tangible
capital).
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Federal
banking regulators are required to take various mandatory supervisory actions
and are authorized to take other discretionary actions with respect to
institutions in the three undercapitalized categories. The severity of the
action depends upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, banking regulators must appoint a
receiver or conservator for an institution that is “critically
undercapitalized.” The federal banking agencies have specified by regulation the
relevant capital level for each category. An institution that is categorized as
“undercapitalized”, “significantly undercapitalized” or “critically
undercapitalized” is required to submit an acceptable capital restoration plan
to its appropriate federal banking agency. A bank holding company must guarantee
that a subsidiary depository institution meets its capital restoration plan,
subject to various limitations. The controlling holding company’s obligation to
fund a capital restoration plan is limited to the lesser of 5% of an
“undercapitalized” subsidiary’s assets at the time it became “undercapitalized”
or the amount required to meet regulatory capital requirements. An
“undercapitalized” institution is also generally prohibited from increasing its
average total assets, making acquisitions, establishing any branches or engaging
in any new line of business, except under an accepted capital restoration plan
or with regulatory approval. The regulations also establish procedures for
downgrading an institution to a lower capital category based on supervisory
factors other than capital.
Restrictions
on Transactions with Affiliates and Loans to Insiders. First
Guaranty Bank
is subject to the provisions of Section 23A of the FRB Act and its implementing
regulations. These provisions place limits on the amount
of:
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First
Guaranty Bank’s
loans or extensions of credit to
affiliates;
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First
Guaranty Bank’s investment
in affiliates;
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assets
that First Guaranty Bank
may purchase from affiliates, except for real and personal property
exempted by the FRB;
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the
amount of loans or extensions of credit to third parties collateralized by
the securities or obligations of affiliates;
and
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First
Guaranty Bank’s
guarantee, acceptance or letter of credit issued on behalf of an
affiliate.
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The
total amount of the above transactions is limited in amount, as to any one
affiliate, to 10% of First Guaranty Bank’s
capital and surplus and, as to all affiliates combined, to 20% of its capital
and surplus. In addition to the limitation on the amount of these transactions,
each of the above transactions must also meet specified collateral
requirements.
First
Guaranty Bank
is also subject to the provisions of Section 23B of the FRB Act and its
implementing regulations, which, among other things, prohibit First Guaranty
Bank
from engaging in any transaction with an affiliate, such as First Guaranty
Bancshares, Inc., unless the transaction is on terms substantially the same, or
at least as favorable to First Guaranty Bank
as those prevailing at the time for comparable transactions with nonaffiliated
companies.
First
Guaranty Bank
is also subject to restrictions on extensions of credit to its executive
officers, directors, principal shareholders and their related interests. These
types of extensions of credit must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with third parties and must not involve more than the
normal risk of repayment or present other unfavorable
features.
Anti-terrorism
Legislation.
Financial institutions are required to establish anti-money laundering programs.
In 2001, the USA PATRIOT Act was enacted. The USA PATRIOT Act
significantly enhanced the powers of the federal government and law enforcement
organizations to combat terrorism, organized crime and money laundering. While
the USA PATRIOT Act imposed additional anti-money laundering requirements, these
additional requirements are not material to our
operations.
Aside
from the above, the USA PATRIOT Act also requires the federal banking regulators
to assess the effectiveness of an institution’s anti-money laundering program in
connection with merger and acquisition transactions. Failure to
maintain an effective anti-money laundering program is grounds for the denial of
merger or acquisition transactions.
Federal
Securities Laws
First
Guaranty Bancshares, Inc. common stock is registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934. First Guaranty
Bancshares, Inc. will continue to be subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Securities Exchange Act of 1934.
Non-Banking Activities
The
Gramm-Leach-Bliley Act of 1999 eliminated most of the barriers to affiliations
among banks and securities firms, insurance companies and other financial
companies previously imposed under federal banking laws if certain criteria are
satisfied. The financial subsidiaries of “well capitalized” banks are generally
permitted to engage in activities that are financial in nature including
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance brokerage and underwriting activities; merchant
banking activities; and other activities that the Federal Reserve Board has
determined to be closely related to banking.
Brokered Deposits and Pass-Through Insurance
An
FDIC-insured depository institution cannot accept, rollover or renew brokered
deposits unless it is well capitalized or adequately capitalized and receives a
waiver from the FDIC. A depository institution that cannot receive brokered
deposits also cannot offer “pass-through” insurance on certain employee benefit
accounts. Whether or not it has obtained such a waiver, an adequately
capitalized depository institution may not pay an interest rate on any deposits
in excess of 75 basis points over certain prevailing market rates specified by
regulation. As of December 31, 2007, the Bank
did not have brokered deposits.
Interstate Branching
Effective
June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 permits state and national banks with different home states to
operate branches across state lines with approval of the appropriate federal
banking agency, unless the home state of a participating bank passed legislation
“opting out” of interstate banking. This federal law allows branching through
acquisition only, which means a bank must acquire another bank and merge the two
institutions in order to operate across state lines. If a state opted out of
interstate branching within a specified time period, no bank in any other state
may establish a branch in the state which has opted out, whether through an
acquisition or de
novo. Louisiana did not opt out of this law. The Company currently has no
branches located outside of Louisiana.
FDIC
Deposit Insurance Assessments
The
Bank
is subject to FDIC deposit insurance assessments for deposit insurance
under the Deposit Insurance Fund. The FDIC’s current risk-based system places a
bank
in a risk assessment category, principally on the basis of its capital level and
an evaluation of the bank’s
risk to the fund, and bases premiums on the probability of loss to the FDIC with
respect to each individual bank.
As
of December 2007, the Bank
was a risk category I for assessment purposes. Total assessments paid to the
FDIC amounted to $91,900 in 2007 and $167,900 in 2006.Under the provisions of
the Federal Deposit Insurance Reform Act of 2005, the Bank
received a one-time FDIC assessment credit of $245,000 to be used against
deposit insurance assessments beginning January 1, 2007. This credit was used up
completely to offset the FDIC assessment for 2007.
The
FDIC may terminate the deposit insurance of any insured depository institution
if it determines that the institution has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations
or has violated any applicable law, regulation, order or any condition imposed
by an agreement with the FDIC. If insurance of accounts is terminated, the
accounts at the institution at the time of the termination, less subsequent
withdrawals, continue to be insured for a period of six months to two years, as
determined by the FDIC. The Bank
is not aware of any existing circumstances which would result in the termination
of deposit insurance.
Community
Reinvestment Act
Under
the Community Reinvestment Act, or CRA, a financial institution has a continuing
and affirmative obligation, consistent with its safe and sound operation, to
help meet the credit needs of its entire community, including low and moderate
income neighborhoods. The FDIC assigns banks
a CRA rating of “outstanding,” “satisfactory,” “needs to improve” or
“substantial noncompliance,” and the bank
must publicly disclose its rating. The FDIC rated the Bank
as “satisfactory” in meeting community credit needs under the CRA at its most
recent CRA performance examination.
Privacy
Provisions
Under
the Gramm-Leach-Bliley Act, federal banking
regulators have adopted new rules requiring disclosure of privacy policies and
information sharing practices to consumers. These rules prohibit depository
institutions from sharing customer information with nonaffiliated parties
without the customer’s consent, except in limited situations, and require
disclosure of privacy policies to consumers and, in some circumstances, enable
consumers to prevent disclosure of personal information to nonaffiliated third
parties. In addition, the Fair and Accurate Credit Transactions Act of 2003
requires banks
to notify their customers if they report negative information about them to a
credit bureau or if they grant credit to them on terms less favorable than those
generally available.
The
Company has instituted risk Management systems to comply with all required
privacy provisions and believes that the new disclosure requirements and
implementation of the privacy laws will not materially increase operating
expenses.
Check
21
The
Check 21 Act facilitates check truncation and electronic check exchange by
authorizing a new negotiable instrument called a “substitute check”. The Act
provides that a properly prepared substitute check is the legal equivalent of
the original check for all purposes. This law supercedes contradictory state
laws (i.e., state laws that allow customers to demand the return of original
checks).
Although
the Check 21 Act does not require any bank
to create substitute checks or to accept checks electronically, it does require
banks
to accept a legally equivalent substitute check in place of an original check
after the Check 21 Act’s effective date of October 28,
2004.
Sarbanes-Oxley Act
The
Company is also subject to the Sarbanes-Oxley Act of 2002, which has
imposed corporate governance and accounting oversight restrictions and
responsibilities on the board of directors, executive officers and independent
auditors. The law has increased the time spent discharging responsibilities and
costs for audit services. In 2007, Management is required to report on the
effectiveness of internal controls and procedures.
Recent
Developments
Definitive
Agreement with First Community Holding
Company. In November 2007, First Guaranty Bancshares,
Inc., parent company
of First Guaranty
Bank,
and First Community
Holding Company,
parent company
of First Community
Bank,
entered into a
definitive agreement under which First Community Holding Company
will be acquired for
approximately $19 million in
cash.
Under
the terms of the agreement, First Guaranty Bancshares, Inc. will acquire all of
the issued and outstanding shares of common stock of First Community Holding
Company
for the cash purchase price of $34.06 per share. In addition, each
outstanding and unexercised option to acquire a share of common stock of First
Community Holding Company
will be converted into the right to receive cash in an amount equal to
$26.04. The transaction has been approved by the boards of directors
of First Guaranty Bancshares, Inc. and First Community Holding Company. The
acquisition is subject to customary conditions, including the approval of the
shareholders of First Community Holding Company
and the approval of certain financial institution regulatory
authorities.
Item
1A. – Risk Factors
Various
factors, such as general economic conditions in the U.S. and Louisiana,
regulatory and legislative initiatives and increasing competition could impact
our business. There are also several other risks, many beyond our control, which
could adversely affect our business, results of operations and/or financial
condition.
Risks
Associated with our Business
We
may not be able to successfully maintain and manage our growth.
Since
December 31, 2002, assets have grown 85.6%, loan balances have grown 63.7% and
deposits have grown 100.1%. Continued growth depends, in part, upon
the ability to expand market presence, to successfully attract core deposits,
and to identify attractive commercial lending
opportunities.
Management
cannot be certain as to its ability to manage increased levels of assets and
liabilities. We may be required to make additional investments in
equipment and personnel to manage higher asset levels and loans balances, which
may adversely impact our efficiency ratio, earnings and shareholder
returns.
In
addition, franchise growth is anticipated through acquisitions and de novo
branching. The ability to successfully integrate such acquisitions into our
consolidated operations will have a direct impact on our financial condition and
results of operations.
Our loan portfolio consists of a high percentage of loans secured by non-farm non-residential real estate. These loans are riskier than loans secured by one- to four-family properties.
At
December 31, 2007, $236.5 million, or 41.1% of the loan portfolio consisted of
non-farm non-residential real estate loans (primarily loans secured by
commercial real estate such as office buildings, hotels and gaming facilities).
Management intends to continue to emphasize the origination of these types of
loans. These loans generally expose a lender to greater risk of
nonpayment and loss than one- to four-family residential mortgage loans because
repayment of the loans often depends on the successful operation and income
stream of the borrowers. Such loans typically involve larger loan balances to
single borrowers or groups of related borrowers compared to one- to four-family
residential loans. Consequently, an adverse development with respect to one loan
or one credit relationship can expose us to a significantly greater risk of loss
compared to an adverse development with respect to a one- to four-family
residential mortgage loan.
Emphasis
on the origination of short-term loans could expose us to increased lending
risks.
At
December 31, 2007, $547.4 million, or 95.2% of our loan portfolio consisted of
loans that mature within five years. These loans typically provide for payments
based on a twenty-year amortization schedule. This results in our borrowers
having significantly higher final payments due at maturity, known as a “balloon
payment”. In the event our borrowers are unable to make their balloon payments
when they are due, we may incur significant losses in our loan portfolio.
Moreover, while the shorter maturities of our loan portfolio help us to manage
our interest rate risk, they also increase the reinvestment risk associated with
new loan originations. To mitigate this risk, we generally will originate loans
to existing customers. There can be no assurance that during an economic
slow-down we might not incur significant losses as our loan portfolio
matures.
We
may be unable to effectively integrate the future acquisition with and into our
operations.
The
future growth of First Guaranty Bank
and First Guaranty Bancshares, Inc. will depend, in part, on the success of the
merger of First Community Holding Company
and its subsidiary with First Guaranty Bancshares, Inc. and its subsidiary. The
success of this acquisition will, in turn, depend on a number of factors,
including: First Guaranty Bank’s
ability to integrate First Community Bank’s
branches into the current operations of First Guaranty Bank;
First Guaranty Bank’s
and First Community Bank’s
ability to limit the outflow of deposits; the ability to control the incremental
noninterest expense from the merger; and the ability to retain and integrate the
appropriate personnel of First Community Bank
into our consolidated operations.
We
could potentially recognize goodwill impairment charges
post-merger.
The
acquisition of First Community Holding Company and its subsidiary will be
accounted for using the purchase method of accounting. In accordance with
applicable accounting literature, we estimate that goodwill totaling $8.3
million will be recorded under Statement of Financial Accounting Standards No.
142., Goodwill
and Other Intangible Assets (“SFAS No. 142”). As a result, goodwill is
approximately 1.1% of $955.2 million of pro forma consolidated total assets at
December 31, 2007. Pursuant to the provisions of SFAS No. 142, we will annually
measure the fair value of our investment in our acquisitions to determine that
such fair value equals or exceeds the carrying value of its investment,
including goodwill. If the fair value of our investment in First Community Bank
does not equal or exceed its carrying value, we will be required to record
goodwill impairment charges which may adversely affect future earnings. The fair
value of a banking franchise can fluctuate downward based on a number of factors
that are beyond Management’s control, (e.g.
adverse trends in interest rates and increased loan losses). There can be no
assurance that our banking franchise value will not decline, thereby
necessitating goodwill impairment charges to
operations.
Hurricane
Activity in Louisiana can have an adverse impact on our market
area.
Our
market area in Southeast Louisiana is close to New Orleans and the Gulf of
Mexico, an area which is susceptible to hurricanes and tropical
storms.
Hurricane
Katrina hit the greater New Orleans area in August 2005. The hurricane caused
widespread property damage, required the relocation of an unprecedented number
of residents and business operations, and severely disrupted normal economic
activity in the impacted areas. The hurricane affected our loan originations and
impacted our deposit base. While Hurricane Katrina did not affect our operations
as adversely as other areas of Southeast Louisiana, future hurricane activity
may have a severe and adverse affect on our operations. More generally, our
ability to compete effectively with financial institutions whose operations are
not concentrated in areas affected by hurricanes or whose resources are greater
than ours, will depend primarily on our ability to continue normal business
operations following a hurricane. The severity and duration of the effects of
hurricanes will depend on a variety of factors that are beyond our control,
including the amount and timing of government, private and philanthropic
investments including deposits in the region, the pace of rebuilding and
economic recovery in the region and the extent to which a hurricane’s property
damage is covered by insurance.
None
of the effects described above can be accurately predicted or quantified at this
time. As a result, significant uncertainty remains regarding the impact a
hurricane may have on our business, financial condition and results or
operations.
If
the allowance for loan losses is not sufficient to cover actual loan losses,
earnings could decrease.
Loan
customers may not repay their loans according to the terms of their loans, and
the collateral securing the payment of their loans may be insufficient to assure
repayment. We may experience significant credit losses, which could have a
material adverse effect on our operating results. Various assumptions and
judgments about the collectability of the loan portfolio are made, including the
creditworthiness of borrowers and the value of the real estate and other assets
serving as collateral for the repayment of many loans. In determining the amount
of the allowance for loan losses, Management reviews the loans and the loss and
delinquency experience and evaluates economic conditions. If assumptions prove
to be incorrect, the allowance for loan losses may not cover inherent losses in
the loan portfolio at the date of the financial statements. Material additions
to the allowance would materially decrease net income. At December 31, 2007, our
allowance for loan losses totaled $6.2 million, representing 1.08% of loans, net
of unearned income.
Management
believes it has underwriting standards to manage normal lending risks, and at
December 31, 2007, nonperforming loans consisted of $10.8 million, or 1.95% of
loans, net of unearned income. We can give no assurance that the nonperforming
loans will not increase or that nonperforming or delinquent loans will not
adversely affect future performance.
In
addition, federal and state regulators periodically review the allowance for
loan losses and may require an increase in the allowance for loan losses or
recognize further loan charge-offs. Any increase in our allowance for loan
losses or loan charge-offs as required by these regulatory agencies could have a
material adverse effect on the results of operations and financial
condition.
Adverse
events in Louisiana, where our business is concentrated, could adversely affect
our results and future growth.
Our
business, the location of our branches and the real estate used as collateral on
our real estate loans are primarily concentrated in Louisiana. As a result, we
are exposed to geographic risks. The occurrence of an economic downturn in
Louisiana, or adverse changes in laws or regulations in Louisiana could impact
the credit quality of our assets, the business of our customers and our ability
to expand our business.
Our
success significantly depends upon the growth in population, income levels,
deposits and housing in our market area. If the communities in which
we operate do not grow or if prevailing economic conditions locally or
nationally are unfavorable, our business may be negatively
affected. In addition, the economies of the communities in which we
operate are substantially dependent on the growth of the economy in the state of
Louisiana. To the extent that economic conditions in Louisiana are
unfavorable or do not continue to grow as projected, the economy in our market
area would be adversely affected. Moreover, we cannot give any
assurance that we will benefit from any market growth or favorable economic
conditions in our market area if they do occur.
In
addition, the market value of the real estate securing loans as collateral could
be adversely affected by unfavorable changes in market and economic conditions.
As of December 31, 2007, approximately 79.1% of our total loans were secured by
real estate. Adverse developments affecting commerce or real estate
values in the local economies in our primary market areas could increase the
credit risk associated with our loan portfolio. In addition, substantially all
of our loans are to individuals and businesses in Louisiana. Our
business customers may not have customer bases that are as diverse as businesses
serving regional or national markets. Consequently, any decline in the economy
of our market area could have an adverse impact on our revenues and financial
condition. In particular, we may experience increased loan
delinquencies, which could result in a higher provision for loan losses and
increased charge-offs. Any sustained period of increased non-payment,
delinquencies, foreclosures or losses caused by adverse market or economic
conditions in our market area could adversely affect the value of our assets,
revenues, results of operations and financial
condition.
Our
continued pace of growth, both internally and for our pending acquisition, may
require us to raise additional capital in the future, but that capital may not
be available when it is needed.
We
are required by federal and state regulatory authorities to maintain adequate
levels of capital to support our operations. We anticipate that our
existing capital resources will satisfy our capital requirements for the
foreseeable future. We may, at some point, need to raise additional capital to
support continued growth, both internally and for our pending
acquisition.
Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets at that time, which are outside of our control. Accordingly, we
cannot assure you of our ability to raise additional capital if needed or that
the terms acceptable to us will be available. If we cannot raise additional
capital when needed, our ability to further expand our operations through
internal growth and pending acquisition could be materially
impaired.
We
rely on our Management team for the successful implementation of our business
strategy.
The
success of First Guaranty Bancshares, Inc. and First Guaranty Bank has been
largely due to the efforts of our executive Management team consisting of
Michael R. Sharp, President and Chief Executive Officer, and Michele E.
LoBianco, Chief Financial Officer. In addition, we substantially rely upon
Marshall T. Reynolds, our Chairman of the Board of Directors. The
loss of services of one or more of these individuals may have a material adverse
effect on our ability to implement our business plan.
There
is no assurance that we will be able to successfully compete with others for
business.
The
area in which we operate is considered attractive from an economic and
demographic viewpoint, and is a highly competitive banking market. We compete
for loans and deposits with numerous regional and national banks and other
community banking institutions, as well as other kinds of financial institutions
and enterprises, such as securities firms, insurance companies, savings
associations, credit unions, mortgage brokers and private lenders. Many
competitors have substantially greater resources than we do and operate under
less stringent regulatory environments. The differences in resources and
regulations may make it harder for us to compete profitably, reduce the rates
that we can earn on loans and investments, increase the rates we must offer on
deposits and other funds, and adversely affect our overall financial condition
and earnings.
We
depend primarily on net interest income for our earnings rather than noninterest
income.
Net
interest income is the most significant component of our operating income. We do
not rely on traditional sources of fee income utilized by some community banks,
such as fees from sales of insurance, securities or investment advisory products
or services. For the years ended December 31, 2007 and 2006, our net interest
income was $34.1 million and $31.7 million, respectively. The amount
of our net interest income is influenced by the overall interest rate
environment, competition, and the amount of interest-earning assets relative to
the amount of interest-bearing liabilities. In the event that one or more of
these factors were to result in a decrease in our net interest income, we do not
have significant sources of fee income to make up for decreases in net interest
income.
Fluctuations
in interest rates could reduce our profitability.
We
realize income primarily from the difference between the interest we earn on
loans and investments and the interest we pay on deposits and borrowings. The
interest rates on our assets and liabilities respond differently to changes in
market interest rates, which means our interest-bearing liabilities may be more
sensitive to changes in market interest rates than our interest-earning assets,
or vice versa. In either event, if market interest rates change, this “gap”
between the amount of interest-earning assets and interest-bearing liabilities
that reprice in response to these interest rate changes may work against us, and
our earnings may be negatively affected.
We
are unable to predict fluctuations in market interest rates, which are affected
by, among other factors, changes in the following:
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inflation
rates;
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business
activity levels;
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money
supply; and
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domestic
and foreign financial
markets.
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The
value of our investment portfolio and the composition of our deposit base are
influenced by prevailing market conditions and interest rates. Our
asset-liability Management strategy, which is designed to mitigate the risk to
us from changes in market interest rates, may not prevent changes in interest
rates or securities market downturns from reducing deposit outflow or from
having a material adverse effect on our results of operations, our financial
condition or the value of our investments.
We
expect to incur additional expenses in connection with our compliance with
Sarbanes-Oxley.
Under
Section 404 of the Sarbanes-Oxley Act of 2002, we were required to conduct
a comprehensive review and assessment of the adequacy of our existing financial
systems and controls at December 31, 2007. Future reviews of our
financial systems and controls may uncover deficiencies in existing systems and
controls. If that is the case, we would have to take the necessary steps to
correct any deficiencies, which may be costly and may strain our Management
resources and negatively impact earnings. We also would be required to
disclose any such deficiencies, which could adversely affect the market price of
our common stock. At December 31, 2008, we will be required to obtain an
attestation report from a registered public accounting firm on the effectiveness
of our internal controls over financial reporting.
We
operate in a highly regulated environment and may be adversely affected by
changes in federal, state and local laws and regulations.
We
are subject to extensive regulation, supervision and examination by federal and
state banking authorities. Any change in applicable regulations or federal,
state or local legislation could have a substantial impact on us and our
operations. Additional legislation and regulations that could significantly
affect our powers, authority and operations may be enacted or adopted in the
future, which could have a material adverse effect on our financial condition
and results of operations. Further, regulators have significant discretion and
authority to prevent or remedy unsafe or unsound practices or violations of laws
by banks and bank holding companies in the performance of their supervisory and
enforcement duties. The exercise of regulatory authority may have a negative
impact on our results of operations and financial
condition.
Like
other bank holding companies and financial institutions, we must comply with
significant anti-money laundering and anti-terrorism laws. Under
these laws, we are required, among other things, to enforce a customer
identification program and file currency transaction and suspicious activity
reports with the federal government. Government agencies have substantial
discretion to impose significant monetary penalties on institutions which fail
to comply with these laws or make required reports.
Risk
Associated with an Investment in our Common Stock
The
market price of our common stock is established between a buyer and
seller.
First
Guaranty Bank acts as the transfer agent for First Guaranty Bancshares, Inc. All
shares traded are agreed upon by mutual buyers and sellers. First Guaranty
Bancshares, Inc. is not traded on an exchange, therefore liquidation and/or
purchases of stock may not be readily available.
Our
Management controls a substantial percentage of our common stock and therefore
have the ability to exercise substantial control over our affairs.
As
of December 31, 2007, our directors and executive officers (and their
affiliates) beneficially owned 1,894,735 shares or approximately 34.1% of our
common stock. Because of the large percentage of common stock held by our
directors and executive officers, such persons could significantly influence the
outcome of any matter submitted to a vote of our shareholders even if other
shareholders were in favor of a different result.
Item
1B – Unresolved Staff Comments
None.
Item
2 - Properties
The
Company does not directly own any real estate, but it does own real estate
indirectly through its subsidiaries. The Bank operates 18 retail-banking
centers. The following table sets forth certain information relating to each
office. The Bank also owns three additional properties which are currently not
being used as banking facilities. One of the properties is a banking center
location previously owned and operated by Homestead Bank but was closed at the
time of the merger. The Bank’s intentions are to sell this property. In
addition, the Bank owns two parcels of raw land which it intends to build de
nevo banking center locations. The net book value of our properties at December
31, 2007 was $9.4 million.
|
Location
|
Use
of Facilities
|
Year
Facility Opened or Acquired
|
Owned/
Leased
|
|||
|
First
Guaranty Square
400
East Thomas Street
Hammond,
LA 70401
|
Bank’s
Main Office
|
1975
|
Owned
|
|||
|
2111
West Thomas Street
Hammond,
LA 70401
|
Guaranty West Banking Center
|
1974
|
Owned
|
|||
|
100
East Oak Street
Amite,
LA 70422
|
Amite Banking Center
|
1970
|
Owned
|
|||
|
455
Railroad Avenue
Independence,
LA 70443
|
Independence Banking Center
|
1979
|
Owned
|
|||
|
301
Avenue F
Kentwood,
LA 70444
|
Kentwood Banking Center
|
1975
|
Owned
|
|||
|
170
West Hickory
Ponchatoula,
LA 70454
|
Ponchatoula Banking Center
|
1960
|
Owned
|
|||
|
196
Burt Blvd
Benton,
LA 71006
|
Benton Banking Center
|
1999
|
Owned
|
|||
|
126
South Hwy. 1
Oil
City, LA 71061
|
Oil City Banking Center
|
1999
|
Owned
|
|||
|
401
North 2nd
Street
Homer,
LA 71040
|
Homer Main Banking Center
|
1999
|
Owned
|
|||
|
10065
Hwy 79
Haynesville,
LA 71038
|
Haynesville Banking Center
|
1999
|
Owned
|
|||
|
117
East Hico Street
Dubach,
LA 71235
|
Dubach Banking Center
|
1999
|
Owned
|
|||
|
102
East Louisiana Avenue
Vivian,
LA 71082
|
Vivian Banking Center
|
1999
|
Owned
|
|||
|
500
North Cary
Jennings,
LA 70546
|
Jennings Banking Center
|
1999
|
Owned
|
|||
|
799
West Summers Drive
Abbeville,
LA 70510
|
Abbeville Banking Center
|
1999
|
Owned
|
|||
|
105
Berryland
Ponchatoula,
LA 70454
|
Berryland Banking Center
|
2004
|
Leased
|
|||
|
2231
S. Range Avenue
Denham
Springs, LA 70726
|
Denham Springs Banking Center
|
2005
|
Owned
|
|||
|
North
6th
Street
Ponchatoula,
LA 70454
|
Ponchatoula Banking Center
|
2007
|
Owned
|
|||
|
29815
Walker Rd S
Walker,
LA 70785
|
Walker Banking Center
|
2007
|
Owned
|
Item
3 - Legal Proceedings
The
Company is subject to various legal proceedings in the normal course of its
business. It is Management’s belief that the ultimate resolution of such claims
will not have a material adverse effect on the financial position or results of
operations. At December 31, 2007, we were not involved in any material legal
proceedings
There
were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal
2007.
PART
II
Item
5 - Market for Registant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
There
is no liquid or active market for our common stock. The Company’s shares
of common stock are not traded on a stock exchange or in any established
over-the-counter market. Trades occur primarily between individuals at a price
mutually agreed upon by the buyer and seller. Trading in the Company’s common
stock has been infrequent and such trades cannot be characterized as
constituting an active trading market. Based on information recorded in the
Bank’s Stock Transfer Agent records, Management believes that approximately
924,692 shares of the Company’s common stock were traded during 2007 of which
22,882 shares were traded in the fourth quarter of 2007. The purchasers in these
transactions were, in most cases, either affiliates of the Company or their
associates. No assurance can be given that an active trading market for the
common stock will develop.
The
following table sets forth the high and low bid quotations for First Guaranty
Bancshares, Inc.’s (and First Guaranty Bank prior to July 27, 2007) common stock
for the periods indicated. These quotations represent trades of which we are
aware and do not include retail markups, markdowns, or commissions and do not
necessarily reflect actual transactions. As of December 31, 2007, there were
5,559,644 shares of First Guaranty Bancshares, Inc. common stock issued and
outstanding. At December 31, 2007, First Guaranty Bancshares, Inc. had
approximately 1,293 shareholders of record.
|
2007
|
2006
|
||||||
|
Quarter
Ended:
|
High
|
Low
|
Dividend
|
High
|
Low
|
Dividend
|
|
|
March
|
$ 24.30
|
$ 23.42
|
$ 0.15
|
$ 23.42
|
$ 18.57
|
$ 0.15
|
|
|
June
|
24.30
|
24.30
|
0.16
|
23.42
|
23.42
|
0.15
|
|
|
September
|
24.30
|
24.30
|
0.16
|
23.42
|
23.42
|
0.15
|
|
|
December
|
24.30
|
24.30
|
0.16
|
23.42
|
23.42
|
0.15
|
|
Our
stockholders are entitled to receive dividends when, and if declared by the
board of directors, out of funds legally available for dividends. We have paid
consecutive quarterly cash dividends on our common stock for each of the last
ten years and the board of directors intends to continue to pay regular
quarterly cash dividends. The ability to pay dividends in the future will depend
on earnings and financial condition, liquidity and capital requirements,
regulatory restrictions, the general economic and regulatory climate and ability
to service any equity or debt obligations senior to common
stock.
There
are legal restrictions on the ability of First Guaranty Bank to pay cash
dividends to First Guaranty Bancshares, Inc. Under federal and state
law, we are required to maintain certain surplus and capital levels and may not
distribute dividends in cash or in kind, if after such distribution we would
fall below such levels. Specifically, an insured depository
institution is prohibited from making any capital distribution to its
shareholders, including by way of dividend, if after making such distribution,
the depository institution fails to meet the required minimum level for any
relevant capital measure including the risk-based capital adequacy and leverage
standards.
Additionally,
under the Louisiana Business Corporation Act, First Guaranty Bancshares, Inc. is
prohibited from paying any cash dividends to shareholders if, after the payment
of such dividend, if its total assets would be less than its total liabilities
or where net assets are less than the liquidation value of shares that have a
preferential right to participate in First Guaranty Bancshares, Inc.’s assets in
the event First Guaranty Bancshares, Inc. were to be
liquidated.
We
have not repurchased any shares of our outstanding common stock during the past
year.
Stock Performance Graph
The
line graph below compares the cumulative total return for the Company’s common
stock with the cumulative total return of both the NASDAQ Stock Market Index for
U.S. companies and the NASDAQ Index for bank stocks for the period December 31,
2002 through December 31, 2007. The total return assumes the reinvestment of all
dividends and is based on a $100 investment on December 31, 1998. It also
reflects the stock price on December 31st of each year shown, although this
price reflects only a small number of transactions involving a small number of
directors of the Company or affiliates or associates and cannot be taken as an
accurate indicator of the market value of the Company’s common
stock.
Performance
Graph
Cummulative
Total Return of First Guaranty Bancshares, Inc. Compared to NASDAQ Bank
Index
and
NASDAQ Composite Index
|
Total
Returns for the Year
|
||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
||
|
First
Guaranty Bancshares,
Inc.
|
$110
|
$114
|
$139
|
$168
|
$179
|
|
|
NASDAQ
Banks
|
$158
|
$175
|
$168
|
$186
|
$145
|
|
|
NASDAQ
Composite
|
$ 91
|
$ 99
|
$101
|
$110
|
$121
|
|
We
have no equity based benefit plans.
Item
6 - Selected Financial Data
The
following selected financial data should be read in conjunction with the
financial statements, including the related notes, and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” which are
included elsewhere in this Form 10-K. Except for the data under “Performance
Ratios,” “Capital Ratios” and “Asset Quality Ratios,” the income statement data
and share and per share data for the years ended December 31, 2007, 2006 and
2005 and the balance sheet data as of December 31, 2007 and 2006 are derived
from the audited financial statements and related notes which are included
elsewhere in this Form 10-K, and the income statement data and share and per
share data for the years ended December 31, 2004 and 2003 and the balance sheet
data as of December 31, 2005, 2004 and 2003 are derived from the audited
financial statements and related notes that are not included in this Form
10-K.
|
At
or For the Years Ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Year
End Balance Sheet Data:
|
||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Securities
|
$ | 142,068 | $ | 158,352 | $ | 175,200 | $ | 106,526 | $ | 59,454 | ||||||||||
|
Federal
funds sold
|
35,869 | 6,793 | 1,786 | 552 | 356 | |||||||||||||||
|
Loans,
net of unearned income
|
575,256 | 507,195 | 491,582 | 456,104 | 381,342 | |||||||||||||||
|
Allowance
for loan losses
|
6,193 | 6,675 | 7,597 | 5,910 | 4,942 | |||||||||||||||
|
Total
assets
|
807,331 | 714,487 | 713,544 | 607,154 | 484,715 | |||||||||||||||
|
Total
deposits
|
723,094 | 626,293 | 632,908 | 481,358 | 376,002 | |||||||||||||||
|
Borrowings
|
13,494 | 24,568 | 22,132 | 71,771 | 60,396 | |||||||||||||||
|
Stockholders'
equity
|
66,533 | 59,203 | 53,923 | 51,706 | 45,798 | |||||||||||||||
|
Average
Balance Sheet Data:
|
||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Securities
|
$ | 152,990 | $ | 178,419 | $ | 109,236 | $ | 87,232 | $ | 58,092 | ||||||||||
|
Federal
funds sold
|
8,083 | 3,115 | 6,028 | 618 | 128 | |||||||||||||||
|
Loans,
net of unearned income
|
543,946 | 505,623 | 476,144 | 415,606 | 366,034 | |||||||||||||||
|
Total
earning assets
|
712,212 | 690,057 | 595,141 | 509,261 | 431,432 | |||||||||||||||
|
Total
assets
|
751,237 | 726,593 | 631,554 | 542,460 | 464,633 | |||||||||||||||
|
Total
deposits
|
658,456 | 622,869 | 526,995 | 438,214 | 368,463 | |||||||||||||||
|
Borrowings
|
23,450 | 42,435 | 45,732 | 51,558 | 48,398 | |||||||||||||||
|
Stockholders'
equity
|
63,564 | 56,640 | 54,901 | 49,257 | 43,744 | |||||||||||||||
|
Performance
Ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
1.37% | 1.21% | 0.95% | 1.58% | 1.51% | |||||||||||||||
|
Return
on average equity
|
16.15% | 15.54% | 10.97% | 17.37% | 16.04% | |||||||||||||||
|
Return on
average tangible assets(1)
|
1.37% | 1.21% | 0.96% | 1.58% | 1.52% | |||||||||||||||
|
Return on
average tangible equity(2)
|
16.47% | 15.73% | 11.24% | 18.08% | 17.03% | |||||||||||||||
|
Net
interest margin
|
4.79% | 4.60% | 4.71% | 5.09% | 5.08% | |||||||||||||||
|
Average
loans to average deposits
|
82.61% | 81.18% | 90.35% | 94.84% | 99.34% | |||||||||||||||
|
Efficiency
ratio
|
54.50% | 50.90% | 55.44% | 52.47% | 55.84% | |||||||||||||||
|
Efficiency
ratio (excluding amortization of
|
||||||||||||||||||||
|
intangibles
and securities transactions)
|
53.32% | 49.12% | 53.55% | 50.33% | 53.45% | |||||||||||||||
|
Full
time equivalent employees (year end)
|
222 | 196 | 189 | 181 | 169 | |||||||||||||||
__________________________________
(1) Average
tangible assets represent average assets less average core deposit
intangibles.
(2) Average
tangible equity represents average equity less average core deposit
intangibles.
- 17
-
|
At
or For the Years Ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Capital
Ratios:
|
|
|||||||||||||||||||
|
Average
stockholders' equity to average assets
|
8.46% | 7.80% | 8.69% | 9.08% | 9.41% | |||||||||||||||
|
Average
tangible equity to average tangible assets(1),(2)
|
8.31% | 7.71% | 8.51% | 8.76% | 8.91% | |||||||||||||||
|
Stockholders'
equity to total assets
|
8.24% | 8.29% | 7.56% | 8.52% | 9.45% | |||||||||||||||
|
Tier
1 leverage capital
|
7.38% | 8.16% | 7.67% | 8.53% | 9.00% | |||||||||||||||
|
Tier
1 capital
|
10.13% | 9.92% | 8.80% | 9.50% | 10.92% | |||||||||||||||
|
Total
risk-based capital
|
11.09% | 11.03% | 10.05% | 10.62% | 12.16% | |||||||||||||||
|
Income
Data:
|
||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Interest
income
|
$ | 55,480 | $ | 50,937 | $ | 40,329 | $ | 33,835 | $ | 28,716 | ||||||||||
|
Interest
expense
|
21,398 | 19,206 | 12,367 | 8,057 | 6,781 | |||||||||||||||
|
Net
interest income
|
34,082 | 31,731 | 27,962 | 25,778 | 21,935 | |||||||||||||||
|
Provision
for loan losses
|
1,918 | 4,419 | 5,621 | 1,670 | 1,258 | |||||||||||||||
|
Noninterest
income (excluding securities transactions)
|
5,176 | 4,601 | 5,221 | 5,082 | 5,006 | |||||||||||||||
|
Securities
(losses) gains
|
(478 | ) | (234 | ) | 7 | (56 | ) | (23 | ) | |||||||||||
|
Noninterest
expense
|
21,133 | 18,373 | 18,399 | 16,162 | 15,030 | |||||||||||||||
|
Earnings
before income taxes
|
15,729 | 13,306 | 9,170 | 12,972 | 10,630 | |||||||||||||||
|
Net
income
|
10,263 | 8,802 | 6,024 | 8,556 | 7,016 | |||||||||||||||
|
Per
Common Share Data:(3)
|
||||||||||||||||||||
|
Net
earnings
|
$ | 1.85 | $ | 1.58 | $ | 1.08 | $ | 1.54 | $ | 1.26 | ||||||||||
|
Cash
dividends paid
|
0.63 | 0.60 | 0.57 | 0.50 | 0.38 | |||||||||||||||
|
Book
value
|
11.97 | 10.65 | 9.70 | 9.30 | 8.24 | |||||||||||||||
|
Dividend
payout ratio
|
34.13% | 37.89% | 52.67% | 32.16% | 29.73% | |||||||||||||||
|
Weighted
average number of shares outstanding
|
5,559,644 | 5,559,644 | 5,559,644 | 5,559,644 | 5,559,644 | |||||||||||||||
|
Number
of share outstanding (year end)
|
5,559,644 | 5,559,644 | 5,559,644 | 5,559,644 | 5,559,644 | |||||||||||||||
|
Market
data:
|
||||||||||||||||||||
|
High
|
$ | 24.30 | $ | 23.42 | $ | 20.00 | $ | 15.27 | $ | 15.27 | ||||||||||
|
Low
|
$ | 23.42 | $ | 18.57 | $ | 15.27 | $ | 15.12 | $ | 15.27 | ||||||||||
|
Trading
Volume
|
924,692 | 535,264 | 279,503 | 104,835 | 110,836 | |||||||||||||||
|
Stockholders
of record
|
1,293 | 1,181 | 1,141 | 1,148 | 1,247 | |||||||||||||||
|
Asset
Quality Ratios:
|
||||||||||||||||||||
|
Nonperforming
assets to total assets
|
1.39% | 1.81% | 3.05% | 1.18% | 1.46% | |||||||||||||||
|
Nonperforming
assets to loans
|
1.95% | 2.55% | 4.43% | 1.57% | 1.85% | |||||||||||||||
|
Loan
loss reserve to nonperforming assets
|
55.26% | 51.53% | 34.92% | 82.59% | 70.00% | |||||||||||||||
|
Net
charge-offs to average loans
|
0.50% | 1.06% | 0.83% | 0.17% | 0.19% | |||||||||||||||
|
Provision
for loan loss to average loans
|
0.35% | 0.87% | 1.18% | 0.40% | 0.34% | |||||||||||||||
|
Allowance
for loan loss to total loans
|
1.08% | 1.32% | 1.55% | 1.30% | 1.30% | |||||||||||||||
__________________________________
(1) Average
tangible assets represents average assets less average core deposit
intangibles.
(2) Average
tangible equity represents average equity less average core deposit
intangibles.
(3) For the
years ended 2003, 2004 and 2005 amounts have been restated to reflect
a stock dividend of one-third of a share of $1 par value common stock for each
share of $1 and $5
par value common
stock outstanding, accounted for as a four-for-three stock split, effective and
payable to stockholders of record as of October 20,
2005.
First
Guaranty Bancshares, Inc. became the holding company for First Guaranty Bank on
July 27, 2007 in a corporate reorganization (see “Recent Developments”). In
addition, First Guaranty Bancshares, Inc. completed its acquisition of Homestead
Bancorp on July 30, 2007. Information at or for the year ended December 31,
2006, and any prior periods, reflects the operations of First Guaranty Bank on a
stand-alone basis. Prior to becoming the holding company of First Guaranty Bank,
First Guaranty Bancshares, Inc. had no assets, liabilities or
operations.
This
discussion and analysis reflects our financial statements and other relevant
statistical data, and is intended to enhance your understanding of our financial
condition and results of operations. Reference should be made to those financial
statements of this Form 10-K and the selected financial data (above) presented
in this report in order to obtain a better understanding of the commentary which
follows.
For
the years ended 2005, 2004, and 2003 all per share data in this discussion has
been adjusted to reflect the stock dividend of one-third of a share of the $1
par value common stock for each share of the $1 and $5 par value common stock
outstanding, accounted for as a four-for-three stock split, effective and
payable to stockholders of record as of October 20, 2005. Fractional shares were
settled for cash.
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, which could
cause our actual results and experience to differ from the anticipated results
and expectations, expressed in such forward-looking
statements.
Application
of Critical Accounting Policies
The
accounting and reporting policies of the Company conform to generally accepted
accounting principles in the United States of America and to predominant
accounting practices within the banking industry. Certain critical accounting
policies require judgment and estimates which are used in the preparation of the
financial statements.
Allowance
for Loan Losses. The Company’s most critical accounting policy relates to
its allowance for loan losses. The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans are charged
against the allowance for loan losses when Management believes that the
collectability of the principal is unlikely. The allowance, which is based on
the evaluation of the collectability of loans and prior loan loss experience, is
an amount Management believes will be adequate to reflect the risks inherent in
the existing loan portfolio and that exist at the reporting date. The
evaluations take into consideration a number of subjective factors including
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, current economic conditions that may
affect a borrower’s ability to pay, adequacy of loan collateral and other
relevant factors.
Changes
in such estimates may have a significant impact on the financial statements. For
further discussion of the allowance for loan losses, see the “Allowance for Loan
Losses” section of this analysis and Note 1 to the Consolidated Financial
Statements.
Valuation
of Goodwill, Intangible Assets and Other Purchase Accounting Adjustments.
The Company accounts for acquisitions in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,”
which requires the use of the purchase method of accounting. For purchase
acquisitions, the Company is required to record the assets acquired, including
identified intangible assets and liabilities assumed, at their fair value, which
in many instances involves estimates based on third party valuations, such as
appraisals, or internal valuations based on discounted cash flow analyses or
other valuation techniques. The determination of the useful lives of intangible
assets is subjective as is the appropriate amortization period for such
intangible assets. In addition, purchase acquisitions typically result in
recording goodwill. The Company performs a goodwill valuation at least annually.
Impairment testing of goodwill is a two step process that first compares the
fair value of goodwill with its carrying amount, and second measures impairment
loss by comparing the implied fair value of goodwill with the carrying amount of
that goodwill. Based on Management’s goodwill impairment tests, there was no
impairment of goodwill at December 31, 2007. For additional information on
goodwill and intangible assets, see Notes 1 and 8 to the Consolidated Financial
Statements.
Recent
Developments
During
2007, the Company engaged in the following transactions:
Formation
of Holding Company; Share Exchange
On
July 27, 2007, (the “Effective Date”), First Guaranty Bancshares, Inc., a
Louisiana corporation (the “Company”) became the holding company for First
Guaranty Bank (the “Reorganization”), a Louisiana chartered bank (the “Bank”),
pursuant to an Agreement and Plan of Exchange dated as of July 27, 2007 (the
“Agreement”). Pursuant to the Agreement, on the Effective Date, each
issued and outstanding share of the Bank’s common stock, par value $1.00 per
share, automatically was converted into and exchanged for one share of the
Company’s common stock, par value $1.00 per share. On the Effective Date, the
Bank became a wholly owned subsidiary of the Company and the stockholders of the
Bank became stockholders of the Company.
Prior
to the Effective Date of the Reorganization, the Bank’s common stock was
registered under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), as administered by the
FDIC.
Homestead
Bancorp, Inc. Merger – July 30, 2007
The
Company completed its acquisition of Homestead Bancorp, Inc for cash totaling
$12.1 million. The transaction resulted in $1.9 million of goodwill and $2.1
million of core deposit intangibles. At acquisition, Homestead had total assets
of $125.6 million, including loans of $74.4 million and deposits were $67.4
million (see Note 3).
Pending
Acquisitions - First Community Holding Company – November 2, 2007
On
November 2, 2007, First Guaranty Bancshares, Inc. and First Community Holding
Company (“BHC”), a Louisiana corporation and holding company for First Community
Bank, entered into an Agreement and Plan of Reorganization (the “Merger
Agreement”) pursuant to which, among other things, the Company will acquire all
of the issued and outstanding shares of capital stock of First Community BHC and
all of the outstanding and unexercised options of First Community
BHC.
Under
the terms and subject to the conditions of the Merger Agreement, which has been
approved by the Boards of Directors of First Guaranty BHC and First Community
BHC, all of the outstanding common stock of First Community BHC will be
cancelled in exchange for $34.06 per share. All of the outstanding and
unexercised options to acquire shares of common stock of First Community BHC
will be cancelled in exchange for an amount in cash per outstanding and
unexercised option equal to $26.06. The Company will acquire First Community BHC
for approximately $19 million in cash. The Company anticipates using cash and
proceeds from the issuance of perpetual preferred
stock.
Consummation
of the Interim Merger is subject to various conditions, including
(i) requisite approvals of the holders of First Community BHC common stock
and (ii) receipt of regulatory approvals. The acquisition is subject
to customary conditions, including the approval of the shareholders of First
Community Holding Company and the approval of certain financial institution
regulatory authorities (see Note 3).
For
more information on the Company’s acquisitions, see Note 3 to the Consolidated
Financial Statements.
Financial
Condition
Assets.
Total assets at December 31, 2007 were $807.3 million, an increase of
$92.8 million, or 13.0%, from $714.5 million at December 31, 2006. Assets
acquired from the Homestead Bank acquisition totaled $129.6 million, however
$44.5 million of the acquired securities and $34.3 million of
the acquired loans were sold in 2007 (see Note 3). An increase of
$68.5 million in net loans was offset by a $16.3 million decrease in securities.
Total deposits increased by $96.8 million or 15.5% from 2006 to 2007. At
December 31, 2007, long-term borrowings were $3.1 million, a decrease of $14.9
million or 82.8%, from $18.0 million at December 31,
2006.
Investment
Securities. The securities portfolio totaled $142.1 million at
December 31, 2007, representing a decrease of $16.3 million from December 31,
2006. Securities sales, calls and repayments reduced the securities portfolio
and primarily funded the increase in the loan portfolio. The primary changes in
the portfolio consisted of $575.5 million in purchases, $45.0 million in
securities acquired in the Homestead Bank merger, sales of $65.2 million, calls
totaling $23.0 million and maturities of $548.8 million. The portfolio provides
a relatively stable source of income and has lower interest rate and credit risk
compared to loans.
At
December 31, 2007 approximately 34.6% of the securities portfolio (excluding
Federal Home Loan Bank stock) mature in less than one year while securities with
maturity dates over 10 years totaled 47.0% of the portfolio. At December 31,
2007, the average maturity of the securities portfolio was 3.3 years, compared
to the average maturity at December 31, 2006 of 7.3
years.
At
December 31, 2007, securities totaling $105.6 million were classified as
available for sale and $36.5 million were classified as held to maturity as
compared to $111.4 million and $47.0 million, respectively at December 31,
2006.
The
book yields on securities available for sale ranged from 3.3% to 8.5% at
December 31, 2007, exclusive of the effect of changes in fair value reflected as
a component of stockholders’ equity. The book yields on held to maturity
securities ranged from 3.7% to 6.1%.
Average
securities as a percentage of average interest-earning assets were 21.5% and
25.9% at December 31, 2007 and 2006, respectively. Most securities held at
December 31, 2007 and 2006 qualified as securities pledgeable to collateralize
repurchase agreements and public funds. At December 31, 2007 and 2006, $131.6
million and $147.3 million in securities were pledged,
respectively.
Loans.
At December 31, 2007, the loan portfolio (loans, net of unearned income)
totaled $575.3 million, an increase of approximately $68.1 million, or 13.4%,
from the December 31, 2006 level of $507.2 million. The Company acquired $40.4
million in loans from the merger with Homestead Bank (see Note 3).
Loans
represented 79.6% of deposits at December 31, 2007, compared to 81.0% of
deposits at December 31, 2006. The majority of the loan increases continued to
be in the real estate loan segments of the portfolio. Real estate and related
loans comprised 79.1% of the portfolio in 2007 as compared to 81.5% in 2006.
Loan charge-offs taken during 2007 totaled $3.9 million, compared to charge-offs
of $5.9 million in 2006. Of the loan charge-offs in 2007, approximately $3.0
million were loans secured by real estate of which $2.2 million were commercial
real estate and approximately $0.8 million were residential properties. In 2007,
recoveries of $1.2 million were recognized on loans previously charged off as
compared to $547,000 in 2006. Of the loan charge-offs in 2006, $4.6 million
related to home mortgages, as discussed below. In 2006, recoveries of $547,000
were recognized on these loan charge-offs and other loans previously charged off
as compared to $228,000 in 2005.
In
2005, we discovered mortgage loans and commitments originated in one branch
involved irregularities suggesting that many of these mortgage loans had been
made against overvalued collateral on the basis of misleading loan applications.
As of December 31, 2007, the aggregate principal balance on these loans was
approximately $0.8 million. The allowance for loan losses to provide for any
potential future losses relating to these two remaining home mortgage loans
totaled $178,000. For the year ended December 31, 2007, we charged off
approximately $363,000 as a result of these mortgage loans. As of December 31,
2006, the aggregate principal balance on these loans was approximately $2.5
million. The allowance for loan losses to provide for any potential future
losses relating to these 11 remaining home mortgage loans totaled $206,000. For
the year ended December 31, 2006, we charged off approximately $4.6 million as a
result of these mortgage loans.
In
2007, excluding the merger with Homestead Bank (see Note 3), loan growth
was geographically dispersed between north and south Louisiana (throughout
our market area). Increased loan volume from larger commercial real estate
customers outpaced loan demand from consumer clients in this
period.
Nonperforming
Assets. Nonperforming assets were $11.2 million, or 1.4% of total assets
at December 31, 2007, compared to $13.3 million, or 1.9% of total assets at
December 31, 2006. The decrease resulted from a $2.2 million, or 85.3%, decrease
in other real estate to $373,000 at December 31, 2007 from $2.5 million at
December 31, 2006. The decrease in other real estate was primarily the result of
a reduction in properties foreclosed on the home mortgage loans and commitments
from prior years which involved irregularities (see Note
6).
Deposits.
From December 31, 2006 to December 31, 2007, total deposits increased by $96.8
million or 15.5%, to $723.1 million at December 31, 2007 from $626.3 million at
December 31, 2006. In 2007, noninterest-bearing demand deposits decreased $1.8
million, or 1.5%. Interest-bearing demand deposits increased $37.8 million,
savings deposits increased $3.9 million and time deposits increased $56.9
million. The increased deposits include the merger with Homestead Bank (see Note
3). The increase in deposits was due to a $62.8 million increase in individual
and business deposits while public fund deposits decreased by $34.0 million. The
increase in core deposits (comprised of interest-bearing demand deposits,
noninterest-bearing demand deposits and savings accounts) resulted from $67.4
million acquired in the merger with Homestead Bank, a series of marketing
campaigns launched in 2007 and a continued effort to obtain deposit
relationships with new and existing loan customers.
Borrowings. Short-term
borrowings increased $3.8 million in 2007 to $10.4 million at December 31, 2007
from $6.6 million at December 31, 2006. Short-term borrowings are used to manage
liquidity on a daily or otherwise short-term basis. The short-term borrowings at
December 31, 2007 and 2006 respectively was comprised of repurchase agreements.
Long-term borrowings decreased $14.9 million, or 82.8%, to $3.1 million at
December 31, 2007, compared to $18.0 million at December 31, 2006. At December
31, 2007, long-term borrowings consisted of subordinated debt (see Note
10). At December 31, 2006, long-term borrowings consisted of advances from the
Federal Home Loan Bank, all of which were paid during
2007.
Equity.
Total equity increased $7.3 million or 12.4% to $66.5 million at December
31, 2007 from $59.2 million at December 31, 2006. The increase in stockholders’
equity reflected consolidated net income of $10.3 million during 2007, partially
offset by dividends paid of $3.5 million.
Loan
Portfolio Composition. The following table sets forth the composition of
our loan portfolio, excluding loans held for sale, by type of loan at the dates
indicated.
|
December
31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
As
% of
|
As
% of
|
As
% of
|
||||||||||||||||||||||
|
Balance
|
Category
|
Balance
|
Category
|
Balance
|
Category
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Real
estate
|
||||||||||||||||||||||||
|
Construction
& land development
|
$ | 98,127 | 17.0% | $ | 49,837 | 9.9% | $ | 67,099 | 13.6% | |||||||||||||||
|
Farmland
|
23,065 | 4.0% | 25,582 | 5.0% | 24,903 | 5.1% | ||||||||||||||||||
|
1-4
Family
|
84,640 | 14.7% | 67,022 | 13.2% | 78,789 | 16.0% | ||||||||||||||||||
|
Multifamily
|
13,061 | 2.3% | 14,702 | 2.9% | 11,125 | 2.3% | ||||||||||||||||||
|
Non-farm
non-residential
|
236,474 | 41.1% | 256,176 | 50.5% | 223,622 | 45.5% | ||||||||||||||||||
|
Total
real estate
|
455,367 | 79.1% | 413,319 | 81.5% | 405,538 | 82.5% | ||||||||||||||||||
|
Agricultural
|
16,816 | 2.9% | 16,359 | 3.2% | 11,490 | 2.3% | ||||||||||||||||||
|
Commercial
and industrial
|
81,073 | 14.1% | 59,072 | 11.6% | 54,740 | 11.1% | ||||||||||||||||||
|
Consumer
and other
|
22,517 | 3.9% | 18,880 | 3.7% | 20,078 | 4.1% | ||||||||||||||||||
|
Total
loans before unearned income
|
575,773 | 100.0% | 507,630 | 100.0% | 491,846 | 100.0% | ||||||||||||||||||
|
Less:
unearned income
|
(517 | ) | (435 | ) | (264 | ) | ||||||||||||||||||
|
Total
loans after unearned income
|
$ | 575,256 | $ | 507,195 | $ | 491,582 | ||||||||||||||||||
|
December
31,
|
||||||||||||||||||||||||
|
2004
|
2003
|
|||||||||||||||||||||||
|
As
% of
|
As
% of
|
|||||||||||||||||||||||
|
Balance
|
Category
|
Balance
|
Category
|
|||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Real
estate
|
||||||||||||||||||||||||
|
Construction
& land development
|
$ | 72,063 | 15.8% | $ | 36,808 | 9.6% | ||||||||||||||||||
|
Farmland
|
18,303 | 4.0% | 19,807 | 5.2% | ||||||||||||||||||||
|
1-4
Family
|
86,162 | 18.9% | 62,023 | 16.3% | ||||||||||||||||||||
|
Multifamily
|
7,601 | 1.7% | 6,865 | 1.8% | ||||||||||||||||||||
|
Non-farm
non-residential
|
178,090 | 39.0% | 163,771 | 42.9% | ||||||||||||||||||||
|
Total
real estate
|
362,219 | 79.4% | 289,274 | 75.8% | ||||||||||||||||||||
|
Agricultural
|
9,546 | 2.1% | 7,641 | 2.0% | ||||||||||||||||||||
|
Commercial
and industrial
|
59,135 | 12.9% | 61,184 | 16.0% | ||||||||||||||||||||
|
Consumer
and other
|
25,495 | 5.6% | 23,506 | 6.2% | ||||||||||||||||||||
|
Total
loans before unearned income
|
456,395 | 100.0% | 381,605 | 100.0% | ||||||||||||||||||||
|
Less:
unearned income
|
(291 | ) | (263 | ) | ||||||||||||||||||||
|
Total
loans after unearned income
|
$ | 456,104 | $ | 381,342 | ||||||||||||||||||||
Loan
Maturities by Type. The following table summarizes the scheduled
repayments of our loan portfolio at December 31, 2007. Loans having no stated
repayment schedule or maturity and overdraft loans are reported as being due in
one year or less. Maturities are based on the final contractual payment date and
do not reflect the effect of prepayments and scheduled principal
amortization.
|
One
Year
|
One
Through
|
After
|
||||||||||||||
|
or
Less
|
Five
Years
|
Five
Years
|
Total
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Real
estate:
|
||||||||||||||||
|
Construction
& land development
|
$ | 95,441 | $ | 2,566 | $ | 120 | $ | 98,127 | ||||||||
|
Farmland
|
21,438 | 1,163 | 464 | 23,065 | ||||||||||||
|
1-4
Family
|
41,966 | 25,560 | 17,114 | 84,640 | ||||||||||||
|
Multifamily
|
12,897 | 77 | 87 | 13,061 | ||||||||||||
|
Non-farm
non-residential
|
194,754 | 37,263 | 3,940 | 235,957 | ||||||||||||
|
Total
real estate
|
366,496 | 66,629 | 21,725 | 454,850 | ||||||||||||
|
Agricultural
|
13,658 | 3,158 | - | 16,816 | ||||||||||||
|
Commercial
and industrial
|
64,141 | 16,771 | 161 | 81,073 | ||||||||||||
|
Consumer
and other
|
10,987 | 11,317 | 213 | 22,517 | ||||||||||||
|
Total
loans
|
$ | 455,282 | $ | 97,875 | $ | 22,099 | $ | 575,256 | ||||||||
The following
table sets forth the scheduled contractual maturities at December 31, 2007 of
fixed- and floating-rate loans excluding non-accrual loans.
|
December
31, 2007
|
||||||||||||
|
Fixed
|
Floating
|
Total
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
One
year or less
|
$ | 98,095 | $ | 339,955 | $ | 438,050 | ||||||
|
One
to five years
|
97,198 | 1,867 | 99,065 | |||||||||
|
Five
to 15 years
|
8,179 | 144 | 8,323 | |||||||||
|
Over
15 years
|
19,530 | - | 19,530 | |||||||||
|
Subtotal
|
223,002 | 341,966 | 564,968 | |||||||||
|
Nonaccrual
loans
|
10,288 | |||||||||||
|
Total
loans after unearned income
|
$ | 223,002 | $ | 341,966 | $ | 575,256 | ||||||
Non-Performing
Assets. The table
below sets forth the amounts and categories of our non-performing assets at the
dates indicated.
|
At
December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Non-accrual
loans:
|
||||||||||||||||||||
|
Real
estate loans:
|
||||||||||||||||||||
|
Construction
and land development
|
$ | 1,841 | $ | 2,676 | $ | 16,376 | $ | 206 | $ | 100 | ||||||||||
|
Farmland
|
419 | 33 | - | - | - | |||||||||||||||
|
One-
to four- family residential
|
1,819 | 3,202 | 3,548 | 1,059 | 678 | |||||||||||||||
|
Multifamily
|
2 | - | - | - | - | |||||||||||||||
|
Non-farm
non-residential
|
4,950 | 3,882 | 153 | 1,232 | 756 | |||||||||||||||
|
Non-real
estate loans:
|
||||||||||||||||||||
|
Agricultural
|
- | - | - | - | - | |||||||||||||||
|
Commercial
and industrial
|
978 | 267 | 358 | 514 | 78 | |||||||||||||||
|
Consumer
and other
|
279 | 302 | 655 | 450 | 640 | |||||||||||||||
|
Total
non-accrual loans
|
10,288 | 10,362 | 21,090 | 3,461 | 2,252 | |||||||||||||||
|
Loans
90 days and greater delinquent
|
||||||||||||||||||||
|
and
still accruing:
|
||||||||||||||||||||
|
Real
estate loans:
|
||||||||||||||||||||
|
Construction
and land development
|
- | - | - | - | - | |||||||||||||||
|
Farmland
|
- | - | - | - | - | |||||||||||||||
|
One-
to four- family residential
|
544 | 334 | 248 | 370 | 529 | |||||||||||||||
|
Multifamily
|
- | - | - | - | - | |||||||||||||||
|
Non-farm
non-residential
|
- | - | - | - | - | |||||||||||||||
|
Non-real
estate loans:
|
||||||||||||||||||||
|
Agricultural
|
- | - | - | - | - | |||||||||||||||
|
Commercial
and industrial
|
- | - | - | 28 | 50 | |||||||||||||||
|
Consumer
and other
|
3 | - | - | 11 | 3 | |||||||||||||||
|
Total
loans 90 days greater
|
||||||||||||||||||||
|
delinquent and still accruing
|
547 | 334 | 248 | 409 | 582 | |||||||||||||||
|
Restructured
loans
|
- | 51 | 121 | 134 | 226 | |||||||||||||||
|
Total
non-performing loans
|
10,835 | 10,747 | 21,459 | 4,004 | 3,060 | |||||||||||||||
|
Real
estate owned:
|
||||||||||||||||||||
|
Construction
and land development
|
84 | 2,217 | - | - | - | |||||||||||||||
|
Farmland
|
- | - | 144 | 133 | 92 | |||||||||||||||
|
One-
to four- family residential
|
170 | 78 | 81 | 554 | 720 | |||||||||||||||
|
Multifamily
|
- | - | - | - | - | |||||||||||||||
|
Non-farm
non-residential
|
119 | 245 | 321 | 3,018 | 3,782 | |||||||||||||||
|
Non-real
estate loans:
|
||||||||||||||||||||
|
Agricultural
|
- | - | - | - | - | |||||||||||||||
|
Commercial
and industrial
|
- | - | - | - | - | |||||||||||||||
|
Consumer
and other
|
- | - | - | - | - | |||||||||||||||
|
Total
real estate owned
|
373 | 2,540 | 546 | 3,705 | 4,594 | |||||||||||||||
|
Total
non-performing assets
|
$ | 11,208 | $ | 13,287 | $ | 22,005 | $ | 7,709 | $ | 7,654 | ||||||||||
|
Ratios:
|
||||||||||||||||||||
|
Non-performing
assets to total loans
|
1.95% | 2.62% | 4.48% | 1.69% | 2.01% | |||||||||||||||
|
Non-performing
assets to total assets
|
1.39% | 1.86% | 3.08% | 1.27% | 1.58% | |||||||||||||||
For
the years ended December 31, 2007 and 2006, gross interest income that would
have been recorded had our non-accruing loans been current in accordance with
their original terms was $0.6 million and $1.4 million, respectively.
Allowance
for Loan Losses. The allowance for loan losses is maintained at a level
considered sufficient to absorb potential losses embedded in the loan portfolio.
The allowance is increased by the provision for anticipated loan losses as well
as recoveries of previously charged-off loans and is decreased by loan
charge-offs. The provision is the necessary charge to current expense to provide
for current loan losses and to maintain the allowance at an adequate level
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 nonperforming 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 its Board of
Directors;
|
|
·
|
competition
and legal and regulatory requirements on
borrowers;
|
|
·
|
examinations
and review by our internal loan review department, independent accountants
and third-party independent loan review personnel;
and
|
|
·
|
examinations
of the loan portfolio by federal and state regulatory
agencies.
|
The
data collected from all sources in determining the adequacy of the allowance is
evaluated on a regular basis by Management with regard to current national and
local economic trends, prior loss history, underlying collateral values, credit
concentrations and industry risks. An estimate of potential loss on specific
loans is developed in conjunction with an overall risk evaluation of the total
loan portfolio. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as new information
becomes available.
The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as doubtful, substandard or
special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect the estimate of
probable losses. The unallocated component of the allowance reflects the margin
of imprecision inherent in the underlying assumptions used in the methodologies
for estimating specific and general losses in the
portfolio.
Allocation
of Allowance for Loan Losses. The
Company is
not able to accurately and efficiently provide the allocation of the allowance
for loan losses for a five-year historical period. The following
table sets forth activity in our allowance for loan losses for the periods
indicated.
|
At
or For the Years Ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Balance
at beginning of period
|
$ | 6,675 | $ | 7,597 | $ | 5,910 | $ | 4,942 | $ | 4,378 | ||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Real
estate loans:
|
||||||||||||||||||||
|
Construction
and land development
|
(386 | ) | (5,008 | ) | - | - | (18 | ) | ||||||||||||
|
Farmland
|
(123 | ) | - | - | - | (18 | ) | |||||||||||||
|
One-
to four- family residential
|
(639 | ) | (59 | ) | (2,001 | ) | (208 | ) | (90 | ) | ||||||||||
|
Multifamily
|
- | - | - | - | - | |||||||||||||||
|
Non-farm
non-residential
|
(1,901 | ) | (208 | ) | - | - | (201 | ) | ||||||||||||
|
Commercial
and industrial loans
|
(273 | ) | (301 | ) | (1,649 | ) | (313 | ) | (284 | ) | ||||||||||
|
Consumer
and other
|
(563 | ) | (312 | ) | (512 | ) | (405 | ) | (250 | ) | ||||||||||
|
Total
charge-offs
|
(3,885 | ) | (5,888 | ) | (4,162 | ) | (926 | ) | (861 | ) | ||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Real
estate loans:
|
||||||||||||||||||||
|
Construction
and land development
|
779 | 39 | - | - | - | |||||||||||||||
|
Farmland
|
14 | - | - | - | - | |||||||||||||||
|
One-
to four- family residential
|
14 | 25 | 5 | 20 | 1 | |||||||||||||||
|
Multifamily
|
- | - | - | - | - | |||||||||||||||
|
Non-farm
non-residential
|
4 | 40 | - | - | - | |||||||||||||||
|
Commercial
and industrial loans
|
148 | 304 | 86 | 152 | 104 | |||||||||||||||
|
Consumer
and other
|
201 | 139 | 137 | 52 | 62 | |||||||||||||||
|
Total
recoveries
|
1,160 | 547 | 228 | 224 | 167 | |||||||||||||||
|
Net
charge-offs
|
(2,725 | ) | (5,341 | ) | (3,934 | ) | (702 | ) | (694 | ) | ||||||||||
|
Provision
for loan losses
|
1,918 | 4,419 | 5,621 | 1,670 | 1,258 | |||||||||||||||
|
Additional
provision from acquisition
|
325 | - | - | - | - | |||||||||||||||
|
Balance
at end of period
|
$ | 6,193 | $ | 6,675 | $ | 7,597 | $ | 5,910 | $ | 4,942 | ||||||||||
|
Ratios:
|
||||||||||||||||||||
|
Net
loan charge-offs to average loans
|
0.50% | 1.06% | 0.83% | 0.17% | 0.19% | |||||||||||||||
|
Net
loan charge-offs to loans at end of period
|
0.47% | 1.05% | 0.80% | 0.15% | 0.18% | |||||||||||||||
|
Allowance
for loan losses to loans at end of period
|
1.08% | 1.32% | 1.55% | 1.30% | 1.30% | |||||||||||||||
|
Net
loan charge-offs to allowance for loan losses
|
44.00% | 80.01% | 51.78% | 11.88% | 14.04% | |||||||||||||||
|
Net
loan charge-offs to provision charged to expense
|
142.04% | 120.86% | 69.99% | 42.04% | 55.17% | |||||||||||||||
Investment
Securities Portfolio. The securities portfolio totaled $142.1 million at
December 31, 2007 and consisted principally of U.S. Government agency
securities, mortgage-backed obligations, asset-backed securities, corporate debt
securities and mutual funds or other equity securities. The portfolio provides
us with a relatively stable source of income and provides a balance to interest
rate and credit risks as compared to other categories of the balance
sheet.
At
December 31, 2007, $49.2 million or 34.6% of our securities (excluding Federal
Home Loan Bank of Dallas stock) were scheduled to mature in less than one year.
This includes $48.9 million in discount notes that are being used solely for
pledging purposes. When excluding these securities, only 1.0% of our securities
mature in less than one year. Securities with maturity dates over 15 years
totaled 5.0% of the total portfolio or 7.6% of the portfolio after deducting the
discount notes for pledging. The average maturity of the securities portfolio
was 3.3 years.
At
December 31, 2007, securities totaling $105.6 million were classified as
available for sale and $36.5 million were classified as held to maturity,
compared to $111.4 million classified as available for sale and $47.0 million
classified as held to maturity at December 31, 2006. Management periodically
assesses the quality of our investment holdings using procedures similar to
those used in assessing the credit risks inherent in the loan portfolio. At
December 31, 2007, it is Management’s opinion that we held no investment
securities which bear a greater than the normal amount of credit risk as
compared to similar investments and that no securities had an amortized cost
greater than their recoverable value.
Average
securities as a percentage of average interest-earning assets were 21.5% for the
year December 31, 2007 and 25.9% for the year ended December 31, 2006. All
securities held at December 31, 2007 qualified as pledgeable securities, except
$5.8 million of debt securities and $3.3 million of equity securities.
Securities pledged at December 31, 2007 totaled $131.6
million.
The following
tables set forth the composition of our investment securities portfolio
(excluding Federal Home Loan Bank of Dallas stock) at the dates
indicated.
|
December
31, 2007
|
December
31, 2006
|
December
31, 2005
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
Gross
|
Gross
|
Gross
|
|||||||||||||||||||||||||||||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||||||||||||||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
Cost
|
Gains
|
Losses
|
Value
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
U.S.
Government Agencies
|
$ | 92,962 | $ | 26 | $ | (25 | ) | $ | 92,963 | $ | 98,369 | $ | - | $ | (1,226 | ) | $ | 97,143 | $ | 95,880 | $ | 20 | $ | (805 | ) | $ | 95,095 | |||||||||||||||||||||
|
Mortgage-backed
obligations
|
2,016 | 43 | (23 | ) | 2,036 | 4,077 | 39 | (103 | ) | 4,013 | 2,712 | 3 | (101 | ) | 2,614 | |||||||||||||||||||||||||||||||||
|
Asset-backed
securities
|
1,340 | - | (95 | ) | 1,245 | 1,385 | 1 | (1 | ) | 1,385 | 426 | - | (2 | ) | 424 | |||||||||||||||||||||||||||||||||
|
Corporate
debt securities
|
5,954 | 50 | (214 | ) | 5,790 | 7,394 | 31 | (61 | ) | 7,364 | 8,157 | 36 | (111 | ) | 8,082 | |||||||||||||||||||||||||||||||||
|
Mutual
funds or other equity securities
|
3,805 | 22 | (291 | ) | 3,536 | 1,500 | - | (52 | ) | 1,448 | 1,500 | - | (130 | ) | 1,370 | |||||||||||||||||||||||||||||||||
|
Total
securities
|
$ | 106,077 | $ | 141 | $ | (648 | ) | $ | 105,570 | $ | 112,725 | $ | 71 | $ | (1,443 | ) | $ | 111,353 | $ | 108,675 | $ | 59 | $ | (1,149 | ) | $ | 107,585 | |||||||||||||||||||||
|
Held-to-maturity:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
U.S.
Government Agencies
|
$ | 33,984 | $ | 24 | $ | (281 | ) | $ | 33,727 | $ | 43,976 | $ | - | $ | (1,280 | ) | $ | 42,696 | $ | 63,968 | $ | - | $ | (1,000 | ) | $ | 62,968 | |||||||||||||||||||||
|
Mortgage-backed
obligations
|
2,514 | - | (35 | ) | 2,479 | 3,023 | - | (105 | ) | 2,918 | 3,647 | - | (122 | ) | 3,525 | |||||||||||||||||||||||||||||||||
|
Total
securities
|
$ | 36,498 | $ | 24 | $ | (316 | ) | $ | 36,206 | $ | 46,999 | $ | - | $ | (1,385 | ) | $ | 45,614 | $ | 67,615 | $ | - | $ | (1,122 | ) | $ | 66,493 | |||||||||||||||||||||
Portfolio
Maturities and Yields. The composition and maturities of the
investment securities portfolio at December 31, 2007 are summarized in the
following table. Maturities are based on the final contractual payment dates,
and do not reflect the impact of prepayments or early redemptions that may
occur.
|
More
than One Year
|
More
than Five Years
|
|||||||||||||||||||||||||||||||
|
One
Year or Less
|
through
Five Years
|
through
Ten Years
|
More
than Ten Years
|
|||||||||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||||||||||||||
|
Amortized
|
Average
|
Amortized
|
Average
|
Amortized
|
Average
|
Amortized
|
Average
|
|||||||||||||||||||||||||
|
Cost
|
Yield
|
Cost
|
Yield
|
Cost
|
Yield
|
Cost
|
Yield
|
|||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||
|
Investment
securities held to maturity:
|
||||||||||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | - | - | $ | 999 | 4.15% | $ | 9,469 | 4.57% | $ | 23,516 | 5.49% | ||||||||||||||||||||
|
Mortgage-backed
obligations
|
- | - | - | - | 365 | 3.66% | 2,149 | 4.70% | ||||||||||||||||||||||||
|
Total
securities held to maturity
|
$ | - | - | $ | 999 | 4.15% | $ | 9,834 | 4.53% | $ | 25,665 | 5.42% | ||||||||||||||||||||
|
Investment
securities available for sale:
|
||||||||||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | 48,817 | 4.12% | $ | 7,900 | 5.00% | $ | 3,805 | 5.24% | $ | 32,440 | 5.88% | ||||||||||||||||||||
|
Mortgage-backed
obligations
|
- | - | - | - | - | - | 2,016 | 5.43% | ||||||||||||||||||||||||
|
Asset-backed
securities
|
- | - | 90 | 5.92% | - | - | 1,250 | 8.16% | ||||||||||||||||||||||||
|
Corporate
debt securities
|
365 | 6.00% | 2,683 | 5.48% | 763 | 5.91% | 2,143 | 6.99% | ||||||||||||||||||||||||
|
Mutual
funds or other equity securities
|
- | - | - | - | - | - | 3,805 | 6.47% | ||||||||||||||||||||||||
|
Total
securities available for sale
|
$ | 49,182 | 4.13 | % | $ | 10,673 | 5.13% | $ | 4,568 | 5.35% | $ | 41,654 | 6.04% | |||||||||||||||||||
|
Total
Securities
|
||||||||||||||||||||||||||||||||
|
Weighted
|
||||||||||||||||||||||||||||||||
|
Amortized
|
Average
|
|||||||||||||||||||||||||||||||
|
Cost
|
Fair
Value
|
Yield
|
||||||||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||
|
Investment
securities held to maturity:
|
||||||||||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | 33,984 | $ | 33,727 | 5.19% | |||||||||||||||||||||||||||
|
Mortgage-backed
obligations
|
2,514 | 2,479 | 4.55% | |||||||||||||||||||||||||||||
|
Total
securities held to maturity
|
$ | 36,498 | $ | 36,206 | 5.15% | |||||||||||||||||||||||||||
|
Investment
securities available for sale:
|
||||||||||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | 92,962 | $ | 92,963 | 4.85% | |||||||||||||||||||||||||||
|
Mortgage-backed
obligations
|
2,016 | 2,036 | 5.43% | |||||||||||||||||||||||||||||
|
Asset-backed
securities
|
1,340 | 1,245 | 8.01% | |||||||||||||||||||||||||||||
|
Corporate
debt securities
|
5,954 | 5,790 | 6.22% | |||||||||||||||||||||||||||||
|
Mutual
funds or other equity securities
|
3,805 | 3,536 | 6.47% | |||||||||||||||||||||||||||||
|
Total
securities available for sale
|
$ | 106,077 | $ | 105,570 | 5.04% | |||||||||||||||||||||||||||
Deposits. The
following table sets forth the distribution of our average total deposit
accounts, by account type, for the periods indicated.
|
December
31,
|
||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Balance
|
As
% of Total
|
Wtd
Avg Rate
|
Balance
|
As
% of Total
|
Wtd
Avg Rate
|
Balance
|
As
% of Total
|
Wtd
Avg Rate
|
||||||||||||||||||||||||||||
|
Noninterest-bearing
demand
|
$ | 120,740 | 16.7 | % | 0.0 | % | $ | 122,540 | 19.5 | % | 0.0 | % | $ | 129,827 | 20.5 | % | 0.0 | % | ||||||||||||||||||
|
Interest-bearing
demand
|
223,142 | 30.9 | % | 3.1 | % | 185,308 | 29.6 | % | 3.1 | % | 161,958 | 25.6 | % | 1.8 | % | |||||||||||||||||||||
|
Savings
|
45,044 | 6.2 | % | 0.5 | % | 41,161 | 6.6 | % | 0.4 | % | 42,633 | 6.7 | % | 0.3 | % | |||||||||||||||||||||
|
Time
|
334,168 | 46.2 | % | 4.6 | % | 277,284 | 44.3 | % | 4.2 | % | 298,490 | 47.2 | % | 3.2 | % | |||||||||||||||||||||
|
Total
deposits
|
$ | 723,094 | 100.0 | % | $ | 626,293 | 100.0 | % | $ | 632,908 | 100.0 | % | ||||||||||||||||||||||||
As
of December 31, 2007, the aggregate amount of outstanding certificates of
deposit in amounts greater than or equal to $100,000 was approximately $167.3
million. The following table sets forth the maturity of those certificates as of
December 31, 2007, 2006 and 2005.
|
December
31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Due
in one year or less
|
$ | 140,052 | 4.43% | $ | 114,793 | 4.88% | $ | 141,964 | 3.77% | |||||||||||||||
|
Due
after one year through three years
|
20,207 | 4.39% | 15,228 | 4.27% | 25,938 | 4.19% | ||||||||||||||||||
|
Due
after three years
|
7,083 | 5.14% | 12,526 | 5.07% | 12,656 | 4.82% | ||||||||||||||||||
|
Total
|
$ | 167,342 | 4.46% | $ | 142,547 | 4.83% | $ | 180,558 | 3.90% | |||||||||||||||
Borrowings.
The following table sets forth information concerning balances and interest
rates on all of our short-term borrowings at the dates and for the periods
indicated.
|
December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Outstanding
at year end
|
$ | 10,401 | $ | 6,584 | $ | 8,981 | ||||||
|
Maximum
month-end outstanding
|
45,766 | 37,353 | 32,348 | |||||||||
|
Average
daily outstanding
|
16,655 | 23,731 | 17,381 | |||||||||
|
Weighted
average rate during the year
|
5.18% | 5.19% | 3.14% | |||||||||
|
Average
rate at year end
|
3.50% | 4.41% | 3.56% | |||||||||
Long-term
borrowings consist of junior subordinated debentures totaling $3.1 million.
These debentures were issued in August 2003 for a 30 year period, callable after
5 years. The rate is LIBOR plus 300bp with quarterly interest payments. It is
currently the Company’s intent to redeem these debentures in August 2008 (see
Note 10).
Shareholders’
Equity and Return on Equity and Assets. Shareholders’ equity provides a
source of permanent funding, allows for future growth and the ability to absorb
unforeseen adverse developments. At December 31, 2007, shareholders’ equity
totaled $66.5 million compared to $59.2 million at December 31,
2006.
Information
regarding performance and equity ratios is as
follows:
|
December
31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Return
on average assets
|
1.37%
|
1.21%
|
0.95%
|
|
Return
on average equity
|
16.15%
|
15.54%
|
10.97%
|
|
Dividend
payout ratio
|
34.13%
|
37.89%
|
52.67%
|
Results
of Operations for the Years Ended December 31, 2007 and 2006
Net
Income. Net income for the year ended December 31, 2007 was $10.3
million, an increase of $1.5 million or 16.6%, from $8.8 million for the year
ended December 31, 2006. The increase in income was due primarily to an increase
in net interest income, and a decrease in the provision for loan losses
partially offset by increases in salaries and employee benefits. Net interest
income increased $2.4 million in 2007 due to an increase in average balances and
the net yield on interest-earning assets. $1.9 million was charged against the
provision for loan losses during the year ended December 31, 2007, a decrease of
$2.5 million as compared to $4.4 million for the year ended December 31, 2006.
Salaries and employee benefits increased by $1.7 million in connection with the
additional staff acquired from the Homestead Bank merger (see Note 3) and
increased support staff.
Earnings
per share for the year ended December 31, 2007 was $1.85 per share, an increase
of 16.6% or $0.26 per share from $1.58 per share for the year ended December 31,
2006.
Net
Interest Income. Net interest income is the largest component of our
earnings. It is calculated by subtracting the cost of interest-bearing
liabilities from the income earned on interest-earning assets and represents the
earnings from our primary business of gathering deposits and making loans and
investments. Our long-term objective is to manage this income to provide the
largest possible amount of income while balancing interest rate, credit and
liquidity risks.
A
financial institution’s asset and liability structure is substantially different
from that of an industrial company, in that virtually all assets and liabilities
are monetary in nature. Accordingly, changes in interest rates, which are
generally impacted by inflation rates, may have a significant impact on a
financial institution’s performance. The impact of interest rate changes depends
on the sensitivity to change of our interest-earning assets and interest-bearing
liabilities. The effects of the changing interest rate environment in recent
years and our interest sensitivity position are discussed
below.
Net
interest income in 2007 was $34.1 million, an increase of $2.4 million or 7.4%,
as compared to $31.8 million in 2006. The increase in interest income was due
principally to increases in the average balances of loans. Also during those
same periods, yields on investment securities and loans enhanced interest
income. An increase in interest income was partially offset by the increase in
interest expense from 2006 to 2007, which was attributable to the increased
volume of interest-bearing liabilities and increased cost of
funds.
Comparing
2007 to 2006, the average yield on interest-earning assets increased by 40 basis
points and the average rate paid on interest-bearing liabilities increased by 20
basis points. The net yield on interest-earning assets was 4.8% for the year
ended December 31, 2007, compared to 4.6% for 2006.
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 (leverage). The leverage for the
year ending December 31, 2007 and 2006 was 78.6% and 77.5%,
respectively.
The
following tables set forth average balance sheets, average yields and costs, and
certain other information for the periods indicated. No tax-equivalent yield
adjustments were made, as the effect thereof was not material. All average
balances are daily average balances. Non-accrual loans were included
in the computation of average balances, but have been reflected in the table as
loans carrying a zero yield. The yields set forth below include the effect of
deferred fees, discounts and premiums that are amortized or accreted to interest
income or expense.
|
Years
Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
Average
|
Yield/
|
Average
|
Yield/
|
Average
|
Yield/
|
|||||||||||||||||||||||||||||||
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
||||||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing
deposits with banks
|
$ | 1,977 | $ | 87 | 4.4 | % | $ | 2,323 | $ | 95 | 4.1 | % | $ | 2,509 | $ | 96 | 3.8 | % | ||||||||||||||||||
|
Securities
(including FHLB stock)
|
152,990 | 8,381 | 5.5 | % | 178,419 | 9,654 | 5.4 | % | 109,236 | 5,637 | 5.2 | % | ||||||||||||||||||||||||
|
Federal
funds sold
|
8,083 | 400 | 4.9 | % | 3,115 | 159 | 5.1 | % | 6,028 | 229 | 3.8 | % | ||||||||||||||||||||||||
|
Loans
held for sale
|
5,216 | 142 | 2.7 | % | 577 | 27 | 4.7 | % | 1,224 | 87 | 7.1 | % | ||||||||||||||||||||||||
|
Loans,
net of unearned income
|
543,946 | 46,470 | 8.5 | % | 505,623 | 41,002 | 8.1 | % | 476,144 | 34,280 | 7.2 | % | ||||||||||||||||||||||||
|
Total
interest-earning assets
|
712,212 | 55,480 | 7.8 | % | 690,057 | 50,937 | 7.4 | % | 595,141 | 40,329 | 6.8 | % | ||||||||||||||||||||||||
|
Noninterest-earning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Cash
and due from banks
|
19,569 | 20,415 | 22,047 | |||||||||||||||||||||||||||||||||
|
Premises
and equipment, net
|
14,812 | 12,442 | 11,413 | |||||||||||||||||||||||||||||||||
|
Other
assets
|
4,644 | 3,679 | 2,953 | |||||||||||||||||||||||||||||||||
|
Total
|
$ | 751,237 | $ | 55,480 | $ | 726,593 | $ | 50,937 | $ | 631,554 | $ | 40,329 | ||||||||||||||||||||||||
|
Liabilities
and Stockholders' Equity
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Demand
deposits
|
$ | 196,805 | $ | 6,152 | 3.1 | % | $ | 180,384 | $ | 5,657 | 3.1 | % | $ | 124,757 | $ | 2,289 | 1.8 | % | ||||||||||||||||||
|
Savings
deposits
|
42,564 | 228 | 0.5 | % | 42,727 | 174 | 0.4 | % | 35,969 | 117 | 0.3 | % | ||||||||||||||||||||||||
|
Time
deposits
|
297,193 | 13,673 | 4.6 | % | 269,016 | 11,224 | 4.2 | % | 263,720 | 8,468 | 3.2 | % | ||||||||||||||||||||||||
|
Borrowings
|
23,450 | 1,345 | 5.7 | % | 42,435 | 2,151 | 5.1 | % | 45,732 | 1,493 | 3.3 | % | ||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
560,012 | 21,398 | 3.8 | % | 534,562 | 19,206 | 3.6 | % | 470,178 | 12,367 | 2.6 | % | ||||||||||||||||||||||||
|
Noninterest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Demand
deposits
|
121,894 | 130,742 | 102,549 | |||||||||||||||||||||||||||||||||
|
Other
|
5,767 | 4,649 | 3,926 | |||||||||||||||||||||||||||||||||
|
Total
liabilities
|
687,673 | 21,398 | 669,953 | 19,206 | 576,653 | 12,367 | ||||||||||||||||||||||||||||||
|
Stockholders'
equity
|
63,564 | 56,640 | 54,901 | |||||||||||||||||||||||||||||||||
|
Total
|
$ | 751,237 | 21,398 | $ | 726,593 | 19,206 | $ | 631,554 | 12,367 | |||||||||||||||||||||||||||
|
Net
interest income
|
$ | 34,082 | $ | 31,731 | $ | 27,962 | ||||||||||||||||||||||||||||||
|
Net
interest rate spread
(1)
|
4.0 | % | 3.8 | % | 4.1 | % | ||||||||||||||||||||||||||||||
|
Net
interest-earning assets
(2)
|
$ | 152,200 | $ | 155,495 | $ | 124,963 | ||||||||||||||||||||||||||||||
|
Net
interest margin (3)
|
4.8 | % | 4.6 | % | 4.7 | % | ||||||||||||||||||||||||||||||
|
Average
interest-earning assets to
|
||||||||||||||||||||||||||||||||||||
|
interest-bearing
liabilities
|
127.2 | % | 129.1 | % | 126.6 | % | ||||||||||||||||||||||||||||||
__________________________________
(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.
- 30
-
Rate/Volume
Analysis.
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities for the periods indicated. The table distinguishes
between (i) changes attributable to rate (change in rate multiplied by the prior
period’s volume), (ii) changes attributable to volume (changes in volume
multiplied by the prior period’s rate), (iii) mixed changes (changes that are
not attributable to either rate of volume) and (iv) total increase (decrease)
(the sum of the previous columns).
|
Years
Ended December 31,
|
||||||||||||||||||||||||||||||||
|
2007
Compared to 2006
|
2006
Compared to 2005
|
|||||||||||||||||||||||||||||||
|
Increase
(Decrease) Due To
|
Increase
(Decrease) Due To
|
|||||||||||||||||||||||||||||||
|
Rate/
|
Increase/
|
Rate/
|
Increase/
|
|||||||||||||||||||||||||||||
|
Volume
|
Rate
|
Volume
|
Decrease
|
Volume
|
Rate
|
Volume
|
Decrease
|
|||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
|
Interest
earned on:
|
||||||||||||||||||||||||||||||||
|
Interest-bearing
deposits with banks
|
$ | (14 | ) | $ | 7 | $ | (1 | ) | $ | (8 | ) | $ | (7 | ) | $ | 6 | $ | - | $ | (1 | ) | |||||||||||
|
Securities
(including FHLB stock)
|
(1,376 | ) | 120 | (17 | ) | (1,273 | ) | 3,570 | 273 | 174 | 4,017 | |||||||||||||||||||||
|
Federal
funds sold
|
254 | (5 | ) | (8 | ) | 241 | (111 | ) | 79 | (38 | ) | (70 | ) | |||||||||||||||||||
|
Loans
held for sale
|
217 | (11 | ) | (91 | ) | 115 | (46 | ) | (30 | ) | 16 | (60 | ) | |||||||||||||||||||
|
Loans,
net of unearned income
|
3,108 | 2,194 | 166 | 5,468 | 2,122 | 4,332 | 268 | 6,722 | ||||||||||||||||||||||||
|
Total
interest income
|
2,189 | 2,305 | 49 | 4,543 | 5,528 | 4,660 | 420 | 10,608 | ||||||||||||||||||||||||
|
Interest
paid on:
|
||||||||||||||||||||||||||||||||
|
Demand
deposits
|
515 | (18 | ) | (2 | ) | 495 | 1,021 | 1,623 | 724 | 3,368 | ||||||||||||||||||||||
|
Savings
deposits
|
(1 | ) | 55 | - | 54 | 22 | 29 | 6 | 57 | |||||||||||||||||||||||
|
Time
deposits
|
1,176 | 1,153 | 120 | 2,449 | 170 | 2,535 | 51 | 2,756 | ||||||||||||||||||||||||
|
Borrowings
|
(962 | ) | 283 | (127 | ) | (806 | ) | (108 | ) | 825 | (59 | ) | 658 | |||||||||||||||||||
|
Total
interest expense
|
728 | 1,473 | (9 | ) | 2,192 | 1,105 | 5,012 | 722 | 6,839 | |||||||||||||||||||||||
|
Change
in net interest income
|
$ | 1,461 | $ | 832 | $ | 58 | $ | 2,351 | $ | 4,423 | $ | (352 | ) | $ | (302 | ) | $ | 3,769 | ||||||||||||||
Provision
for
Loan Losses. The provision for loan losses was $1.9 million and $4.4
million in 2007 and 2006, respectively. The decreased 2007 provisions were
attributable to $2.7 million in net loan charge-offs during 2007 compared to
$5.3 million in net loan charge-offs during 2006. Of the loan charge-offs in
2007, approximately $3.0 million were loan secured by real estate of which $2.2
million were commercial real estate and approximately $0.8 million were
residential properties. In 2007, recoveries of $1.2 million were recognized on
loans previously charged off as compared to $547,000 in 2006. Of the loan
charge-offs during 2006, and the consequent increase in the provision, $4.8
million related specifically to home mortgages. The allowance for loan losses at
December 31, 2007 was $6.2 million, compared to $6.7 million at December 31,
2006, and comprised 1.08% and 1.32% of total loans, respectively. Management
believes that the current level of the allowance is adequate to cover losses in
the loan portfolio given the current economic conditions, expected net
charge-offs and nonperforming asset levels.
In
July 2007, the Company signed a Final Release and Settlement Agreement with
BankInsurance, Inc., the Company’s insurance company, for a claim made by the
Company under the Financial Institution Bond for the suspected fraudulent
mortgage loans (see Note 6 to the Consolidated Financial Statements). Under this
Release and Agreement, the Company received $1.1 million. After attorney fees
and expenses, the Company recorded a loan recovery totaling $723,000
in 2007.
Noninterest
Income.
Noninterest income totaled $4.7 million in 2007, a decrease of $331,000,
compared to $4.4 million in 2006. Service charges, commissions and fees totaled
$3.8 million and $3.6 million for the years ended December 31, 2007 and 2006,
respectively. Net securities losses were $478,000 in 2007, compared to $234,000
in 2006. As a result of increases in staff and mortgage loan volume, gains on
sale of loans were $272,000 in 2007, up $201,000 when compared to $71,000 gains
in 2006. Other noninterest income increased $156,000 to $1.1 million in 2007
from $926,000 in 2006 primarily from increases in bankcard fees and credit card
fee income.
Noninterest
Expense. Noninterest expense totaled $21.1 million in 2007 and $18.4
million in 2006. Salaries and benefits increased $1.7 million in 2007 to
$9.7 million from $7.9 million in 2006. The increase in salaries was primarily
related the Homestead Bank merger (see Note 3) and to staffing several
operational departments, including, credit and audit, to accommodate increased
activities. At December 31, 2007, 240 employees represented 222 full-time
equivalent staff members as compared to 196 full-time equivalent staff members
in 2006. Occupancy and equipment expense totaled $2.6 million in 2007 and $2.3
million in 2006. The net cost of other real estate and repossessions increased
$119,000 million in 2007 to $396,000 from $277,000 in 2006 due to increases
in costs incurred in connection with owning, maintaining and the sale and
disposition of other real estate owned. Other noninterest expense totaled $8.5
million in 2007, compared to $7.8 million in 2006, an increase of $673,000 or
8.6%. The increase in other noninterest expense was primarily attributable to
increased legal and professional fees, operating supplies, data processing
expenses, travel and lodging, sales tax and tax on capital expenses offset by
the reduction in amortization of core deposits.
- 31
-
The
following is a summary of the significant components of other noninterest
expense:
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Other
noninterest expense:
|
||||||||||||
|
Legal
and professional fees
|
$ | 1,610 | $ | 1,390 | $ | 1,201 | ||||||
|
Operating
supplies
|
615 | 545 | 514 | |||||||||
|
Marketing
and public relations
|
842 | 823 | 564 | |||||||||
|
Data
processing
|
955 | 904 | 736 | |||||||||
|
Travel
and lodging
|
439 | 280 | 280 | |||||||||
|
Taxes
- sales and capital
|
628 | 582 | 684 | |||||||||
|
Telephone
|
211 | 244 | 421 | |||||||||
|
Amortization
of core deposit intangibles
|
203 | 525 | 630 | |||||||||
|
Other
|
2,999 | 2,535 | 2,410 | |||||||||
|
Total
other expense
|
$ | 8,502 | $ | 7,828 | $ | 7,440 | ||||||
Income
Taxes. The provision for income taxes for the years ended
December 31, 2007 and 2006 was $5.5 million and $4.5 million respectively. The
higher provision for income taxes in 2007 reflected higher income during 2007 as
compared to 2006 resulting from increases in net interest income, reductions in
the provision for loan losses offset by increases in noninterest expense. The
Company’s effective tax rate amounted to 34.8% and 33.8% during 2007 and 2006,
respectively. The difference between the effective tax rate and the statutory
tax rate primarily relates to variances in items that are non-taxable or
non-deductible and various tax credits.
Results
of Operations for the Years Ended December 31, 2006 and 2005
Net
Income. Net income for the year ended December 31, 2006 was $8.8 million,
an increase of $2.8 million or 46.1%, from $6.0 million for the year ended
December 31, 2005. The increase in income was due primarily to an increase in
net interest income, a decrease in the provision for loan losses and a decrease
in the net cost of other real estate and repossessions. Net interest income
increased $3.8 million in 2006 due to an increase in average balances and yields
of both securities and loans. To primarily provide for current year charge-offs,
$4.4 million was charged to the loan loss provision for the year ended December
31, 2006, a decrease of $1.2 million as compared to $5.6 million for the year
ended December 31, 2005. The net cost of other real estate and repossessions
decreased by $1.2 million due to a reduction in costs incurred in connection
with owning, maintaining and the sale and disposition of other real estate
owned.
Earnings
per share for the year ended December 31, 2006 was $1.58 per share, an increase
of 46.1% or $0.50 per share from $1.08 per share for the year ended December 31,
2005.
Net
Interest Income.
Net interest income in 2006 was $31.7 million, an increase of $3.8 million or
13.5%, as compared to $28.0 million in 2005. The increase in interest income was
due principally to increases in the average balances of investment securities
and loans. Also during those same periods, yields on investment securities and
loans enhanced interest income. An increase in interest income was partially
offset by the increase in interest expense from 2005 to 2006, which was
attributable to the increased volume of interest-bearing liabilities and
increased cost of funds.
The
net yield on interest-earning assets is calculated by dividing net interest
income by our 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.
Comparing
2006 to 2005, the average yield on interest-earning assets increased by 60 basis
points and the average rate paid on interest-bearing liabilities increased by
100 basis points. The net yield on interest-earning assets was 4.6% for the year
ended December 31, 2006, compared to 4.7% for 2005.
Noninterest
Income.
Noninterest income totaled $4.4 million in 2006, a decrease of $861,000,
compared to $5.2 million in 2005. Service charges, commissions and fees totaled
$3.6 million and $3.5 million for the years ended December 31, 2006 and 2005,
respectively. Net securities losses were $234,000 in 2006, compared to gains of
$7,000 in 2005. As a result of staff and mortgage loan volume reductions, gains
on sale of loans were $71,000 in 2006, down $252,000 when compared to $323,000
gains in 2005. Other noninterest income decreased $466,000 to $926,000 in 2006
from $1.4 million in 2005 primarily from the sale of Pulse stock (ATM software
vendor) in 2005 resulting from the merger of Pulse with
Discover.
Provision
for Loan Losses. The provision for loan losses was $4.4 million and $5.6
million in 2006 and 2005, respectively. The increased 2006 provisions were
attributable to $3.9 million in net loan charge-offs during 2005 and $5.3
million in net loan charge-offs during 2006. Of the loan charge-offs
during 2006, and the consequent increase in the provision, $4.8 million related
specifically to home mortgages. Of the loans charged-off during 2005, $1.6
million related to seven distinct commercial credits. In addition, $145,000
related to home mortgages and $1.3 million were storm-related credits in
2005. The allowance for loan losses at December 31, 2006 was $6.7
million, compared to $7.6 million at December 31, 2005, and comprised 1.32% and
1.55% of total loans, respectively.
Noninterest
Expense. Noninterest expense totaled $18.4 million in 2006 and remained
relatively flat compared to 2005. Salaries and benefits increased $699,000 in
2006 to $7.9 million from $7.2 million in 2005. The increase in salaries was
primarily related to staffing several operational departments, including loan
review, credit and audit, to accommodate increased activities. At December 31,
2006, 214 employees represented 196 full-time equivalent staff members as
compared to 189 full-time equivalent staff members in 2005. Occupancy and
equipment expense totaled $2.3 million in 2006 and $2.2 million in 2005. The net
cost of other real estate and repossessions decreased $1.2 million in 2006 to
$277,000 from $1.5 million in 2005 due to a reduction in costs incurred in
connection with owning, maintaining and the sale and disposition of other real
estate owned. Other noninterest expense totaled $7.8 million in 2006, compared
to $7.4 million in 2005, an increase of $388,000 or 5.2%. The increase in other
noninterest expense was primarily attributable to legal and professional fees,
data processing expenses and marketing and public relations
expenses.
Income
Taxes. Our provision for income taxes for the years ended December 31,
2006 and 2005 was $4.5 million and $3.1 million respectively. The higher
provision for income taxes in 2006 resulted from higher income during 2006 as
compared to 2005. The Company’s effective tax rate amounted to 33.8% and
34.3% during 2006 and 2005, respectively. The difference between the effective
tax rate and the statutory tax rate primarily relates to variances in items that
are non-taxable or non-deductible and various tax
credits.
Asset/Liability
Management and Market Risk
Asset/LiabilityManagement.
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 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. Our assets,
consisting primarily of loans secured by real estate, 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.
Accordingly, our Board of Directors has established an Asset/Liability Committee
which is responsible for evaluating 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. Senior Management monitors the
level of interest rate risk on a regular basis and the Asset/Liability
Committee, which consists of executive Management and other bank personnel
operating under a policy adopted by the Board of Directors, meets as needed to
review our asset/liability policies and interest rate risk
position.
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 being
repriced 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.
To
maximize our margin, we attempt to be somewhat more asset sensitive during
periods of rising rates and more liability sensitive during periods of falling
rates. 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. The mix is
relatively difficult to manage. Because of the significant impact on net
interest margin from mismatches in repricing opportunities, the asset-liability
mix is monitored periodically depending upon Management’s assessment of current
business conditions and the interest rate outlook. Exposure to interest rate
fluctuations is maintained within prudent levels by the use of varying
investment strategies.
We
monitor interest rate risk using an interest sensitivity analysis set forth on
the following table. This analysis, which we prepare monthly, reflects the
maturity and repricing characteristics of assets and liabilities over various
time periods. The gap indicates whether more assets or liabilities are subject
to repricing over a given time period. The interest sensitivity analysis at
December 31, 2007 reflects an asset-sensitive position with a positive
cumulative gap on a one-year basis.
INTEREST
SENSITIVITY AT DECEMBER 31, 2007
|
Interest
Sensitivity Within
|
||||||||||||||||||||
|
3
Months
|
Over
3 Months
|
Total
|
Over
|
|||||||||||||||||
|
Or
Less
|
thru
12 Months
|
One
Year
|
One
Year
|
Total
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Earning
Assets:
|
||||||||||||||||||||
|
Loans
(including loans held for sale)
|
$ | 377,276 | $ | 84,769 | $ | 462,045 | $ | 117,170 | $ | 579,215 | ||||||||||
|
Securities
(including FHLB stock)
|
49,795 | 375 | 50,170 | 92,853 | 143,023 | |||||||||||||||
|
Federal
Funds Sold
|
35,869 | - | 35,869 | - | 35,869 | |||||||||||||||
|
Other
earning assets
|
2,218 | - | 2,218 | - | 2,218 | |||||||||||||||
|
Total
earning assets
|
465,158 | 85,144 | 550,302 | 210,023 | $ | 760,325 | ||||||||||||||
|
Source
of Funds:
|
||||||||||||||||||||
|
Interest-bearing
accounts:
|
||||||||||||||||||||
|
Demand
deposits
|
165,552 | - | 165,552 | 57,590 | 223,142 | |||||||||||||||
|
Savings
deposits
|
11,261 | - | 11,261 | 33,783 | 45,044 | |||||||||||||||
|
Time
deposits
|
128,734 | 139,033 | 267,767 | 66,401 | 334,168 | |||||||||||||||
|
Short-term
borrowings
|
10,401 | - | 10,401 | - | 10,401 | |||||||||||||||
|
Long-term
borrowings
|
- | 3,093 | 3,093 | - | 3,093 | |||||||||||||||
|
Noninterest-bearing,
net
|
- | - | 144,477 | 144,477 | ||||||||||||||||
|
Total
source of funds
|
315,948 | 142,126 | 458,074 | 302,251 | $ | 760,325 | ||||||||||||||
|
Period
gap
|
149,210 | (56,982 | ) | 92,228 | (92,228 | ) | ||||||||||||||
|
Cumulative
gap
|
$ | 149,210 | $ | 92,228 | $ | 92,228 | $ | - | ||||||||||||
|
Cumulative
gap as a
|
||||||||||||||||||||
|
percent
of earning assets
|
19.62% | 12.13% | 12.13% | |||||||||||||||||
Net
Interest Income at Risk. Net
interest income (NII) at risk measures the risk of a decline in earnings due to
changes in interest rates. The 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 at
December 31, 2007. Shifts are measured in 100 basis point increments (+ 200
through - 200 basis points,) from base case. Base case 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; the
instantaneous shocks are performed against that yield
curve.
|
Change
in
|
Estimated
Increase
|
|
|
Interest
|
(Decrease)
in NII
|
|
|
Rates
|
December
31, 2007
|
|
|
(basis
points)
|
||
|
-200
|
-22.37%
|
|
|
-100
|
-10.70%
|
|
|
Stable
|
0.00%
|
|
|
+100
|
10.63%
|
|
|
+200
|
19.26%
|
The
increasing rate scenarios shows higher levels of net interest income while the
decreasing scenarios show higher levels of volatility and subsequently lower
levels of NII. These scenarios are instantaneous shocks that assume balance
sheet Management will mirror base case. Should the yield curve begin to rise or
fall, Management has several strategies available to maximize earnings
opportunities or offset the negative impact to earnings. For example, in a
falling rate environment, deposit pricing strategies could be adjusted to
further sway customer behavior to non-contractual or short-term (less than 12
months) contractual deposit products which would reset downward with the changes
in the yield curve and prevailing market rates. Another opportunity at the start
of such a cycle would be reinvesting the securities portfolio cash flows into
longer term, non-callable bonds that would lock in higher
yields.
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 NII than indicated above. Strategic Management of our
balance sheet and earnings would be adjusted to accommodate these movements. As
with any method of measuring IRR, 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 its exposure to interest rate
risk.
Liquidity
and Capital Resources
Liquidity and
Capital Resources. 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. Including securities pledged to collateralize
public fund deposits, these assets represent 20.3%, 19.1% and 19.1% of the total
liquidity base at December 31, 2007, 2006 and 2005, respectively. In addition,
we maintained borrowing availability with the Federal Home Loan Bank, or FHLB,
approximating $54.7 million and $6.9 million at December 31, 2007 and December
31, 2006, respectively. We also maintain federal funds lines of
credit totaling $59.7 million at three other correspondent banks, of which $59.7
was available at December 31, 2007, and $54.0 million was available at December
31, 2006. Management believes there is sufficient liquidity to satisfy current
operating needs.
Stockholders’
equity at December 31, 2007 was $66.5 million, an increase of $7.3 million, or
12.4%, from $59.2 million at December 31, 2006. At December 31, 2006,
stockholders’ equity was $59.2 million, an increase of $5.3 million, or 9.8%,
from $53.9 million on December 31, 2005. The increase in stockholders’ equity
primarily reflected net income for the years ended December 31, 2007 and
2006, offset by quarterly dividend payments.
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. 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. All bank holding
companies and 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.
At
December 31, 2007, we satisfied the minimum regulatory capital requirements and
were “well capitalized” within the meaning of federal regulatory
requirements.
Off-Balance
Sheet Arrangements
We
had $105.0 million, $45.0 million and $80.0 million in letters of credit issued
by the Federal Home Loan Bank at December 31, 2007, 2006, and 2005,
respectively, which was used as collateral for public fund deposits. The changes
in the arrangements parallel the changes in our public fund
deposits.
Contractual
Obligations
The
following table summarizes our significant fixed and determinable contractual
obligations and other funding needs by payment date at December 31, 2007. The
payment amounts represent those amounts due to the recipient and do not include
any unamortized premiums or discounts or other similar carrying amount
adjustments.
At December
31, 2007, our contractual obligations were as follows:
|
Payments
Due by Period
|
||||||||||||||||
|
One
Year
|
One
Through
|
Over
Three
|
||||||||||||||
|
or
Less
|
Three
Years
|
Years
|
Total
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Operating
leases
|
$ | 10 | $ | 21 | $ | 95 | $ | 126 | ||||||||
|
Time
deposits
|
267,850 | 49,848 | 16,470 | 334,168 | ||||||||||||
|
Short-term
borrowings
|
10,401 | - | - | 10,401 | ||||||||||||
|
Long-term
borrowings (1)
|
3,093 | - | - | 3,093 | ||||||||||||
|
Total
|
$ | 281,354 | $ | 49,869 | $ | 16,565 | $ | 347,788 | ||||||||
__________________________________
(1) This
represents the call date of the subordinated debentures. The stated maturity is
2033.
Impact
of Inflation and Changing Prices
The
consolidated financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles,
which generally require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial companies,
the majority of the Company’s assets and liabilities are monetary in nature. As
a result, interest rates generally have a more significant impact on the
Company’s performance than does the effect of inflation. Although fluctuations
in interest rates are neither completely predictable or controllable, the
Company regularly monitors its interest rate position and oversees its financial
risk Management by establishing policies and operating limits (see
“Asset/Liability Management and Market Risk” section). Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services, since such prices are affected by inflation to a larger
extent than interest rates. Although not as critical to the banking industry as
to other industries, inflationary factors may have some impact on the Company’s
growth, earnings, total assets and capital levels. Management does not expect
inflation to be a significant factor in 2008.
For
discussion on this matter, see the “Asset/Liability Management and Market Risk”
section of this analysis.
Report
of Castaing, Hussey & Lolan, LLC
Independent
Registered Accounting Firm
To the
Stockholders and Board of Directors
First
Guaranty Bancshares,
Inc.
We
have audited the accompanying consolidated balance sheets of First
Guaranty Bancshares, Inc. as of December 31, 2007 and 2006, and the related
consolidated statements of income, changes in stockholders’ equity and cash
flows for each of the years in the three-year period ended December 31, 2007.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
apropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of First Guaranty
Bancshares, Inc. as of December 31, 2007 and 2006, and the consolidated results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America.
Castaing,
Hussey & Lolan, LLC
New
Iberia, Louisiana
March 28,
2008
|
FIRST
GUARANTY BANCSHARES, INC. AND SUBSIDIARY
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
(dollars
in thousands, except share data)
|
||||||||
| December 31, | ||||||||
|
2007
|
2006
|
|||||||
|
Assets
|
||||||||
|
Cash
and cash equivalents:
|
||||||||
|
Cash
and due from banks
|
$ | 22,778 | $ | 17,893 | ||||
|
Interest-earning
demand deposits with banks
|
30 | 131 | ||||||
|
Federal
funds sold
|
35,869 | 6,793 | ||||||
|
Cash
and cash equivalents
|
58,677 | 24,817 | ||||||
|
Interest-earning
time deposits with banks
|
2,188 | 2,188 | ||||||
|
Investment
securities:
|
||||||||
|
Available
for sale, at fair value
|
105,570 | 111,353 | ||||||
|
Held
to maturity, at cost (estimated fair value of
|
||||||||
|
$36,206
and $45,614, respectively)
|
36,498 | 46,999 | ||||||
|
Investment
securities
|
142,068 | 158,352 | ||||||
|
Federal
Home Loan Bank stock, at cost
|
955 | 2,264 | ||||||
|
Loans
held for sale
|
3,959 | 1,049 | ||||||
|
Loans,
net of unearned income
|
575,256 | 507,195 | ||||||
|
Less:
allowance for loan losses
|
6,193 | 6,675 | ||||||
|
Net
loans
|
569,063 | 500,520 | ||||||
| Premises and equipment, net | 16,240 | 13,593 | ||||||
|
Goodwill
|
1,911 | - | ||||||
|
Intangible
assets, net
|
2,383 | 456 | ||||||
|
Other
real estate, net
|
373 | 2,540 | ||||||
|
Accrued
interest receivable
|
5,126 | 5,378 | ||||||
|
Other
assets
|
4,388 | 3,330 | ||||||
|
Total
Assets
|
$ | 807,331 | $ | 714,487 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Deposits:
|
||||||||
|
Noninterest-bearing
demand
|
$ | 120,740 | $ | 122,540 | ||||
|
Interest-bearing
demand
|
223,142 | 185,308 | ||||||
|
Savings
|
45,044 | 41,161 | ||||||
|
Time
|
334,168 | 277,284 | ||||||
|
Total
deposits
|
723,094 | 626,293 | ||||||
|
Short-term
borrowings
|
10,401 | 6,584 | ||||||
|
Accrued
interest payable
|
2,956 | 3,070 | ||||||
|
Long-term
borrowings
|
3,093 | 17,984 | ||||||
|
Other
liabilities
|
1,254 | 1,353 | ||||||
|
Total
Liabilities
|
740,798 | 655,284 | ||||||
|
Stockholders'
Equity
|
||||||||
|
Common
stock:
|
||||||||
|
$1
par value - authorized 100,000,000 shares; issued and
|
||||||||
|
outstanding
5,559,644 shares
|
5,560 | 5,560 | ||||||
|
Surplus
|
26,459 | 26,459 | ||||||
|
Retained
earnings
|
34,849 | 28,089 | ||||||
|
Accumulated
other comprehensive loss
|
(335 | ) | (905 | ) | ||||
|
Total
Stockholders' Equity
|
66,533 | 59,203 | ||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 807,331 | $ | 714,487 | ||||
See Notes
to Consolidated Financial Statements.
|
FIRST
GUARANTY BANCSHARES, INC. AND SUBSIDIARY
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||||||
|
(dollars
in thousands, except share data)
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Interest
Income:
|
||||||||||||
|
Loans
(including fees)
|
$ | 46,470 | $ | 41,002 | $ | 34,280 | ||||||
|
Loans
held for sale
|
142 | 27 | 87 | |||||||||
|
Deposits
with other banks
|
87 | 95 | 96 | |||||||||
|
Securities
(including FHLB stock)
|
8,381 | 9,654 | 5,637 | |||||||||
|
Federal
funds sold
|
400 | 159 | 229 | |||||||||
|
Total
Interest Income
|
55,480 | 50,937 | 40,329 | |||||||||
|
Interest
Expense:
|
||||||||||||
|
Demand
deposits
|
6,152 | 5,657 | 2,289 | |||||||||
|
Savings
deposits
|
228 | 174 | 117 | |||||||||
|
Time
deposits
|
13,673 | 11,224 | 8,468 | |||||||||
|
Borrowings
|
1,345 | 2,151 | 1,493 | |||||||||
|
Total
Interest Expense
|
21,398 | 19,206 | 12,367 | |||||||||
|
Net
Interest Income
|
34,082 | 31,731 | 27,962 | |||||||||
|
Provision
for loan losses
|
1,918 | 4,419 | 5,621 | |||||||||
|
Net
Interest Income after Provision for Loan Losses
|
32,164 | 27,312 | 22,341 | |||||||||
|
Noninterest
Income:
|
||||||||||||
|
Service
charges, commissions and fees
|
3,822 | 3,604 | 3,506 | |||||||||
|
Net
(losses) gains on sale of securities
|
(478 | ) | (234 | ) | 7 | |||||||
|
Net
gains on sale of loans
|
272 | 71 | 323 | |||||||||
|
Other
|
1,082 | 926 | 1,392 | |||||||||
|
Total
Noninterest Income
|
4,698 | 4,367 | 5,228 | |||||||||
|
Noninterest
Expense:
|
||||||||||||
|
Salaries
and employee benefits
|
9,662 | 7,926 | 7,227 | |||||||||
|
Occupancy
and equipment expense
|
2,573 | 2,342 | 2,219 | |||||||||
|
Net
cost of other real estate and repossessions
|
396 | 277 | 1,513 | |||||||||
|
Other
|
8,502 | 7,828 | 7,440 | |||||||||
|
Total
Noninterest Expense
|
21,133 | 18,373 | 18,399 | |||||||||
|
Income
Before Income Taxes
|
15,729 | 13,306 | 9,170 | |||||||||
|
Provision
for income taxes
|
5,466 | 4,504 | 3,146 | |||||||||
|
Net
Income
|
$ | 10,263 | $ | 8,802 | $ | 6,024 | ||||||
|
Per
Common Share:
|
||||||||||||
|
Earnings
|
$ | 1.85 | $ | 1.58 | $ | 1.08 | ||||||
|
Cash
dividends paid
|
$ | 0.63 | $ | 0.60 | $ | 0.57 | ||||||
|
Average
Common Shares Outstanding
|
5,559,644 | 5,559,644 | 5,559,644 | |||||||||
See Notes
to Consolidated Financial Statements.
|
FIRST
GUARANTY BANCSHARES, INC. AND SUBSIDIARY
|
||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Common
|
Common
|
Other
|
||||||||||||||||||||||
|
Stock
|
Stock
|
Retained
|
Comprehensive
|
|||||||||||||||||||||
|
$1
Par
|
$5
Par
|
Surplus
|
Earnings
|
Loss
|
Total
|
|||||||||||||||||||
|
Balance
December 31, 2004
|
$ | 5,076 | $ | 2,416 | $ | 24,527 | $ | 19,771 | $ | (84 | ) | $ | 51,706 | |||||||||||
|
Net
income
|
- | - | - | 6,024 | - | 6,024 | ||||||||||||||||||
|
Change
in unrealized loss on
|
||||||||||||||||||||||||
|
available
for sale securities,
|
||||||||||||||||||||||||
|
net
of reclassification adjustments, and taxes
|
- | - | - | - | (634 | ) | (634 | ) | ||||||||||||||||
|
Comprehensive
income
|
5,390 | |||||||||||||||||||||||
|
Cash
dividends on common stock ($0.57 per share)
|
- | - | - | (3,173 | ) | - | (3,173 | ) | ||||||||||||||||
|
Balance
December 31, 2005
|
5,076 | 2,416 | 24,527 | 22,622 | (718 | ) | 53,923 | |||||||||||||||||
|
Net
income
|
- | - | - | 8,802 | - | 8,802 | ||||||||||||||||||
|
Reclassification
of $5 par value into $1 par value
|
484 | (2,416 | ) | 1,932 | - | |||||||||||||||||||
|
Change
in unrealized loss on
|
||||||||||||||||||||||||
|
available
for sale securities,
|
||||||||||||||||||||||||
|
net
of reclassification adjustments, and taxes
|
- | - | - | - | (187 | ) | (187 | ) | ||||||||||||||||
|
Comprehensive
income
|
8,615 | |||||||||||||||||||||||
|
Cash
dividends on common stock ($0.60 per share)
|
- | - | - | (3,335 | ) | - | (3,335 | ) | ||||||||||||||||
|
Balance
December 31, 2006
|
5,560 | - | 26,459 | 28,089 | (905 | ) | 59,203 | |||||||||||||||||
|
Net
income
|
- | - | - | 10,263 | - | 10,263 | ||||||||||||||||||
|
Change
in unrealized loss on
|
||||||||||||||||||||||||
|
available
for sale securities,
|
||||||||||||||||||||||||
|
net
of reclassification adjustments, and taxes
|
- | - | - | - | 570 | 570 | ||||||||||||||||||
|
Comprehensive
income
|
10,833 | |||||||||||||||||||||||
|
Cash
dividends on common stock ($0.63 per share)
|
- | - | - | (3,503 | ) | - | (3,503 | ) | ||||||||||||||||
|
Balance
December 31, 2007
|
$ | 5,560 | $ | - | $ | 26,459 | $ | 34,849 | $ | (335 | ) | $ | 66,533 | |||||||||||
See
Notes to Consolidated Financial Statements.
|
FIRST
GUARANTY BANCSHARES, INC. AND SUBSIDIARY
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
Flows From Operating Activities
|
||||||||||||
|
Net
income
|
$ | 10,263 | $ | 8,802 | $ | 6,024 | ||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||
|
provided
by operating activities:
|
||||||||||||
|
Provision
for loan losses
|
1,918 | 4,419 | 5,621 | |||||||||
|
Depreciation
and amortization
|
1,238 | 1,438 | 1,411 | |||||||||
| Amortization of premium/discount on investments | (1,011 | ) | 66 | (74 | ) | |||||||
|
Loss
(Gain) on sale of securities
|
477 | 234 | (7 | ) | ||||||||
|
Gain
on sale of assets
|
(272 | ) | (81 | ) | (315 | ) | ||||||
|
ORE
writedowns and loss/(gain) on disposition
|
180 | (365 | ) | 1,101 | ||||||||
|
FHLB
stock dividends
|
(134 | ) | (134 | ) | (121 | ) | ||||||
|
Net
decrease (increase) in loans held for sale
|
31,090 | (1,049 | ) | 2,638 | ||||||||
|
Change
in other assets and liabilities, net
|
(1,269 | ) | (106 | ) | 794 | |||||||
|
Net
Cash Provided By Operating Activities
|
42,480 | 13,224 | 17,072 | |||||||||
|
Cash
Flows From Investing Activities
|
||||||||||||
|
Proceeds
from maturities and calls of HTM securities
|
10,493 | 20,604 | 1,215 | |||||||||
|
Proceeds
from maturities, calls and sales of AFS securities
|
627,001 | 26,770 | 225,215 | |||||||||
|
Funds
invested in HTM securities
|
- | - | (30,000 | ) | ||||||||
|
Funds
invested in AFS securities
|
(575,534 | ) | (31,108 | ) | (265,984 | ) | ||||||
|
Proceeds
from sale of Federal Home Loan Bank stock
|
4,175 | 1,797 | 3,029 | |||||||||
|
Funds
invested in Federal Home Loan Bank stock
|
(639 | ) | (2,346 | ) | (238 | ) | ||||||
|
Net
increase in loans
|
(31,222 | ) | (29,492 | ) | (40,226 | ) | ||||||
|
Proceeds
from sale of Mortgage Servicing Rights
|
583 | - | - | |||||||||
|
Purchase
of premises and equipment
|
(801 | ) | (2,478 | ) | (2,465 | ) | ||||||
|
Proceeds
from sales of other real estate owned
|
3,103 | 6,909 | 2,731 | |||||||||
|
Cash
paid in excess of cash received in acquisition
|
(10,646 | ) | - | - | ||||||||
|
Net
Cash Provided By (Used In) Investing Activities
|
26,513 | (9,344 | ) | (106,723 | ) | |||||||
|
Cash
Flows From Financing Activities
|
||||||||||||
|
Net
increase (decrease) in deposits
|
29,355 | (6,615 | ) | 151,550 | ||||||||
|
Net
increase (decrease) in federal funds purchased and short-term
borrowings
|
3,817 | (2,397 | ) | (22,437 | ) | |||||||
|
Proceeds
from long-term borrowings
|
- | 30,000 | 75 | |||||||||
|
Repayment
of long-term borrowings
|
(64,802 | ) | (25,167 | ) | (27,277 | ) | ||||||
|
Dividends
paid
|
(3,503 | ) | (3,335 | ) | (3,173 | ) | ||||||
|
Net
Cash (Used In) Provided By Financing Activities
|
(35,133 | ) | (7,514 | ) | 98,738 | |||||||
|
Net
Increase (Decrease) In Cash and Cash Equivalents
|
33,860 | (3,634 | ) | 9,087 | ||||||||
|
Cash
and Cash Equivalents at the Beginning of the Period
|
24,817 | 28,451 | 19,364 | |||||||||
|
Cash
and Cash Equivalents at the End of the Period
|
$ | 58,677 | $ | 24,817 | $ | 28,451 | ||||||
|
Noncash
Activities:
|
||||||||||||
|
Loans
transferred to foreclosed assets
|
$ | 1,118 | $ | 8,538 | $ | 814 | ||||||
|
1,389,761
shares of $1 par value issued as stock dividend
|
$ | - | $ | - | $ | 1,390 | ||||||
|
Cash
paid during the year:
|
||||||||||||
|
Interest
on deposits and borrowed funds
|
$ | 21,512 | $ | 18,241 | $ | 11,715 | ||||||
|
Income
taxes
|
$ | 6,015 | $ | 5,590 | $ | 1,925 | ||||||
See
Notes to Consolidated Financial Statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Summary of Significant Accounting Policies
Business
First
Guaranty Bancshares, Inc. (the “Company”) is a Louisiana corporation. On July
27, 2007 the Company became the parent of First Guaranty Bank as described in
Note 2. The Company owns all of the outstanding shares of common stock of First
Guaranty Bank. First Guaranty Bank (the “Bank”) is a Louisiana state-chartered
commercial bank that provides a diversified range of financial services to
consumers and businesses in the communities in which it operates. These services
include consumer and commercial lending, mortgage loan origination, the issuance
of credit cards and retail banking services. The Bank has 18 banking offices and
25 automated teller machines (ATMs) in northern and southern of
Louisiana.
Summary
of significant accounting policies
First
Guaranty Bancshares, Inc. completed its acquisition of Homestead Bancorp on July
30, 2007. Information for the year ended December 31, 2006 and any prior
period reflects the operations of First Guaranty Bank on a stand-alone basis.
Prior to becoming the holding company of First Guaranty Bank, First Guaranty
Bancshares, Inc. had no assets, liabilities or
operations.
The
accounting and reporting policies of the Company conform to generally
accepted accounting principles and to predominant accounting practices within
the banking industry. The more significant accounting and reporting policies are
as follows:
Consolidation
The
consolidated financial statements include the accounts of First Guaranty
Bancshares, Inc. (the “Company”), and its wholly owned subsidiary, First
Guaranty Bank (the “Bank”). All significant intercompany balances and
transactions have been eliminated in consolidation.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expense during the reporting periods. Actual
results could differ from those estimates.
Material
estimates that are particularly susceptible to significant change in the
near-term economic environment and market conditions relate to the determination
of the allowance for loan losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and real estate owned, the
Company obtains independent appraisals for significant
properties.
Cash
and cash equivalents
For
purposes of reporting cash flows, cash and cash equivalents are defined as cash,
due from banks, interest-bearing demand deposits with banks and federal funds
sold with maturities of three months or less.
Securities
The Company
reviews its financial position, liquidity and future plans in evaluating
the criteria for classifying investment securities. At December 31, 2007, the
securities portfolio contained two classifications of securities - held to
maturity and available for sale. At December 31, 2007, $105.6 million were
classified as available for sale and $36.5 million were classified as held to
maturity.
Debt
securities that Management has the ability and intent to hold to maturity are
classified as held to maturity and carried at cost, adjusted for amortization of
premiums and accretion of discounts using methods approximating the interest
method. Securities available for sale are stated at fair value. The unrealized
difference, if any, between amortized cost and fair value of these securities is
excluded from income and is reported, net of deferred taxes, as a component of
stockholders' equity. Realized gains and losses on securities are computed based
on the specific identification method and are reported as a separate component
of other income.
Management
evaluates securities for other-than-temporary impairment at least quarterly and
more frequently when economic or market conditions warrant such evaluation.
Consideration is given to (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in fair value.
The
Company has a required investment in Federal Home Loan Bank stock that is
carried at cost that approximates fair value. This stock must be maintained by
the Company.
Loans
held for sale
Mortgage
loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income. Loans held for sale have primarily been fixed rate single-family
residential mortgage loans under contract to be sold in the secondary market. In
most cases, loans in this category are sold within thirty days. Buyers generally
have recourse to return a purchased loan under limited circumstances. Recourse
conditions may include early payment default, breach of representations or
warranties and documentation deficiencies.
Mortgage
loans held for sale are generally sold with the mortgage servicing rights
released. Gains or losses on sales of mortgage loans are recognized based on the
differences between the selling price and the carrying value of the related
mortgage loans sold.
Loans
Loans
are stated at the principal amounts outstanding, net of unearned income and
deferred loan fees. In addition to loans issued in the normal course of
business, overdrafts on customer deposit accounts are considered to be loans and
reclassified as such. At December 31, 2007 and 2006, $461,000 and $226,000,
respectively, in overdrafts have been reclassified to loans. Interest income on
all classifications of loans is calculated using the simple interest method on
daily balances of the principal amount outstanding.
Accrual
of interest is discontinued on a loan when Management believes, after
considering economic and business conditions and collection efforts, the
borrower’s financial condition is such that reasonable doubt exists as to the
full and timely collection of principal and interest. This evaluation is made
for all loans that are 90 days or more contractually past due. When a loan is
placed in non-accrual status, all interest previously accrued but not collected
is reversed against current period interest income. Income on such loans is then
recognized only to the extent that cash is received and where the future
collection of interest and principal is probable. Loans are returned to accrual
status when, in the judgment of Management, all principal and interest amounts
contractually due are reasonably assured of repayment within a reasonable time
frame and when the borrower has demonstrated payment performance of cash or cash
equivalents for a minimum of six months.
Loan
fees and costs
Nonrefundable
loan origination and commitment fees and direct costs associated with
originating loans are deferred and recognized over the lives of the related
loans as an adjustment to the loans' yield using the level yield
method.
Allowance
for loan losses
The
allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
Management believes that the collectability of the principal is unlikely. The
allowance, which is based on evaluation of the collectability of loans and prior
loan loss experience, is an amount that Management believes will be adequate to
reflect the risks inherent in the existing loan portfolio and exist at the
reporting date. The evaluations take into consideration a number of subjective
factors including changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans, current economic
conditions that may affect a borrower’s ability to pay, adequacy of loan
collateral and other relevant factors. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require additional recognition of losses
based on their judgments about information available to them at the time of
their examination.
Although
Management uses available information to recognize losses on loans, because of
uncertainties associated with local economic conditions, collateral values and
future cash flows on impaired loans, it is reasonably possible that a material
change could occur in the allowance for loan losses in the near term. However,
the amount of the change that is reasonably possible cannot be
estimated.
- 44
-
The
evaluation of the adequacy of loan collateral is often based upon estimates and
appraisals. Because of changing economic conditions, the valuations determined
from such estimates and appraisals may also change. Accordingly, the
Company may ultimately incur losses that vary from Management's current
estimates. Adjustments to the allowance for loan losses will be reported in the
period such adjustments become known or can be reasonably estimated. All loan
losses are charged to the allowance for loan losses when the loss actually
occurs or when Management believes that the collectability of the principal is
unlikely. Recoveries are credited to the allowance at the time of
recovery.
The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as doubtful, substandard or
special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect Management’s
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.
A
loan is considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by Management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan-by-loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan’s effective
interest rate, the loan’s obtainable market price or the fair value of the
collateral if the loan is collateral dependent.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, individual consumer and residential loans are not
separately identified for impairment disclosures, unless such loans are the
subject of a restructuring agreement.
Goodwill
and Intangible assets
Intangible
assets are comprised of goodwill and core deposit intangibles. Goodwill is
accounted for in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets, and accordingly is not amortized but is
evaluated at least annually for impairment. Core deposit intangibles are
amortized on a straight-line basis over terms ranging from seven to 15 years.
Management periodically evaluates whether events or circumstances have occurred
that would result in impairment of value.
Premises
and equipment
Premises
and equipment are stated at cost, less accumulated depreciation. Depreciation is
computed for financial reporting purposes using the straight-line method over
the estimated useful lives of the respective assets as
follows:
Buildings and
improvements 10-40
years
Equipment,
fixtures and
automobiles 3-10
years
Expenditures
for renewals and betterments are capitalized and depreciated over their
estimated useful lives. Repairs, maintenance and minor improvements are charged
to operating expense as incurred. Gains or losses on disposition, if any, are
recorded in the Statements of Income.
Other
real estate
Other
real estate includes properties acquired through foreclosure or acceptance of
deeds in lieu of foreclosure. These properties are recorded at the lower of the
recorded investment in the property or its fair value less the estimated cost of
disposition. Any valuation adjustments required prior to foreclosure are charged
to the allowance for loan losses. Subsequent to foreclosure, losses on the
periodic revaluation of the property are charged to current period earnings as
other real estate expense. Costs of operating and maintaining the properties are
charged to other real estate expense as incurred. Any subsequent gains or losses
on dispositions are credited or charged to income in the period of
disposition.
Off-balance
sheet financial instruments
The
Company accounts for its guarantees in accordance with the provisions of
Financial Accounting Standards Board (“FASB”) Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, (“FIN 45”). In the
ordinary course of business, the Company has entered into commitments to extend
credit, including commitments under credit card arrangements, commitments to
fund commercial real estate, construction and land development loans secured by
real estate, and performance standby letters of credit. Such financial
instruments are recorded when they are funded.
Income
taxes
The
Company and all subsidiaries file a consolidated federal income tax return on a
calendar year basis. In lieu of Louisiana state income tax, the Bank is subject
to the Louisiana bank shares tax, which is included in noninterest expense in
the Company's consolidated financial statements. With few exceptions, the
Company is no longer subject to U.S. federal, state or local income tax
examinations for years before 2003.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the deferred tax assets or liabilities are
expected to be settled or realized. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
utilized.
Comprehensive
income
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available for sale securities, are
reported as a separate component of the equity section of the balance sheet,
such items along with net income, are components of comprehensive income. The
components of other comprehensive income and related tax effects are presented
in the Statements of Changes in Stockholders’ Equity and Note 18 of the
Consolidated Notes to the Financial Statements.
Earnings per common share
Earnings
per share is computed and presented in accordance with SFAS No. 128 “Earnings
Per Share”. No convertible shares or other agreements to issue common stock are
outstanding. The $1 par value common stock outstanding has the same privileges,
restrictions and rights, including voting and dividend rights. In 2006, all $5
par value stock was converted into $1 par value.
Transfers
of Financial Assets
Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (i) the assets have been isolated from the Company, (ii) the transferee
obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and (iii) the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS 160, Non-controlling
Interests in Consolidated Financial Statements, an Amendment of ARB 51.
SFAS 160 establishes new accounting and reporting standards for
non-controlling interests in a subsidiary. SFAS 160 will require entities
to classify non-controlling interests as a component of stockholders’ equity and
will require subsequent changes in ownership interests in a subsidiary to be
accounted for as an equity transaction. SFAS 160 will also require entities
to recognize a gain or loss upon the loss of control of a subsidiary and to
remeasure any ownership interest retained at fair value on that date. This
statement also requires expanded disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. SFAS 160 is effective on a prospective basis for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008, except for the presentation and disclosure
requirements, which are required to be applied retrospectively. We anticipate
the adoption of SFAS No. 160 will not have a significant impact to the Company’s
financial condition or results of operations
In
December 2007, FASB issued SFAS No. 141R, Business
Combinations (“SFAS No. 141R”) which applies to all business
combinations. The statement requires most identifiable assets, liabilities,
non-controlling interests, and goodwill acquired in a business combination to be
recorded at “full fair value.” All business combinations will be accounted for
by applying the acquisition method (previously referred to as the purchase
method). Companies will have to identify the acquirer; determine the acquisition
date and purchase price; recognize at their acquisition-date fair values the
identifiable assets acquired, liabilities assumed, and any non-controlling
interests in the acquiree, and recognize goodwill or, in the case of a bargain
purchase, a gain. SFAS No. 141R is effective for periods beginning on or after
December 15, 2008, and early adoption is prohibited. It will be applied to
business combinations occurring after the effective date. We anticipate the
adoption of SFAS No. 141R will not have a significant impact to the Company’s
financial condition or results of operations.
In
November 2007, the SEC issued Staff Accounting Bulletin No. 109, Written
Loan Commitments Recorded at Fair Value Through Earnings (“SAB No. 109”).
SAB No. 109 rescinds SAB No. 105’s prohibition on inclusion of expected net
future cash flows related to loan servicing activities in the fair value
measurement of a written loan commitment. SAB No. 109 applies to any loan
commitments for which fair value accounting is elected under SFAS No. 159. SAB
No. 109 is effective prospectively for derivative loan commitments issued or
modified in fiscal quarters beginning after December 15, 2007. We anticipate the
adoption of SAB No. 109 will not have a significant impact to the Company’s
financial condition or results of operations.
In
June 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No.
06-11, Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Award. The
objective of this issue is to determine the accounting for the income tax
benefits of dividend or dividend equivalents when the dividends or dividend
equivalents are: (a) linked to equity-classified non-vested shares or share
units or equity-classified outstanding share options and (b) charged to retained
earnings under SFAS Statement No. 123 (Revised 2004), Share-Based
Payment. The Task Force reached a consensus that EITF No. 06-11 should be
applied prospectively to the income tax benefits of dividends on
equity-classified employee share-based payment awards that are declared in
fiscal years beginning after September 15, 2007. We anticipate the adoption of
the provisions of EITF No. 06-11 will not have a significant impact to the
Company’s financial condition or results of
operations.
- 46
-
In
March 2007, the FASB ratified EITF No. 06-10, Accounting
for Collateral Assignment Split-Dollar Life Insurance Arrangements. One
objective of EITF No. 06-10 is to determine whether a liability for future
benefits under a collateral assignment split-dollar life insurance arrangement
that provides a benefit to an employee that extends into postretirement periods
should be recognized in accordance with SFAS No. 106 or APB Opinion 12, as
appropriate, based on the substantive agreement with the employee. Another
objective of EITF No. 06-10 is to determine how the asset arising from a
collateral assignment split-dollar life insurance arrangement should be
recognized and measured. EITF No. 06-10 is effective for fiscal years beginning
after December 15, 2007. We anticipate the adoption of the provisions of EITF
No. 06-10 will not have a significant impact to the Company’s financial
condition or results of operations.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities. SFAS
No. 159 provides the Company with an option to report selected financial
assets and liabilities at fair value and establishes presentation and disclosure
requirements to facilitate reporting between companies. The fair
value option established by this Statement permits the Company to choose to
measure eligible items at fair value at specified election
dates. The Company shall then 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. The Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We anticipate
the adoption of SFAS No. 159 will not have a significant impact to the Company’s
financial condition or results of operations.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. This Statement defines fair value, established a
framework for measuring fair value in generally accepted accounting principles
(GAAP) and expands disclosures about fair value measurement. The
Statement is effective for the financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The Bank anticipates that the adoption of SFAS No. 157 will not have a material
impact on the Bank’s financial position or results of
operations.
Reclassifications
Certain
reclassifications have been made to prior year financial statements in order to
conform to the classification adopted for reporting in
2007.
All
share and per share data has been restated to reflect a
stock dividend of one-third of a share of $1 par value common stock for each
share of $1 and $5 par value common stock outstanding, accounted for as a
four-for-three stock split, effective and payable to stockholders of record as
of October 20, 2005 for each of the periods
presented.
Note
2. Reorganization
On
July 27, 2007, First Guaranty Bancshares, Inc. became the holding company for
First Guaranty Bank pursuant to an Agreement and Plan of Exchange dated as of
July 27, 2007 (the “Agreement”). Pursuant to the Agreement, on the Effective
Date, each issued and outstanding share of the Bank’s common stock, par value
$1.00 per share, automatically was converted into and exchanged for one share of
the Company’s common stock, par value $1.00 per share. No stockholders exercised
dissenters’ rights of appraisal. On the Effective Date, the Bank
became a wholly owned subsidiary of the Company and the stockholders of the Bank
became stockholders of the Company. No additional shares were offered or sold in
connection with the Reorganization.
Note
3. Acquisition Activity
On
July 30, 2007, the Company acquired all of the outstanding stock of Homestead
Bancorp, Inc., the holding company for Homestead Bank located in Ponchatoula,
Louisiana, for approximately $12.1 million in cash. Homestead Bank and First
Guaranty Bank were also merged on July 30, 2007. This transaction was recorded
using the purchase accounting method. The Company received the
following:
|
(in
thousands)
|
||||
|
Cash
and cash equivalents
|
$ | 1,494 | ||
|
Securities
|
45,000 | |||
|
Loans,
net, including loans held for sale
|
74,357 | |||
|
Premises
and equipment, net
|
2,780 | |||
| Goodwill | 1,911 | |||
|
Core
deposit and other intangibles
|
2,836 | |||
|
Other
assets
|
1,228 | |||
|
Deposits
|
(67,446 | ) | ||
|
Borrowings
|
(49,911 | ) | ||
|
Other
liabilities
|
(109 | ) | ||
|
Total
purchase price
|
$ | 12,140 | ||
The
acquisition resulted in $4.7 million of intangible assets which includes $1.9
million of goodwill, $2.1 million of core deposit intangibles and $729,000 in
mortgage servicing rights. The goodwill acquired is not tax deductible. The core
deposit intangible is being amortized over the estimated useful life of 11.4
years using the straight line method.
The
results of operations of the acquired company subsequent to the acquisition date
are included in the Company's consolidated statements of
income.
The
merger increased the branch franchise from 16 locations to 18 locations and
extended the Company’s presence to Walker, Louisiana.
The
Company borrowed $12.1 million to acquire Homestead Bancorp, Inc. and Homestead
Bank. The Company repaid the debt with cash received from the sale of Homestead
Bank securities. The Company sold $46.4 million of securities owned by Homestead
Bank, which comprised of $40.6 million in mortgage-backed securities and $5.8
million in mutual funds. In addition, $46.9 million in Homestead Bank short- and
long-term FHLB advances matured or were prepaid by the Company in
2007.
On
July 31, 2007, First Guaranty Bancshares, Inc., a Louisiana corporation, and
Douglass Bancorp, Inc., a Kansas corporation, Douglass National Bank, a national
bank headquartered in Kansas, and Fannie Mae, a Congressionally chartered
federal instrumentality that is deemed a citizen of the District of Columbia
entered into a Stock Purchase Agreement pursuant to which, among other things,
First Guaranty Bancshares, Inc. would acquire all of the issued and outstanding
shares of capital stock of Douglass National Bank and all of the outstanding and
unexercised options of Douglass National Bank.
Under the
terms and subject to the conditions of the Stock Purchase Agreement, all of the
outstanding common stock of Douglass National Bank would be cancelled in
exchange for an amount of cash without interest equal to the adjusted book value
of Douglass National Bank immediately prior to the closing.
On October 5,
2007, the Company advised Douglass Bancorp, Inc. and Fannie Mae of its
intent to terminate the Stock Purchase Agreement by and among the Company,
Douglass Bancorp, Inc., Douglass National Bank and Fannie Mae dated July
31, 2007. The Company did not incur any material early termination
penalties as a result of this transaction.
On November 2,
2007, the Company and First Community Holding Company, a Louisiana corporation
and holding company for First Community Bank, a Louisiana state banking
corporation (“First Community BHC”), entered into an Agreement and Plan of
Reorganization (the “Merger Agreement”) pursuant to which, among other
things, the Company will acquire all of the issued and outstanding
shares of capital stock of First Community BHC and all of the outstanding and
unexercised options of First Community BHC by virtue of the merger of a
wholly-owned subsidiary of the Company with and into First Community BHC, with
First Community BHC as the surviving corporation (the “Interim Merger”),
followed by the merger of First Community BHC with and into the
Company.
Under the terms
and subject to the conditions of the Merger Agreement, which has been approved
by the Boards of Directors of the Company and First Community BHC, at
the effective time of the Interim Merger (the “Effective Time”), all of the
outstanding common stock of First Community BHC will be cancelled in exchange
for $34.06 per share. All of the outstanding and unexercised options to
acquire shares of common stock of First Community BHC will be cancelled at the
Effective Time in exchange for an amount in cash per outstanding and unexercised
option equal to $26.06. Immediately following the Merger, First Community Bank
will merge with and into First Guaranty Bank, with First Guaranty Bank as the
sole surviving bank subsidiary of the Company.
Consummation of
the Interim Merger is subject to various conditions, including
(i) requisite approvals of the holders of First Community BHC common stock
and (ii) receipt of regulatory approvals. In addition, each party’s
obligation to consummate the Interim Merger is subject to certain other
conditions, including (i) the other party’s representations and warranties in
the Merger Agreement being true and correct at the Effective Time, subject to
the materiality standards contained in the Merger Agreement, (ii) material
compliance of the other party with its covenants and (iii) the absence of
any law or order prohibiting the consummation of the Interim
Merger.
Note
4. Cash and Due From Banks
Certain reserves
are required to be maintained at the Federal Reserve Bank. The requirement as of
December 31, 2007 and 2006 totaled $750,000. The Company has accounts at
various correspondent banks,
excluding the Federal Reserve Bank,
which exceed the FDIC insured limit of $100,000 by $14.2 million at December 31,
2007. This balance includes $12.2 million at JPMorgan Chase, the
correspondent bank which is used to clear cash letters.
Note
5. Securities
A summary
comparison of securities by type at December 31, 2007 and 2006 is shown
below.
|
December
31, 2007
|
December
31, 2006
|
|||||||||||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
Gross
|
|||||||||||||||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||||||||||
|
U.S.
Government Agencies
|
$ | 92,962 | $ | 26 | $ | (25 | ) | $ | 92,963 | $ | 98,369 | $ | - | $ | (1,226 | ) | $ | 97,143 | ||||||||||||||
|
Mortgage-backed
obligations
|
2,016 | 43 | (23 | ) | 2,036 | 4,077 | 39 | (103 | ) | 4,013 | ||||||||||||||||||||||
|
Asset-backed
securities
|
1,340 | - | (95 | ) | 1,245 | 1,385 | 1 | (1 | ) | 1,385 | ||||||||||||||||||||||
|
Corporate
debt securities
|
5,954 | 50 | (214 | ) | 5,790 | 7,394 | 31 | (61 | ) | 7,364 | ||||||||||||||||||||||
|
Mutual
funds or other equity securities
|
3,805 | 22 | (291 | ) | 3,536 | 1,500 | - | (52 | ) | 1,448 | ||||||||||||||||||||||
|
Total
securities
|
$ | 106,077 | $ | 141 | $ | (648 | ) | $ | 105,570 | $ | 112,725 | $ | 71 | $ | (1,443 | ) | $ | 111,353 | ||||||||||||||
|
Held-to-maturity:
|
||||||||||||||||||||||||||||||||
|
U.S.
Government Agencies
|
$ | 33,984 | $ | 24 | $ | (281 | ) | $ | 33,727 | $ | 43,976 | $ | - | $ | (1,280 | ) | $ | 42,696 | ||||||||||||||
|
Mortgage-backed
obligations
|
2,514 | - | (35 | ) | 2,479 | 3,023 | - | (105 | ) | $ | 2,918 | |||||||||||||||||||||
|
Total
securities
|
$ | 36,498 | $ | 24 | $ | (316 | ) | $ | 36,206 | $ | 46,999 | $ | - | $ | (1,385 | ) | $ | 45,614 | ||||||||||||||
The
scheduled maturities of securities at December 31, 2007, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
|
December
31, 2007
|
||||||||||||
|
Amortized
|
Fair
|
Weighted
|
||||||||||
|
Cost
|
Value
|
Avg
Yield
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Available
For Sale:
|
||||||||||||
|
Due
in one year or less
|
$ | 49,182 | $ | 49,179 | 4.14% | |||||||
|
Due
after one year through five years
|
10,673 | 10,673 | 5.13% | |||||||||
|
Due
after five years through 10 years
|
4,568 | 4,575 | 5.35% | |||||||||
|
Over
10 years
|
41,654 | 41,143 | 5.98% | |||||||||
|
Total
|
$ | 106,077 | $ | 105,570 | 5.00% | |||||||
|
Held
to Maturity:
|
||||||||||||
|
Due
in one year or less
|
$ | - | $ | - | 0.00% | |||||||
|
Due
after one year through five years
|
999 | 992 | 4.15% | |||||||||
|
Due
after five years through 10 years
|
9,834 | 9,673 | 4.53% | |||||||||
|
Over
10 years
|
25,665 | 25,541 | 5.42% | |||||||||
|
Total
|
$ | 36,498 | $ | 36,206 | 5.15% | |||||||
At
December 31, 2007 and 2006, approximately $131.6 million and $147.3 million,
respectively, in securities were pledged to secure public fund deposits, and for
other purposes required or permitted by law. Gross realized gains were $0, $0
and $7,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Gross realized losses were $478,000, $234,000 and $0 for the years ended
December 31, 2007, 2006 and 2005. The tax (benefit) provision applicable to
these realized net (losses)/gains amounted to $(163,000), $(80,000), and $2,000,
respectively. Proceeds from sales of securities classified as available for sale
amounted to $65.2 million, $6.8 million and $0 for the years ended December
31, 2007, 2006 and 2005, respectively.
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,
2007.
|
Less
Than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
|
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Available
for sale:
|
||||||||||||||||||||||||
|
U.S.
Treasury and U.S.
|
||||||||||||||||||||||||
|
Government
Agencies
|
$ | - | $ | - | $ | 3,779 | $ | 25 | $ | 3,779 | $ | 25 | ||||||||||||
|
Mortgage-backed
obligations
|
- | - | 510 | 23 | 510 | 23 | ||||||||||||||||||
|
Asset-backed
securities
|
1,155 | 94 | 90 | 1 | 1,245 | 95 | ||||||||||||||||||
|
Corporate
debt securities
|
1,710 | 147 | 858 | 67 | 2,568 | 214 | ||||||||||||||||||
|
Mutual
funds or other equity securites
|
1,227 | 47 | 1,256 | 244 | 2,483 | 291 | ||||||||||||||||||
|
Total
securities
|
$ | 4,092 | $ | 288 | $ | 6,493 | $ | 360 | $ | 10,585 | $ | 648 | ||||||||||||
|
Held
to maturity:
|
||||||||||||||||||||||||
|
U.S.
Treasury and U.S.
|
||||||||||||||||||||||||
|
Government
Agencies
|
$ | - | $ | - | $ | 27,780 | $ | 281 | $ | 27,780 | $ | 281 | ||||||||||||
|
Mortgage-backed
obligations
|
- | - | 2,479 | 35 | 2,479 | 35 | ||||||||||||||||||
|
Total
securities
|
$ | - | $ | - | $ | 30,259 | $ | 316 | $ | 30,259 | $ | 316 | ||||||||||||
The
Company considers the impairment on securities that have been in a gross
unrealized loss position for less than 12 months to be temporary. The gross
unrealized losses in the portfolio resulted from increases in market interest
rates and not from deterioration in the creditworthiness of the issuer. The
Company believes that it will collect all amounts contractually due and has the
intent and the ability to hold these securities until the fair value is at least
equal to the carrying value. As of December 31, 2007, the Company had 19 debt
securities and two equity securities that had gross unrealized losses for
less than 12 months.
- 50
-
At
December 31, 2007, twelve U.S. Government Agency securities, ten of which are
classified as held to maturity and two classified as available for sale, have
been in a continuous unrealized loss position for twelve months or longer. Six
mortgage-backed fixed rate securities, five classified as held to maturity and
one classified as available for sale, have also been in a continuous unrealized
loss position for twelve months or longer. Also, six corporate debt securities,
one asset-backed security, one mutual fund and one equity security, all
classified as available for sale, have been in a continuous unrealized loss
position for twelve months or longer. These securities with unrealized losses
resulted from increases in interest rates and not from deterioration in the
creditworthiness of the issuer. There were no adverse changes to the portfolio
subsequent to December 31, 2007.
Management
evaluates securities 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 and (iii) the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. In analyzing an issuer’s financial
condition, Management considers whether the securities are issued by the federal
government or its agencies, whether downgrades by bond rating agencies have
occurred and industry reports. As of December 31, 2007, Management’s assessment
concluded that no unrealized losses are deemed to be
other-than-temporary.
At
December 31, 2007, the Company’s exposure to three investment security issuers
exceeded 10% of stockholders’ equity as
follows:
|
Amortized
|
Fair
|
|||||||
|
Cost
|
Value
|
|||||||
|
(in
thousands)
|
||||||||
|
Federal
Home Loan Bank (FHLB)
|
$ | 75,770 | $ | 75,614 | ||||
|
Federal
Home Loan Mortgage Corporation (Freddie Mac)
|
18,026 | 18,060 | ||||||
|
Federal
National Mortgage Association (Fannie Mae)
|
40,333 | 39,963 | ||||||
|
Total
|
$ | 134,129 | $ | 133,637 | ||||
Note
6. Loans and Allowance for Loan Losses
The
following table summarizes the components of the Company's loan portfolio as of
December 31, 2007 and 2006:
|
December
31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
As
% of
|
As
% of
|
|||||||||||||||
|
Balance
|
Category
|
Balance
|
Category
|
|||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Real
estate
|
||||||||||||||||
|
Construction
& land development
|
$ | 98,127 | 17.0% | $ | 49,837 | 9.9% | ||||||||||
|
Farmland
|
23,065 | 4.0% | 25,582 | 5.0% | ||||||||||||
|
1-4
Family
|
84,640 | 14.7% | 67,022 | 13.2% | ||||||||||||
|
Multifamily
|
13,061 | 2.3% | 14,702 | 2.9% | ||||||||||||
|
Non-farm
non-residential
|
236,474 | 41.1% | 256,176 | 50.5% | ||||||||||||
|
Total
real estate
|
455,367 | 79.1% | 413,319 | 81.5% | ||||||||||||
|
Agricultural
|
16,816 | 2.9% | 16,359 | 3.2% | ||||||||||||
|
Commercial
and industrial
|
81,073 | 14.1% | 59,072 | 11.6% | ||||||||||||
|
Consumer
and other
|
22,517 | 3.9% | 18,880 | 3.7% | ||||||||||||
|
Total
loans before unearned income
|
575,773 | 100.0% | 507,630 | 100.0% | ||||||||||||
|
Less:
unearned income
|
(517 | ) | (435 | ) | ||||||||||||
|
Total
loans after unearned income
|
$ | 575,256 | $ | 507,195 | ||||||||||||
The following table summarizes fixed and floating rate loans by maturity and repricing frequencies as of December 31, 2007:
|
December
31, 2007
|
||||||||||||
|
Fixed
|
Floating
|
Total
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
One
year or less
|
$ | 98,095 | $ | 339,955 | $ | 438,050 | ||||||
|
One
to five years
|
97,198 | 1,867 | 99,065 | |||||||||
|
Five
to 15 years
|
8,179 | 144 | 8,323 | |||||||||
|
Over
15 years
|
19,530 | - | 19,530 | |||||||||
|
Subtotal
|
223,002 | 341,966 | 564,968 | |||||||||
|
Nonaccrual
loans
|
10,288 | |||||||||||
|
Total
loans after unearned income
|
$ | 223,002 | $ | 341,966 | $ | 575,256 | ||||||
Changes
in the allowance for loan losses are as follows:
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Balance,
beginning of year
|
$ | 6,675 | $ | 7,597 | $ | 5,910 | ||||||
|
Additional
provision from acquisition
|
325 | - | - | |||||||||
|
Provision
charged to expense
|
1,918 | 4,419 | 5,621 | |||||||||
|
Loans
charged off
|
(3,885 | ) | (5,888 | ) | (4,162 | ) | ||||||
|
Recoveries
|
1,160 | 547 | 228 | |||||||||
|
Balance,
end of year
|
$ | 6,193 | $ | 6,675 | $ | 7,597 | ||||||
The
allowance for loan losses is reviewed by Management on a monthly basis and
additions thereto are recorded in order to maintain the allowance at an adequate
level. In assessing the adequacy of the allowance, Management considers a
variety of internal and external factors that might impact the performance of
individual loans. These factors include, but are not limited to, economic
conditions and their impact upon borrowers' ability to repay loans, respective
industry trends, borrower estimates and independent appraisals. Periodic changes
in these factors impact Management's assessment of each loan and its overall
impact on the adequacy of the allowance for loan
losses.
As
of December 31, 2007, 2006 and 2005, the Company had loans totaling $10.3
million, $10.4 million and $21.1 million, respectively, on which the accrual of
interest had been discontinued. Non-accrual loans remained relatively flat from
December 31, 2006 to 2007. The decrease in non-accrual loans from December 2005
to 2006 is primarily the result of foreclosing on several of the 156 home
mortgage loans that involved irregularities found in 2005 that suggest that many
of these mortgage loans had been made against overvalued collateral on the basis
of misleading loan information. As of December 31, 2007, 2006 and 2005, the
Company had loans past due 90 days or more and still accruing interest
totaling $547,000, $334,000 and $248,000,
respectively.
The
average amount of non-accrual loans in 2007 was $10.3 million compared to $17.1
million in 2006. Had these loans performed in accordance with their original
terms, the Company's interest income would have been increased by approximately
$0.6 million and $1.4 million for the years ended December 31, 2007 and 2006,
respectively. Impaired loans at December 31, 2007 and 2006, including
non-accrual loans, amounted to $10.1 million and $13.3 million, respectively.
The portion of the allowance for loan losses allocated to all impaired loans
amounted to $0.9 million and $2.4 million at December 31, 2007 and 2006,
respectively. As of
December
31, 2007,
the Company has
no outstanding commitments to advance additional funds
in connection with impaired
loans.
- 52
-
The
following is a summary of information pertaining to impaired loans as of
December 31:
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Impaired
loans without a valuation allowance
|
$ | 2,559 | $ | - | ||||
|
Impaired
loans with a valuation allowance
|
7,523 | 13,264 | ||||||
|
Total
impaired loans
|
$ | 10,082 | $ | 13,264 | ||||
|
Valuation
allowance related to impaired loans
|
$ | 879 | $ | 2,420 | ||||
|
Total
Nonaccrual Loans
|
$ | 10,288 | $ | 10,362 | ||||
|
Total
loans past due ninety days and still accruing
|
$ | 547 | $ | 334 | ||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Average
investment in impaired loans
|
$ | 7,571 | $ | 17,128 | $ | 14,680 | ||||||
|
Interest
income recognized on impaired loans
|
$ | 764 | $ | 1,946 | $ | 475 | ||||||
|
Interest
income recognized on a cash basis on impaired loans
|
$ | 182 | $ | 1,636 | $ | 526 | ||||||
Note
7. Premises and Equipment
The
major categories comprising premises and equipment at December 31, 2007 and 2006
are as follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Land
|
$ | 4,301 | $ | 3,137 | ||||
|
Bank
premises
|
15,135 | 13,662 | ||||||
|
Furniture
and equipment
|
13,431 | 12,486 | ||||||
|
Acquired
value
|
32,867 | 29,285 | ||||||
|
Less:
accumulated depreciation
|
16,627 | 15,692 | ||||||
|
Net
book value
|
$ | 16,240 | $ | 13,593 | ||||
Depreciation expense amounted to approximately $0.9 million, $0.8 million and $0.7 million for 2007, 2006 and 2005, respectively.
Note
8. Goodwill and Other Intangible Assets
The
Company accounts for goodwill and intangible assets in accordance with SFAS
No. 142, “Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill
and intangible assets deemed to have indefinite lives are no longer amortized,
but are subject to annual impairment tests in accordance with the provision of
SFAS No. 142. Other intangible assets continue to be amortized over their useful
lives. Goodwill for the year ended December 31, 2007 was $1.9 million, all of
which was acquired in the Homestead acquisition (see Note 3). No impairment
charges were recognized during 2007. No goodwill was recorded for the years
ended December 31, 2006 or 2005.
Mortgage
servicing rights totaled $24,000 at December 31, 2007. No mortgage servicing
rights were recorded at December 31, 2006 or 2005.
Other
intangible assets recorded include core deposit intangibles, which are subject
to amortization. The core deposits reflect the value of deposit relationships,
including the beneficial rates, which arose from the purchase of other financial
institutions and the purchase of various banking center locations from one
single financial institution. The following table summarizes the Company’s
purchased accounting intangible assets subject to amortization. See Note 3 to
the Consolidated Financial Statements for additional information on intangible
assets as a result of the Homestead Bancorp, Inc
merger.
|
December
31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
Gross
Carrying
|
Accumulated
|
Net
Carrying
|
Gross
Carrying
|
Accumulated
|
Net
Carrying
|
|||||||||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amount
|
Amortization
|
Amount
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Core
deposit intangibles
|
$ | 7,997 | $ | 5,638 | $ | 2,359 | $ | 5,891 | $ | 5,435 | $ | 456 | ||||||||||||
|
Mortgage
Servicing Rights
|
24 | - | 24 | - | - | - | ||||||||||||||||||
|
Total
|
$ | 8,021 | $ | 5,638 | $ | 2,383 | $ | 5,891 | $ | 5,435 | $ | 456 | ||||||||||||
Amortization expense
relating to purchase accounting intangibles totaled $203,000, $525,000, and
$630,000 for the year ended December 31, 2007, 2006, and 2005, respectively. The
weighted average amortization period of these assets
is 8.7 years. Estimated
future amortization expense is as follows:
|
For
the Years Ended
|
Estimated
|
|
|
December
31,
|
Amortization
Expense
|
|
|
(in
thousands)
|
||
|
2008
|
$311
|
|
|
2009
|
292
|
|
|
2010
|
218
|
|
|
2011
|
218
|
|
|
2012
|
216
|
|
These
estimates do not assume the addition of any new intangible assets that may be
acquired in the future nor any write-downs resulting from
impairment.
Note
9. Deposits
The
aggregate amount of jumbo time deposits, each with a minimum denomination of
$100,000, was approximately $167.3 million and $142.5 million at December 31,
2007 and 2006, respectively.
At
December 31, 2007, the scheduled maturities of time deposits are as
follows:
|
December
31, 2007
|
||||
|
(in
thousands)
|
||||
|
Due
in one year or less
|
$ | 267,850 | ||
|
Due
after one year through three years
|
49,848 | |||
|
Due
after three years
|
16,470 | |||
|
Total
|
$ | 334,168 | ||
Note
10. Borrowings:
Short-term
borrowings are summarized as follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Federal
Home Loan Bank advances
|
$ | - | $ | - | ||||
|
Securities
sold under agreements to repurchase
|
10,401 | 6,584 | ||||||
|
Total
short-term borrowings
|
$ | 10,401 | $ | 6,584 | ||||
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature daily. Interest rates on repurchase agreements are set by Management and are generally based on the 91-day Treasury bill rate.
The
Company’s available lines of credit with correspondent banks, including the
Federal Home Loan Bank, totaled $111.4 million at December 31, 2007 and $60.9
million at December 31, 2006. In April 2007, the FHLB reinstated “blanket lien”
status which is secured primarily by commercial real estate loans not in custody
by the FHLB. Management chose to retain some of its loans at the FHLB in
“custody status” enabling higher credit availability. In 2006, due to a high
level of nonperforming assets, FHLB borrowings were based on “custody” status
rather than “blanket lien” status. FHLB advances in 2006 were collateralized
primarily by commercial real estate loans in the FHLB’s custody. With the
exception of the FHLB, no other lines were outstanding with any other
correspondent bank
at December 31, 2007 or December 31, 2006.
The
following schedule provides certain information about the Company’s short-term
borrowings during 2007 and 2006:
|
December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Outstanding
at year end
|
$ | 10,401 | $ | 6,584 | $ | 8,981 | ||||||
|
Maximum
month-end outstanding
|
45,766 | 37,353 | 32,348 | |||||||||
|
Average
daily outstanding
|
16,655 | 23,731 | 17,381 | |||||||||
|
Weighted
average rate during the year
|
5.18% | 5.19% | 3.14% | |||||||||
|
Average
rate at year end
|
3.50% | 4.41% | 3.56% | |||||||||
At
December 31, 2007, no long-term debt at the FHLB was
outstanding.
At
December 31, 2007, letters of credit issued by the FHLB totaling $105.0 were
outstanding and carried as off-balance sheet items, all of which expire in 2008.
At December 31, 2006, the Company had $45.0 million in letters of credit
issued by the FHLB which all expired in 2007 and were carried as off-balance
sheet items. The letters of credit are solely used for pledging towards public
fund deposits. See Note 20 to Notes to the Financial Statements for
additional information.
In
2007, the Company assumed $3.1 million in subordinated debentures in the
Homestead acquisition. The debentures were issued in 2003 by the Homestead
Bancorp Trust I, a statutory trust. The interest rate on the
debentures is LIBOR plus 300bp, resets quarterly and was 7.91% at December 31,
2007. The securities have a term of 30 years, callable after 5 years, with
interest payments due on a quarterly basis. The Company may redeem the
debentures on or after August 8, 2008, with regulatory approval, at face value.
It is the Company’s intent to redeem these debentures in August
2008.
Note
11. Preferred Stock
The
number of authorized shares of preferred stock is 100,000 shares of $1,000 par
value. There is no preferred stock outstanding.
Note
12. Minimum Capital Requirements
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors. Prompt corrective action
provisions are not applicable to bank holding
companies.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets and of Tier 1 capital to average assets.
Management believes, as of December 31, 2007 and 2006, that the
Company and the Bank met all capital adequacy requirements to which they
were subject.
As
of December 31, 2007, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following table. There
are no conditions or events since the notification that Management believes have
changed the Bank's category.
The Company’s and the Bank's actual capital amounts and ratios as of
December 31, 2007 and 2006 are presented in the following
table.
|
Minimum
|
||||||||||||||||||||||||
|
To
Be Well
|
||||||||||||||||||||||||
|
Capitalized
Under
|
||||||||||||||||||||||||
|
Minimum
Capital
|
Prompt
Corrective
|
|||||||||||||||||||||||
|
Actual
|
Requirements
|
Action
Provisions
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
(in
thousands, except for percentages)
|
||||||||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||||||
|
Total
risk-based capital:
|
||||||||||||||||||||||||
|
First
Guaranty Bancshares, Inc.
|
$ | 71,556 | 11.09% | $ | 51,600 | 8.00% | N/A | N/A | ||||||||||||||||
|
First
Guaranty Bank
|
71,006 | 11.02% | 51,558 | 8.00% | 64,447 | 10.00% | ||||||||||||||||||
|
Tier
1 capital:
|
||||||||||||||||||||||||
|
First
Guaranty Bancshares, Inc.
|
65,364 | 10.13% | 25,800 | 4.00% | N/A | N/A | ||||||||||||||||||
|
First
Guaranty Bank
|
64,813 | 10.06% | 25,779 | 4.00% | 38,668 | 6.00% | ||||||||||||||||||
|
Tier
1 leverage capital:
|
||||||||||||||||||||||||
|
First
Guaranty Bancshares, Inc.
|
65,364 | 7.38% | 35,414 | 4.00% | N/A | N/A | ||||||||||||||||||
|
First
Guaranty Bank
|
64,813 | 8.22% | 31,556 | 4.00% | 39,444 | 5.00% | ||||||||||||||||||
|
December
31, 2006
|
||||||||||||||||||||||||
|
Total
risk-based capital
|
||||||||||||||||||||||||
|
First
Guaranty Bank
|
$ | 66,292 | 11.03% | $ | 48,073 | 8.00% | $ | 60,091 | 10.00% | |||||||||||||||
|
Tier
1 capital
|
||||||||||||||||||||||||
|
First
Guaranty Bank
|
59,617 | 9.92% | 24,037 | 4.00% | 36,055 | 6.00% | ||||||||||||||||||
|
Tier
1 leverage capital
|
||||||||||||||||||||||||
|
First
Guaranty Bank
|
59,617 | 8.16% | 29,207 | 4.00% | 36,509 | 5.00% | ||||||||||||||||||
Note
13. Restrictions on Dividends and Loans
The
FRB has stated that generally, a bank holding company, should not maintain a
rate of distributions to shareholders unless its available net income has been
sufficient to fully fund the distributions, and the prospective rate of earnings
retention appears consistent with the bank holding company’s capital needs,
asset quality and overall financial condition. As a Louisiana corporation, we
are restricted under the Louisiana corporate law from paying dividends under
certain conditions.
First
Guaranty Bank
may not pay dividends or distribute capital assets if it is in default on any
assessment due to the FDIC. First Guaranty Bank
is also subject to regulations that impose minimum regulatory capital and
minimum state law earnings requirements that affect the amount of cash available
for distribution. In addition, under the Louisiana Banking
Law, dividends may not be paid if it would reduce the unimpaired surplus below
50% of outstanding capital stock in any year.
Note
14. Related Party Transactions
In
the normal course of business, the Company has loans, deposits and other
transactions with its executive officers, directors and certain business
organizations and individuals with which such persons are associated. An
analysis of the activity of loans made to such borrowers during the year ended
December 31, 2007 follows:
|
December
31, 2007
|
||||
|
(in
thousands)
|
||||
|
Balance,
beginning of year
|
$ | 19,989 | ||
|
New
loans
|
12,850 | |||
|
Repayments
|
(13,719 | ) | ||
|
Balance,
end of year
|
$ | 19,120 | ||
Unfunded
commtments to the Company's directors and executive officers totaled $16.9 million at
December 31, 2007. Additionally, included in the Company’s loan portfolio are
participations in loans totaling $0.8 million at December 31, 2007, which were
purchased from affiliated financial institutions. Participations sold to
affiliated financial institutions totaled $10.3 million at December 31,
2007.
During
the year ended 2007, the Company
paid approximately $715,000 for printing services and supplies and office
furniture and equipment to Champion Graphic Communications (or subsidiary
companies of Champion Industries, Inc.), of which Mr. Marshall T. Reynolds, the
Chairman of the Company’s Board of Directors, is President, Chief Executive
Officer, Chairman of the Board of Directors and holder of 41.5% of the capital
stock; approximately $1.1 million to participate in the Champion Industries,
Inc. employee medical benefit plan; and approximately $245,000 to Sabre
Transportation, Inc. for travel expenses of the Chairman and other directors.
These expenses include, but are not limited to, the utilization of an aircraft,
fuel, air crew, ramp fees and other expenses attendant to the Company’s use. The
Harrah and Reynolds Corporation, of which Mr. Reynolds is President and Chief
Executive Officer and sole shareholder, has a 99% ownership interest in Sabre
Transportation, Inc.
During
the year ended 2007, the Company engaged the services of Cashe, Lewis, Coudrain
and Sandage, attorneys-at-law, of which Mr. Alton Lewis, a director of the
Company, is a partner, to represent the Company with certain legal matters. Mr.
Lewis has a 25% ownership interest in the law firm. The fees paid for these
legal services totaled $178,000.
Note
15. Employee Benefit Plans
The
Company has an employee savings plan to which employees, who meet certain
service requirements, may defer one to 20 percent of their base salaries, six
percent of which may be matched up to 100%, at its sole discretion.
Contributions to the savings plan were $115,000, $101,000 and $93,000 in 2007,
2006 and 2005, respectively.
An
Employee Stock Ownership Plan (“ESOP”) benefits all eligible employees.
Full-time employees who have been credited with at least 1,000 hours of service
during a 12 consecutive month period and who have attained age 21 are eligible
to participate in the ESOP. The plan document has been approved by the Internal
Revenue Service. Contributions to the ESOP are at the sole discretion of the
Company.
Voluntary
contributions of $100,000 to the ESOP were made in 2007, 2006, and 2005 for the
purchase of shares from third parties at market value. At December 31, 2007, the
ESOP had acquired 3,843 shares of $1 par value common stock at a cost of
$90,003 for the 2007 contribution, bringing the total shares allocated to 18,353
shares.
In
2006 the ESOP acquired 3,820 shares of $1 par value common stock for a cost of
$89,464. In 2005 the ESOP acquired 4,738 shares of $1 par value common stock for
a cost of $87,997. An analysis of ESOP shares allocated is presented
below:
|
2007
|
2006
|
2005
|
||||||||||
|
Shares
allocated, beginning of year
|
14,510 | 10,690 | 5,952 | |||||||||
|
Shares
allocated, during the year
|
3,843 | 3,820 | 4,738 | |||||||||
|
Allocated
shares held by ESOP, end of year
|
18,353 | 14,510 | 10,690 | |||||||||
Note
16. Other Expense
The following is a
summary of the significant components of other noninterest expense:
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Other
noninterest expense:
|
||||||||||||
|
Legal
and professional fees
|
$ | 1,610 | $ | 1,390 | $ | 1,201 | ||||||
|
Operating
supplies
|
615 | 545 | 514 | |||||||||
|
Marketing
and public relations
|
842 | 823 | 564 | |||||||||
|
Data
processing
|
955 | 904 | 736 | |||||||||
|
Travel
and lodging
|
439 | 280 | 280 | |||||||||
|
Taxes
- sales and capital
|
628 | 582 | 684 | |||||||||
|
Telephone
|
211 | 244 | 421 | |||||||||
|
Amortization
of core deposit intangibles
|
203 | 525 | 630 | |||||||||
|
Other
|
2,999 | 2,535 | 2,410 | |||||||||
|
Total
other expense
|
$ | 8,502 | $ | 7,828 | $ | 7,440 | ||||||
Note
17. Income
Taxes
The
following is a summary of the provision for income taxes included in the
Statements of Income:
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Current
|
$ | 4,632 | $ | 4,046 | $ | 3,822 | ||||||
|
Deferred
|
213 | 617 | (618 | ) | ||||||||
|
Tax
credits
|
(81 | ) | (135 | ) | (34 | ) | ||||||
|
Tax
benefits attributable to items charged to goodwill
|
726 | - | - | |||||||||
|
Benefit
of operating loss carryforward
|
(24 | ) | (24 | ) | (24 | ) | ||||||
|
Total
|
$ | 5,466 | $ | 4,504 | $ | 3,146 | ||||||
The
difference between income taxes computed by applying the statutory federal
income tax rate and the provision for income taxes in the financial statements
is reconciled as follows:
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands, except for percentages)
|
||||||||||||
|
Statutory
tax rate
|
34.2% | 34.2% | 34.1% | |||||||||
|
Federal
income taxes at statutory rate
|
$ | 5,379 | $ | 4,551 | $ | 3,127 | ||||||
|
Tax
credits
|
(81 | ) | (135 | ) | (34 | ) | ||||||
|
Other
|
168 | 88 | 53 | |||||||||
|
Total
|
$ | 5,466 | $ | 4,504 | $ | 3,146 | ||||||
Deferred
taxes are recorded based upon differences between the financial statement and
tax basis of assets and liabilities, and available tax credit carryforwards.
Temporary differences between the financial statement and tax values of assets
and liabilities give rise to deferred tax assets (liabilities). The significant
components of deferred tax assets and liabilities at December 31, 2007 and 2006
are as follows:
|
Years
Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for loan losses
|
$ | 2,023 | $ | 2,270 | ||||
|
Net
operating loss carryforwards
|
- | 24 | ||||||
|
Other
real estate owned
|
85 | 128 | ||||||
|
Depreciation
and amortization
|
- | 302 | ||||||
|
Unrealized
loss on available for sale securities
|
172 | 466 | ||||||
|
Other
|
84 | - | ||||||
|
Gross
deferred tax assets
|
$ | 2,364 | $ | 3,190 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
and amortization
|
(1,095 | ) | - | |||||
|
Other
|
(1,424 | ) | (1,188 | ) | ||||
|
Gross
deferred tax liabilities
|
(2,519 | ) | (1,188 | ) | ||||
|
Net
deferred tax (liabilities) assets
|
$ | (155 | ) | $ | 2,002 | |||
As
of December 31, 2007, there were no net operating loss carry forwards for income
tax purposes. As of December 31, 2006, the Company had a net operating loss
carry forward of $69,000, which was available to offset future taxable
income.
On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes. The Company does not believe it has any
unrecognized tax benefits included in its consolidated financial statements. The
Company has not had any settlements in the current period with taxing
authorities, nor has it recognized tax benefits as a result of a lapse of the
applicable statute of limitations.
The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits, if applicable, in noninterest expense. During the years ended December
31, 2007, 2006 and 2005, the Company did not recognize any interest or penalties
in its consolidated financial statements, nor has it recorded an accrued
liability for interest or penalty payments.
Note
18. Comprehensive Income
The
following is a summary of the components of other comprehensive income as
presented in the Statements of Changes in Stockholders’
Equity:
|
December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Unrealized
gain (loss) on available for sale securities, net
|
$ | 387 | $ | (517 | ) | $ | (954 | ) | ||||
|
Reclassification
adjustments for net losses (gains), realized net income
|
478 | 234 | (7 | ) | ||||||||
|
Other
comprehensive income (loss)
|
865 | (283 | ) | (961 | ) | |||||||
|
Income
tax (provision) benefit related to other comprehensive
income
|
(295 | ) | 96 | 327 | ||||||||
|
Other
comprehensive income (loss), net of income taxes
|
$ | 570 | $ | (187 | ) | $ | (634 | ) | ||||
Note
19. Financial Instruments
The
Company 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 on-balance sheet
instruments.
Unless
otherwise noted, collateral or other security is not required to support
financial instruments with credit risk.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. Each
customer's creditworthiness is evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary upon extension of credit, is based on
Management's credit evaluation of the counterpart. Collateral requirements vary
but may include accounts receivable, inventory, property, plant and equipment,
residential real estate and commercial properties.
Standby
and commercial letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. These guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The majority of these
guarantees are short-term, one year or less; however, some guarantees extend for
up to three years. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Collateral requirements are the same as on-balance sheet instruments and
commitments to extend credit.
There
were no losses incurred on any commitments in 2007, while a $7,000 loss on one
commitment was incurred in 2006.
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 our financial instruments, we 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 the
Company.
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.
- 59
-
The
methods and assumptions used to estimate the fair values of each class 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 in nature and,
accordingly, the
carrying amounts reported in the Statements of Condition are reasonable
approximations of their fair values.
Interest-bearing time
deposits with banks. Time deposits are purchased from other
financial institutions for investment purposes. Time deposits with banks do not
have a
balance greater than
$100,000. Interest earned is paid monthly and not reinvested as principal. The
carrying amount of interest-bearing time deposits with banks approximates
its fair value.
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.
Loans Held for
Sale. Fair values of mortgage loans held for sale are based on
commitments on hand from investors or prevailing market prices.
Loans,
net. The fair value of loans is estimated for segments of the loan
portfolio with similar financial characteristics. For variable rate loans that
re-price frequently with no
significant
change in credit risk, the carrying amounts reported in the Statements of
Condition are reasonable approximations of their fair values. The fair values of
other types of
loans
are estimated by discounting the future cash flows using interest rates that
consider the credit and interest rate risks inherent in the loans, and current
economic and
lending
conditions.
The fair
value of non-accrual loans is either estimated by discounting Management's
estimate of future cash flows using a rate commensurate with the risks involved
or
based
upon
recent internal or external appraisals.
Accrued interest
receivable. The carrying amount of accrued interest receivable
approximates its fair value.
Deposits.
The fair values of deposits subject to immediate withdrawal such as interest and
noninterest-bearing demand deposits and savings deposits are equal to their
carrying
amounts. The carrying
amounts for variable-rate time deposits and other time deposits approximate
their fair values at the reporting date. Fair values for fixed-rate time
deposits
are estimated by
discounting future cash flows using interest rates currently offered on time
deposits with similar remaining maturities.
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 the
Company’s long-term
borrowings are
estimated using discounted cash flow analysis based on the Company’s current
incremental borrowing rates for similar types of borrowing arrangements.
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. 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 December 31, 2007
and 2006 the fair value of guarantees under commercial and standby letters of
credit was
immaterial.
The
estimated fair values and carrying values of the financial instruments at
December 31, 2007 and 2006 are presented in the following
table:
|
December
31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Estimated
|
Estimated
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
Value
|
Value
|
Value
|
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 58,677 | $ | 58,677 | $ | 24,817 | $ | 24,817 | ||||||||
|
Interest-bearing
time deposits with banks
|
2,188 | 2,188 | 2,188 | 2,168 | ||||||||||||
|
Securities,
available for sale
|
105,570 | 105,570 | 111,353 | 111,353 | ||||||||||||
|
Securities,
held to maturity
|
36,498 | 36,206 | 46,999 | 45,614 | ||||||||||||
|
Federal
Home Loan Bank stock
|
955 | 955 | 2,264 | 2,264 | ||||||||||||
|
Loans
held for sale
|
3,959 | 3,959 | 1,049 | 1,049 | ||||||||||||
|
Loans,
net
|
569,063 | 566,616 | 500,520 | 478,719 | ||||||||||||
|
Accrued
interest receivable
|
5,126 | 5,126 | 5,378 | 5,378 | ||||||||||||
|
Liabilities
|
||||||||||||||||
|
Deposits
|
$ | 723,094 | $ | 720,744 | $ | 626,293 | $ | 626,139 | ||||||||
|
Borrowings
|
13,494 | 13,491 | 24,568 | 24,587 | ||||||||||||
|
Accrued
interest payable
|
2,956 | 2,956 | 3,070 | 3,070 | ||||||||||||
A
summary of the notional amounts of the financial instruments with off-balance
sheet risk at December 31, 2007 and 2006 follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Financial
instruments whose contract
|
||||||||
|
amounts
represent credit risk:
|
||||||||
|
Commitments
to extend credit
|
$ | 92,342 | $ | 87,355 | ||||
|
Commitments
to grant loans
|
56,998 | 47,110 | ||||||
|
Standby
letters of credit
|
6,035 | 2,515 | ||||||
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 priced at
market.
Note
20. Concentrations of Credit and Other Risks
Personal,
commercial and residential loans are granted to customers, most of who reside in
northern and southern areas of Louisiana. Although we have a diversified loan
portfolio, significant portions of the loans are collateralized by real estate
located in Tangipahoa Parish and surrounding parishes in southeast Louisiana.
Declines in the Louisiana economy could result in lower real estate values which
could, under certain circumstances, result in losses to the
Company.
The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers. Generally, credit is not extended in excess
of $8.0 million to any single borrower or group of related
borrowers.
A
significant portion of the Company’s deposits (approximately 28.8%) is derived
from local governmental agencies. These governmental depositing authorities are
generally long-term customers. A number of the depositing authorities are under
contractual obligation to maintain their operating funds exclusively with us. In
most cases, we are required to pledge securities or letters of credit issued by
the Federal Home Loan Bank to the depositing authorities to collateralize their
deposits. Under certain circumstances, the withdrawal of all of, or a
significant portion of, the deposits of one or more of the depositing
authorities may result in a temporary reduction in liquidity, depending
primarily on the maturities and/or classifications of the securities pledged
against such deposits and the ability to replace such deposits with either new
deposits or other borrowings.
Note
21. Litigation
The
Company is subject to various legal proceedings in the normal course of its
business. It is Management’s belief that the ultimate resolution of such claims
will not have a material adverse effect on the Company’s financial position or
results of operations.
Note
22. Commitments and Contingencies
In
the ordinary course of business, various outstanding commitments and contingent
liabilities arise that are not reflected in the accompanying financial
statements. Included among these contingent liabilities are certain provisions
in agreements, entered into with outside third parties, to sell loans that we
that may require us to repurchase a loan if it becomes delinquent within a
specified period of time.
Note
23. Condensed Parent Company Information
The
following condensed financial information reflects the accounts and transactions
of First Guaranty Bancshares, Inc. (parent company only) for the dates
indicated:
|
First
Guaranty Bancshares, Inc.
|
||||
|
Condensed
Balance Sheet
|
||||
|
(in
thousands)
|
||||
|
December
31,
|
||||
|
2007
|
||||
|
Assets
|
|
|||
|
Cash
|
$ | 49 | ||
|
Investment
in bank subsidiary
|
69,008 | |||
|
Other
assets
|
623 | |||
|
Total
Assets
|
$ | 69,680 | ||
|
Liabilities
and Stockholders' Equity
|
||||
|
Junior
subordinated debentures
|
$ | 3,093 | ||
|
Other
liabilities
|
54 | |||
|
Stockholders'
Equity
|
66,533 | |||
|
Total
liabilities and stockholders' equity
|
$ | 69,680 | ||
|
First
Guaranty Bancshares, Inc.
|
||||
|
Condensed
Statement of Income
|
||||
|
(in
thousands)
|
||||
|
For
the Period Ended
|
||||
|
December
31, 2007
|
||||
|
Operating
Income
|
||||
|
Dividends
received from bank subsidiaries
|
$ | 19,630 | ||
|
Other
income
|
4 | |||
|
Total
operating income
|
19,634 | |||
|
Operating
Expenses
|
||||
|
Interest
expense
|
233 | |||
|
Other
expenses
|
448 | |||
|
Total
operating expenses
|
681 | |||
|
Income
before income tax expense and increase in equity in
undistributed
|
||||
|
earnings
of subsidiaries
|
18,953 | |||
|
Income
tax benefit
|
220 | |||
|
Income
before increase in equity in undistributed earnings of
subdisiaries
|
19,173 | |||
|
Decrease
in equity in undistributed earnings of subsidiaries
|
(15,222 | ) | ||
|
Net
Income
|
$ | 3,951 | ||
|
First
Guaranty Bancshares, Inc.
|
||||
|
Condensed
Statement of Cash Flows
|
||||
|
(in
thousands)
|
||||
| Year Ended | ||||
| December 31, 2007 | ||||
|
Cash
Flows From Operating Activities
|
||||
|
Net
income
|
$ | 3,951 | ||
|
Adjustments
to reconcile net income to net cash
|
||||
|
provided
by operating activities:
|
||||
|
Equity
in undistributed (earnings) losses of subsidiaries
|
15,222 | |||
|
Net
change in other liabilities
|
(17 | ) | ||
|
Net
change in other assets
|
(49 | ) | ||
|
Net
Cash Provided By Operating Activities
|
19,107 | |||
|
Cash
Flows From Investing Activities
|
||||
|
Payments
for investments in and advances to subsidiaries
|
(5,489 | ) | ||
|
Cash
paid in excess of cash received in acquisition
|
(11,790 | ) | ||
|
Net
Cash Used in Investing Activities
|
(17,279 | ) | ||
|
Cash
Flows From Financing Activities
|
||||
|
Proceeds
from purchased funds and other short-term borrowings
|
17,640 | |||
|
Repayments
of purchased funds and other short-term borrowings
|
(17,640 | ) | ||
|
Dividends
paid
|
(1,779 | ) | ||
|
Net
Cash Used In Financing Activities
|
(1,779 | ) | ||
|
Net
Increase In Cash and Cash Equivalents
|
49 | |||
|
Cash
and Cash Equivalents at the Beginning of the Period
|
- | |||
|
Cash
and Cash Equivalents at the End of the Period
|
$ | 49 | ||
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There
were no changes in or disagreements with accountants on accounting and financial
disclosures for the year ended December 31, 2007
Evaluation
of Disclosure Controls and Procedures
As
defined by the Securities and Exchange Commission in Exchange Act Rules
13a-14(c) and 15d-14(c), 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. The
Company 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 annual report on Form 10-K. 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 annual report are effective. There were no changes in the
Company’s internal control over financial reporting during the last fiscal
quarter in the period covered by this annual report that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
This annual report
does not include a report of management's assessment regarding internal control
over financial reporting or an attestation report of the company's registered
public accounting firm due to a transition period established by rules of the
Securities and Exchange Commission for newly public companies. First Guaranty
Bancshares, Inc. first registered its common stock with the Securities and
Exhange Commission under the Securities Exchange Act of 1934, as amended on July
27, 2007.
None
Part
III
Pursuant
to General Instruction G (3), information on directors and executive officers of
the Registrant will be incorporated by reference from the Company’s 2008
Definitive Proxy Statement.
Item
11 - Executive Compensation
Pursuant
to General Instruction G (3), information on directors and executive officers of
the Registrant will be incorporated by reference from the Company’s 2008
Definitive Proxy Statement.
Item
12 - Security Ownership of Certain Beneficial Owners, Management and
Related Stockholder Matters
Pursuant
to General Instruction G (3), information on directors and executive officers of
the Registrant will be incorporated by reference from the Company’s 2008
Definitive Proxy Statement.
Pursuant
to General Instruction G (3), information on directors and executive officers of
the Registrant will be incorporated by reference from the Company’s 2008
Definitive Proxy Statement.
Pursuant
to General Instruction G (3), information on directors and executive officers of
the Registrant will be incorporated by reference from the Company’s 2008
Definitive Proxy Statement.
Part
IV
|
(a)
|
1
|
Consolidated
Financial Statements
|
|
|
Item
|
Page
|
||
|
First
Guaranty Bancshares, Inc. and Subsidiary
|
|||
|
Report
of Independent Registered Accounting Firm
|
38
|
||
|
Consolidated Balance
Sheets - December 31, 2007 and 2006
|
39
|
||
|
Consolidated
Statements of Income - Years Ended December 31, 2007, 2006 and
2005
|
40
|
||
|
Consolidated
Statements of Changes in Stockholders’ Equity - December 31,
2007, 2006 and 2005
|
41
|
||
|
Consolidated
Statements of Cash Flows - Years Ended December 31, 2007, 2006 and
2005
|
42
|
||
|
Notes
to Consolidated Financial Statements
|
43
|
||
|
2.
|
Consolidated
Financial Statement Schedules
|
||
|
All
schedules to the consolidated financial statements of First Guaranty
Bancshares, Inc. and its subsidiaries have been omitted because they
are not required under the related instructions or are inapplicable, or
because the required information has been provided in the consolidated
financial statements or the notes thereto.
|
|||
|
3
|
Exhibits
|
||
|
The
exhibits required by Regulation S-K are set forth in the following
list and are filed either by incorporation by reference from previous
filings with the Securities and Exchange Commission or by attachment to
this Annual Report on Form 10-K as indicated below.
|
|||
|
Exhibit Number
|
Exhibit
|
||
|
2
|
Agreement
and Plan of Reorganization between First Guaranty Bancshares, Inc. and
First Community Holding Company dated November 2, 2007 (filed as Exhibit
2.1 on the Company’s Form 8-K dated November 8, 2007 and incorporated
herein by reference).
|
||
|
2.1
|
Agreement
and Plan of Exchange dated July 27, 2007 between First Guaranty
Bancshares, Inc and First Guaranty Bank (filed as Exhibit 2 on Form
8-K12G3 dated August 2, 2007 and incorporated herein by
reference).
|
||
|
3.1
|
Restatement
of Articles of Incorporation of First Guaranty Bancshares, Inc. dated July
27, 2007 (filed as Exhibit 3.1 on Form 8-K12G3 dated August 2, 2007 and
incorporated herein by reference).
|
||
|
3.2
|
Bylaws
of First Guaranty Bancshares, Inc. dated January 4, 2007 (filed as Exhibit
3.2 on Form 8-K12G3 dated August 2, 2007 and incorporated herein by
reference).
|
||
|
3.3
|
Amendment
to Bylaws of First Guaranty Bancshares, Inc. dated May 17, 2007 (filed as
Exhibit 3.3 on Form 8-K12G3 dated August 2, 2007 and incorporated herein
by reference).
|
||
|
4
|
Specimen
stock certificate for common stock off First Guaranty Bancshares, Inc.
(filed as Exhibit 3.3 on Form 8-K12G3 dated August 2, 2007 and
incorporated herein by reference).
|
||
|
10.1
|
First
Guaranty Bank Employee Stock Ownership Plan (effective January 1, 2003)
(filed as Exhibit 10.1 on Form 8-K12G3 dated August 2, 2007 and
incorporated herein by reference).
|
||
|
10.2
|
Amendment
Number One to the First Guaranty Bank Employee Stock Ownership Plan
(effective January 1, 2003) (filed as Exhibit 10.2 on Form 8-K12G3 dated
August 2, 2007 and incorporated herein by reference).
|
||
|
10.3
|
Amendment
Number Two to the First Guaranty Bank Employee Stock Ownership Plan
(effective January 1, 2003) (filed as Exhibit 10.3 on Form 8-K12G3 dated
August 2, 2007 and incorporated herein by reference).
|
||
|
10.4
|
Amendment
Number Three to the First Guaranty Bank Employee Stock Ownership Plan
(effective January 1, 2003) (filed as Exhibit 10.3 on Form 8-K12G3 dated
August 2, 2007 and incorporated herein by reference).
|
||
|
10.5
|
Employment
Agreement and Ancillary Confidentiality and Non-Competition Agreement by
and between Reggie H. Harper and First Guaranty Bank, and Employment
Agreement and Ancillary Confidentiality and Non-Competition Agreement by
and between Cordell H. White and First Guaranty Bank dated November 2,
2007 (filed as Exhibit 10.1 on the Company’s Form 8-K dated November 8,
2007 and incorporated herein by reference).
|
||
|
11
|
Statement
Regarding Computation of Earnings Per Share
|
|
|
|
12
|
Statement
Regarding Computation of Ratios
|
|
|
|
14.1
|
First
Guaranty Bancshares, Inc. and Subsidiary Code Of Conduct And Ethics For
Employees, Officers And Directors dated January 25, 2008 (filed as Exhibit
14.1 on the Company’s Form 8-K dated January 31, 2008 and incorporated
herein by reference).
|
||
|
14.2
|
First
Guaranty Bancshares, Inc. Code Of Ethics For Senior Financial Officers
dated January 25, 2008 (filed as Exhibit 14.2 on the Company’s Form 8-K
dated January 31, 2008 and incorporated herein by
reference).
|
||
|
21
|
Subsidiaries
of the First Guaranty Bancshares, Inc. (filed as Exhibit 21 on the
Company’s Form 8-K dated November 8, 2007 and incorporated herein by
reference).
|
||
|
31
|
Section
906 Certification of the Sarbanes-Oxley Act
|
|
|
|
32
|
Section
302 Certification of the Sarbanes-Oxley Act
|
|
|
|
(c)
|
There
are no other financial statements and financial statement schedules which
were excluded from Item 8, which are required to be included
herein.
|
||
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FIRST
GUARANTY BANCSHARES, INC.
Dated:
March 31, 2008
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
|
/s/
Michael R. Sharp
Michael
R. Sharp
|
President
and
Chief
Executive Officer
|
March
31, 2008
|
|
|
/s/
Michele E. LoBianco
Michele
E. LoBianco
|
Chief
Financial Officer,
Secretary
and Treasurer
|
March
31, 2008
|
|
|
/s/Marshall
T. Reynolds
Marshall
T. Reynolds
|
Chairman
of the Board
|
March
31, 2008
|
|
|
/s/
William K. Hood
William
K. Hood
|
Director
|
March
31, 2008
|
|
|
/s/
Alton B. Lewis
Alton
B. Lewis
|
Director
|
March
31, 2008
|
|