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. First Guaranty has generally been liability sensitive. We modified our business plan in 2024 to reduce the liability sensitive nature of our balance sheet. We are working to limit our future exposure to interest rate fluctuations by creating a more balanced mix of rate sensitive assets and liabilities on a one-year time horizon and greater than one-year time horizon. We purchased amortizing mortgage backed securities in 2024. We also purchased U.S. Treasury securities with a maturity of one year or less in 2024. 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. 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, 2024 illustrated below reflects a liability-sensitive position with a negative cumulative gap on a one-year basis.
December 31, 2024
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) $ 917,176 $ 387,048 $ 1,304,224 $ 1,389,556 $ 2,693,780
Securities (including FHLB stock) 109,213 54,391 163,604 448,821 612,425
Federal Funds Sold 430 — 430 — 430
Other earning assets 545,081 — 545,081 — 545,081
Total earning assets $ 1,571,900 $ 441,439 $ 2,013,339 $ 1,838,377 $ 3,851,716
Source of Funds:
Interest-bearing accounts:
Demand deposits $ 1,387,068 $ — $ 1,387,068 $ — $ 1,387,068
Savings deposits 234,444 — 234,444 — 234,444
Time deposits 208,429 595,703 804,132 646,560 1,450,692
Short-term borrowings — — — 6,916 6,916
Senior long-term debt 15,169 — 15,169 135,000 150,169
Junior subordinated debt 44,745 — 44,745 — 44,745
Noninterest-bearing, net — — — 577,682 577,682
Total source of funds $ 1,889,855 $ 595,703 $ 2,485,558 $ 1,366,158 $ 3,851,716
Period gap $ (317,955) $ (154,264) $ (472,219) $ 472,219
Cumulative gap $ (317,955) $ (472,219) $ (472,219) $ —
Cumulative gap as a percent of earning assets (8.3) % (12.3) % (12.3) %
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