Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A– Quantitative and Qualitative Disclosures about Market Risk
Asset/Liability Management and Market Risk
Asset/Liability Management.
Our asset/liability management process consists of quantifying, analyzing and controlling interest rate risk to maintain reasonably stable net interest income levels under various interest rate environments. The principal objective of asset/liability management is to maximize net interest income while operating within acceptable limits established for interest rate risk and to maintain adequate levels of liquidity.
The majority of our assets and liabilities are monetary in nature. Consequently, one of our most significant forms of market risk is interest rate risk, which is inherent in our lending and deposit-taking activities. Our assets, consisting primarily of loans secured by real estate and fixed rate securities in our investment portfolio, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. The board of directors of First Guaranty Bank has established two committees, the management asset liability committee and the board investment committee, to oversee the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. The management asset liability committee is comprised of senior officers of the Bank and meets as needed to review our asset liability policies and interest rate risk position. The board ALCO investment committee is comprised of certain members of the board of directors of the Bank and meets monthly. The management asset liability committee provides a monthly report to the board ALCO investment committee.
The need for interest sensitivity gap management is most critical in times of rapid changes in overall interest rates. We generally seek to limit our exposure to interest rate fluctuations by maintaining a relatively balanced mix of rate sensitive assets and liabilities on a one-year time horizon and greater than one-year time horizon. Because of the significant impact on net interest margin from mismatches in repricing opportunities, we monitor the asset-liability mix periodically depending upon the management asset liability committee's assessment of current business conditions and the interest rate outlook. We maintain exposure to interest rate fluctuations within prudent levels using varying investment strategies. These strategies include, but are not limited to, frequent internal modeling of asset and liability values and behavior due to changes in interest rates. We monitor cash flow forecasts closely and evaluate the impact of both prepayments and extension risk.
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The following interest sensitivity analysis is one measurement of interest rate risk. This analysis, which we prepare quarterly, reflects the contractual maturity characteristics of assets and liabilities over various time periods. This analysis does not factor in prepayments or interest rate floors on loans which may significantly change the report. This table includes nonaccrual loans in their respective maturity periods. The gap indicates whether more assets or liabilities are subject to repricing over a given time period. The interest sensitivity analysis at December 31, 2022 illustrated below reflects a liability-sensitive position with a negative cumulative gap on a one-year basis.
December 31, 2022
Interest Sensitivity Within
(dollars in thousands) 3 Months Or Less Over 3 Months
thru 12 Months Total One Year Over One Year Total
Earning Assets:
Loans (including loans held for sale) $ 635,288 $ 264,614 $ 899,902 $ 1,619,175 $ 2,519,077
Securities (including FHLB stock) 56,748 691 57,439 400,615 458,054
Federal Funds Sold 423 — 423 — 423
Other earning assets 70,086 — 70,086 — 70,086
Total earning assets $ 762,545 $ 265,305 $ 1,027,850 $ 2,019,790 $ 3,047,640
Source of Funds:
Interest-bearing accounts:
Demand deposits $ 1,460,259 $ — $ 1,460,259 $ — $ 1,460,259
Savings deposits 205,760 — 205,760 — 205,760
Time deposits 66,523 248,236 314,759 218,599 533,358
Short-term borrowings 140,000 — 140,000 5,884 145,884
Senior long-term debt 21,927 — 21,927 — 21,927
Junior subordinated debt 15,000 — 15,000 — 15,000
Noninterest-bearing, net — — — 665,452 665,452
Total source of funds $ 1,909,469 $ 248,236 $ 2,157,705 $ 889,935 $ 3,047,640
Period gap $ (1,146,924) $ 17,069 $ (1,129,855) $ 1,129,855
Cumulative gap $ (1,146,924) $ (1,129,855) $ (1,129,855) $ —
Cumulative gap as a percent of earning assets (37.6) % (37.1) % (37.1) %
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