What changed in this filing

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Item 1. Business

2021-03-16 compared with 2020-03-16 · 246 added, 215 removed, 744 unchanged (38% of the section changed)

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Our wholly owned subsidiary, First Guaranty Bank (the "Bank"), a Louisiana-chartered commercial bank, provides personalized commercial banking services mainly to Louisiana and Texas customers through 34 banking facilities primarily located in the Market Services Areas ("MSAs"), of Hammond, Baton Rouge, Lafayette, Shreveport-Bossier City, Lake Charles, Alexandria, Dallas-Fort Worth-Arlington, and Waco.

Our principal business consists of attracting deposits from the general public and local municipalities in our market areas and investing those deposits, together with funds generated from operations and borrowings in lending and in securities activities to serve the credit needs of our customer base, including commercial real estate loans, commercial and industrial loans, one- to four-family residential real estate loans, construction and land development loans, agricultural and farmland loans, and to a lesser extent, consumer and multi-family loans.

Our principal business consists of attracting deposits from the general public and local municipalities in our market areas and investing those deposits.

It also includes generating funds from operations and borrowings in lending and in securities activities to serve the credit needs of our customer base, including commercial real estate loans, commercial and industrial loans, commercial leases, one- to four-family residential real estate loans, construction and land development loans, agricultural and farmland loans, and to a lesser extent, consumer and multi-family loans.

We also participate in certain syndicated loans, including shared national credits, with other financial institutions.

We offer a variety of deposit accounts to consumers and small businesses, including personal and business checking and savings accounts, time deposits, money market accounts and demand accounts.

We invest a portion of our assets in securities issued by the United States Government and its agencies, state and municipal obligations, corporate debt securities, mutual funds, and equity securities.

We also invest in mortgage-backed securities primarily issued or guaranteed by United States Government agencies or enterprises.

We offer a variety of deposit accounts to consumers, small businesses and municipalities, including personal and business checking and savings accounts, time deposits, money market accounts and demand accounts.

In addition, we offer a broad range of consumer services, including personal and commercial credit cards, remote deposit capture, safe deposit boxes, official checks, online and mobile banking, automated teller machines, and online bill pay.

For our business customers we are pleased to offer additional solutions such as merchant services, remote deposit capture, and lockbox services.

We also invest in mortgage-backed securities primarily issued or guaranteed by United States Government agencies or enterprises.

At December 31, 2020, we had consolidated total assets of $2.5 billion, total deposits of $2.2 billion and total shareholders' equity of $178.6 million.

Recent Events

On November 7, 2019, First Guaranty completed the acquisition of Union Bancshares, Incorporated, a Louisiana corporation ("Union").

On the November 7, 2019 acquisition date, Union was merged with and into First Guaranty with First Guaranty as the surviving corporation followed by the merger of Union's wholly-owned subsidiary, The Union Bank ("Union Bank") with and into the Bank, with the Bank continuing as the surviving entity.

Shareholders of Union received $1,061.20 per share in cash, yielding an aggregate deal value of $43.4 million.

Union Bancshares, Inc.

had total consolidated assets of approximately $258.5 million on November 7, 2019.

First Guaranty currently has one new facility under construction in order to facilitate future expansion.

This construction commitment totals $10.1 million at December 31, 2019.

Total costs incurred for this facility as of December 31, 2019 was $6.8 million.

First Guaranty also completed construction on a new branch facility in Amite, Louisiana during the fourth quarter of 2019.

In November 2017, First Guaranty announced the launch of an At-The-Market Equity Offering program ("ATM Offering").

First Guaranty may sell up to $25.0 million of common stock under the ATM Offering.

First Guaranty expects to use the net proceeds of the ATM Offering for general corporate purposes, including support for organic growth and financing possible acquisitions of other financial institutions.

First Guaranty has not sold any shares of common stock under the ATM Offering.

Our History and Growth

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The following table summarizes the four acquisitions:

Acquired Institution/Market

Date of Acquisition

(dollars in thousands)

Fair Value of

Acquired Institution/Market Date of Acquisition Deal Value

(dollars in thousands) Fair Value of

Total Assets Acquired

(dollars in thousands)

Union Bancshares, Incorporated

November 7, 2019

Union Bancshares, Incorporated November 7, 2019 $ 43,383 $ 275,159

Alexandria MSA

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Greensburg Bancshares, Inc.

July 1, 2011 $ 5,308 $ 89,386

Baton Rouge MSA

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We are continuing this campaign even after we redeemed our SBLF preferred stock in December 2015.

Our gross loan portfolio has increased by $952.4 million , or 166.2% , to $1.5 billion at December 31, 2019 from $573.1 million at December 31, 2011.

Our gross loan portfolio has increased by $1.3 billion, or 221.8%, to $1.8 billion at December 31, 2020 from $573.1 million at December 31, 2011.

Our commercial lending team is organized around our regional market areas of Louisiana and Texas.

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We will continue to be a leading agricultural lender and grow our Farm Service Agency lending.

Over the last twelve years, we have pursued a focused program to participate in syndicated loans (loans made by a group of lenders, including us, who share or participate in a specific loan, which is typically secured by business assets or equipment, and also commercial real estate) with a larger regional financial institution as the lead lender.

Over the last thirteen years, we have pursued a focused program to participate in syndicated loans (loans made by a group of lenders, including us, who share or participate in a specific loan, which is typically secured by business assets or equipment, and also commercial real estate) with a larger regional financial institution as the lead lender.

Our focus has been to finance middle market companies whose borrowing needs typically range from $25 million to $75 million.

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We emphasize a disciplined credit culture based on intimate market knowledge, close ties to our customers, sound underwriting standards and experienced loan officers.

While the challenging operating environment which began following the 2008-2009 recession of the United States contributed to an increase in problem assets, management's primary objective has been to expeditiously reduce the level of non-performing assets through diligent monitoring and aggressive resolution efforts.

The results of this effort are reflected in our improved asset quality.

At December 31, 2019 , non-performing assets totaled $21.9 million , or 1.04% of total assets, and has declined by $0.1 million from $22.0 million , or 1.51% of total assets at December 31, 2015 .

First Guaranty has taken pro-active measures to address the challenging operating environment that began following the onset of the COVID-19 pandemic.

First Guaranty provided various loan relief measures as provided by the CARES Act such as loan payment deferrals.

First Guaranty funded over $111.1 million in SBA Paycheck Protection loans (PPP) in 2020 that were designed to assist business customers.

First Guaranty is also participating the second round of the PPP loan program that was initiated in early 2021.

First Guaranty continues to monitor its loan portfolio given the ongoing economic uncertainty.

Pursue Strategic Acquisitions.

Our strategy is to supplement our organic growth by executing a targeted and disciplined acquisition strategy of community banks and non-banking financial companies as opportunities arise.

On November 7, 2019, First Guaranty completed its merger with Union Bancshares, Incorporated headquartered in Marksville, Louisiana.

We have successfully integrated prior acquisitions as demonstrated by our acquisitions of Premier Bancshares, Inc.

We have successfully integrated prior acquisitions as demonstrated by our acquisitions of Union Bancshares, Incorporated in 2019, Premier Bancshares, Inc.

in 2017, Greensburg Bancshares, Inc.

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Our lending operations consist of the following major segments:

non-farm, non-residential loans secured by real estate, commercial and industrial loans, one- to four-family residential loans, construction and land development loans, agricultural loans, farmland loans, consumer and other loans, and multifamily loans.

All loan decisions are locally made which can allow for a faster approval process than many of our larger regional and nationwide bank competitors.

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Our non-farm non-residential loans are secured by commercial real estate generally located in our market area, which may be owner-occupied or non-owner occupied.

We may originate, participate in, or purchase real estate loans outside of our market area in order to diversify our portfolio.

Our owner-occupied commercial real estate loans totaled $314.5 million, or 38.2% of total non-farm non-residential loans at December 31, 2020.

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We also participate in government programs which guarantee portions of commercial and industrial loans such as the SBA and USDA.

During 2020, First Guaranty participated in the Paycheck Protection Program or PPP loan program.

First Guaranty continues to participate in this program in 2021.

In most cases, we require collateral of equipment, accounts receivable, inventory, chattel or other assets before making a commercial business loan.

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We generally obtain personal guarantees from the borrower or a third party as a condition to originating commercial and industrial loans.

Over the last twelve years, we pursued a focused program to participate in syndicated loans (loans made by a group of lenders, including us, who share or participate in a specific loan) with a larger regional financial institution as the lead lender.

Over the last thirteen years, we pursued a focused program to participate in syndicated loans (loans made by a group of lenders, including us, who share or participate in a specific loan) with a larger regional financial institution as the lead lender.

Syndicated loans are typically made to large businesses (which are referred to as shared national credits) or middle market companies (which do not meet the regulatory definition of shared national credits), both of which are secured by business assets or equipment, and also commercial real estate.

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Our credit department independently reviews all syndicate loans and our board of directors has created a special committee to oversee the underwriting and approval of these loans.

At December 31, 2019 , syndicated loans secured by assets other than commercial real estate totaled $30.0 million , or 11.2% of the commercial and industrial loan portfolio.

On December 21, 2017 the Federal Reserve, FDIC, and Office of Comptroller of the Currency issued a change to the definition of a Shared National Credit.

Effective January 1, 2018, the aggregate loan commitment threshold for inclusion in the Shared National Credit (SNC) program increased from $20 million to $100 million.

First Guaranty's syndicated loans that meet the revised definition at December 31, 2019 were $22.0 million .

At December 31, 2020, syndicated loans secured by assets other than commercial real estate totaled $42.7 million, or 12.1% of the commercial and industrial loan portfolio, of which $29.3 million were shared national credits.

Commercial and industrial loans generally involve increased credit risk and, therefore, typically yield a higher return.

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We also have a commercial lease program with the loan balances included in other loans.

Commercial leases generally have higher yields and shorter average lives than real estate secured loans.

Commercial leases totaled $104.1 million and consumer and other loans totaled $44.6 million at December 31, 2020.

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In these cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan, and the remaining value often does not warrant further substantial collection efforts against the borrower.

Loan Originations, Sales and Participations.

Loan Originations, Sales, Purchases and Participations.

Loan originations are derived from a number of sources such as referrals from our board of directors, existing customers, borrowers, builders, attorneys and walk-in customers.

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We had $37.0 million at December 31, 2020 in purchased loan participations that were not syndicated loans.

We had $119.0 million in purchased loans, primarily secured by real estate, at December 31, 2020.

At December 31, 2020, we had $75.2 million in syndicated loans, of which $29.3 million were shared national credits.

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These deposits are from local government entities such as school districts, hospital districts, sheriff departments and other municipalities.

We solicit their operating, savings, and time deposits and we are often the fiscal agent for the municipality.

The majority of these deposits are under contractual terms of up to three years.

Public funds deposit accounts are collateralized by FHLB letters of credit and by eligible government and government agency securities such as those issued by the FHLB, FFCB, Fannie Mae, and Freddie Mac.

Public fund deposits are generally priced in relation to an index such as a U.S.

Treasury rate.

We believe that public funds provide a stable source of funding.

Deposits under fiscal agency agreements are generally stable but public entities may maintain the ability to negotiate term deposits on a specific basis including with other financial institutions.

These deposits generally have stable balances as we maintain both operating accounts and time deposits for these entities.

There is a seasonal component to public deposit levels associated with annual tax collections.

Public funds will increase at the end of the year and during the first quarter.

In addition to seasonal fluctuations, there are monthly fluctuations associated with internal payroll and short-term tax collection accounts for our public funds deposit accounts.

Public funds deposit accounts are collateralized by FHLB letters of credit, reciprocal deposit insurance programs, Louisiana municipal bonds and eligible government and government agency securities such as those issued by the FHLB, FFCB, Fannie Mae, and Freddie Mac.

The interest rates paid by us on deposits are set at the direction of our executive management.

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(6) mutual funds and other equity securities and (7) municipal bonds.

Our mortgage-backed securities comprise the largest share of our investment securities, having a fair value of $243.0 million , of which $179.6 million were classified as available for sale and $63.4 million as held to maturity, at December 31, 2019 .

Government agency securities comprise the largest share of our investment securities, having a fair value of $169.7 million, which were classified as available for sale, at December 31, 2020.

The Bank's management asset liability committee and board investment committee are responsible for regular review of our investment activities and the review and approval of our investment policy.

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During the last five years, our securities portfolio has generated $76.5 million of pre-tax income.

For the year ended December 31, 2019 , we had no securities with other than temporary impairment that was recognized.

For the year ended December 31, 2020, we had one security with an other than temporary impairment recognized.

We face intense competition both in making loans and attracting deposits.

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Any change in such regulatory requirements and policies, whether by the Louisiana legislature, the OFI, the FDIC, the Federal Reserve Board or the United States Congress, could have a material adverse impact on the financial condition and results of operations of First Guaranty Bancshares and First Guaranty Bank.

As is further described below, the Dodd-Frank Act has significantly changed the bank regulatory structure and may affect the lending, investment and general operating activities of depository institutions and their holding companies.

Set forth below is a summary of certain material statutory and regulatory requirements applicable to First Guaranty Bancshares and First Guaranty Bank.

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The Dodd-Frank Act increased the ability of shareholders to influence boards of directors by requiring companies to give shareholders a non-binding vote on executive compensation and so-called "golden parachute" payments.

The Dodd-Frank Act also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to company executives, regardless of whether the company is publicly traded or not.

The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018

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In addition, the law required the Federal Reserve Board to raise the asset threshold under its Small Bank Holding Company Policy Statement from $1 billion to $3 billion for bank or savings and loan holding companies that are exempt from consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in significant nonbanking activities.

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”)

The CARES Act, which became law on March 27, 2020, provided over $2 trillion to combat the coronavirus disease (COVID-19) and stimulate the economy.

The law had several provisions relevant to financial institutions, including:

• Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a troubled debt restructuring and also allowing them to suspend the corresponding impairment determination for accounting purposes;

• Temporarily reducing the community bank leverage ratio alternative available to institutions of less than $10 billion of assets to 8%;

• The establishment of the Paycheck Protection Program (the “PPP”), a specialized low-interest forgivable loan program funded by the U.S.

Treasury Department and administered through the SBA’s 7(a) loan guaranty program to support businesses affected by the COVID-19 pandemic, which was subsequently extended by the Consolidated Appropriations Act;

• The ability of a borrower of a federally-backed mortgage loan (VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic, to request forbearance from paying their mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19 emergency.

Such a forbearance could be granted for up to 180 days, subject to extension for an additional 180-day period upon the request of the borrower.

During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract could accrue on the borrower’s account.

Except for vacant or abandoned property, the servicer of a federally-backed mortgage was prohibited from taking any foreclosure action, including any eviction or sale action, for not less than the 60-day period beginning March 18, 2020, extended by federal mortgage-backing agencies to at least June 30, 2021.

Louisiana Bank Regulation

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a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio.

The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders' equity and retained earnings.

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Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets ( e.g.

, recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset.

Higher levels of capital are required for asset categories believed to present greater risk.

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In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements.

The capital conservation buffer requirement was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each year until it became fully implemented at 2.5% on January 1, 2019.

In assessing an institution's capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

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Such institutions that meet the community bank leverage ratio and certain other qualifying criteria will automatically be deemed to be well-capitalized.

The new rule takes effect on January 1, 2020.

The final rule established a two quarter grace period for community banks, whose leverage ratio falls below 9% or fails to meet other qualifying criteria so long as the bank maintains a leverage ratio of 8% or greater.

The new rule took effect on January 1, 2020.

Section 4012 of the CARES Act required that the community bank leverage ratio be temporarily lowered to 8%.

The federal regulators issued a rule making the reduced ratio effective for the second quarter of 2020.

The rule also established a two quarter grace period for a qualifying community bank whose leverage ratio falls below the 8% community bank leverage ratio requirement, or fails to meet other qualifying criteria, so long as the bank maintains a leverage ratio of 7% or greater.

Another rule was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter.

First Guaranty Bank did not elect to follow the community bank leverage ratio.

At December 31, 2020, First Guaranty Bank was well-capitalized based on FDIC guidelines.

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The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions.

In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in accordance with specified requirements.

In addition, loans or other extensions of credit by the institution to

the affiliate are required to be collateralized in accordance with specified requirements.

The law also requires that affiliate transactions be on terms and conditions that are substantially the same, or at least as favorable to the institution, as those provided to non-affiliates.

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Federal Insurance of Deposit Accounts.

The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.

The maximum amount of deposit insurance for banks, savings institutions and credit unions is $250,000 per depositor.

Assessments for most institutions are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years.

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Insured institutions of less than $10 billion of assets received credits for the portion of their assessments that contributed to the reserve ratio between 1.15% and 1.35%.

The credits were exhausted as of September 30, 2020.

The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC, and the FDIC has exercised that discretion by establishing a long-range fund ratio of 2%.

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Federal Reserve System.

The Federal Reserve Board regulations require savings institutions to maintain non interest-earning reserves against their transaction accounts (primarily negotiable order of withdrawal (NOW) and regular checking accounts).

For 2020, the regulations generally provide that reserves be maintained against aggregate transaction accounts as follows:

a 3% reserve ratio is assessed on net transaction accounts up to and including $127.5 million;

a 10% reserve ratio is applied above $127.5 million.

The first $16.9 million of otherwise reservable balances are exempted from the reserve requirements.

The amounts are adjusted annually.

First Guaranty Bank complies with the foregoing requirements.

The Federal Reserve Board regulations require banks to maintain non interest-earning reserves against their transaction accounts (primarily negotiable order of withdrawal (NOW) and regular checking accounts).

In March 2020, due to a change in its approach to monetary policy due to COVID-19, the Federal Reserve Board issued an interim rule to amend Regulation D requirements and reduce reserve requirement ratios to zero.

The Federal Reserve Board has indicated that it has no plans to re-impose reserve requirements, but may do so in the future if conditions warrant.

First Guaranty Bank is a member of the FHLB System, which consists of twelve regional FHLBs.

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The Federal Reserve Board's policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by using available resources to provide capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary.

The Dodd-Frank Act codified the source of strength policy and requires the promulgation of implementing regulations.

The Dodd-Frank Act codified the source of strength policy.

Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.

Federal Reserve Board guidance provides for consultation with and supervisory review by the Federal Reserve Board prior to the payment of dividends or stock repurchases under certain circumstances.

These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions.

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If any of the risks described herein develop into actual events, our business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected, the market price of our common stock could decline and you may lose all or part of your investment.

Risks Related to Our Business and Operations

Risks Related to the COVID-19 Pandemic

The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations and our ability to execute on our growth strategies.

The COVID-19 pandemic has caused significant economic dislocation in the United States, including a slow-down in economic activity and a related increase in unemployment.

Since the COVID-19 outbreak, millions of individuals have filed claims for unemployment.

In response to the COVID-19 outbreak, the Federal Open Market Committee has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows.

Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees).

The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak.

Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry.

The spread of the coronavirus has caused us to significantly modify our business practices, including business operating hours and delivery methods, as well as employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences.

These changes, as well as adverse economic conditions, could cause us not to be able to execute on our growth strategies.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business.

The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

• demand for our products and services may decline, making it difficult to execute on our strategic initiatives related to growing assets and earnings;

• if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

• collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

• our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

• the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

• as the result of the decline in the target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

• a material decrease in net income or a net loss over several quarters could result in a decrease or elimination of our quarterly cash dividend;

• our cyber security risks are increased as the result of an increase in the number of employees working remotely;

• we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us;

• Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs;

• Internal controls as designed may not prove effective, to the extent procedures are modified as a result of remote work locations.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

Risks Related to Our Lending

Adverse events in Louisiana and North Central Texas, where our business is concentrated, could adversely affect our results of operations and future growth.

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The occurrence of an economic downturn in Louisiana and North Central Texas, or adverse changes in laws or regulations in Louisiana and North Central Texas could impact the credit quality of our assets, the businesses of our customers and our ability to expand our business.

The COVID-19 pandemic has caused a severe economic downturn in our market area.

Our success significantly depends upon the growth in population, income levels, deposits and housing in our market area.

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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.

We have a significant number of loans secured by real estate, and a downturn in the local real estate market could negatively impact our profitability.

At December 31, 2019 , approximately 73.6% of our total loan portfolio was secured by real estate, almost all of which is located in Louisiana and North Central Texas.

As a result of the severe recession in 2008 and 2009, real estate values nationally and in our Louisiana markets declined.

Recently, real estate values both nationally and in our market areas have shown improvement.

We have a significant number of loans secured by real estate, and a downturn in the local or national real estate market could negatively impact our profitability.

At December 31, 2020, approximately 71.4% of our total loan portfolio was secured by real estate, most of which is located in Louisiana and North Central Texas.

Future declines in the real estate values in our Louisiana and North Central Texas markets could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower's obligations to us.

First Guaranty may participate in or purchase real estate loans located outside of our traditional markets which may be affected by national or other localized market trends.

This could require increasing our allowance for loan losses to address the decrease in the value of the real estate securing our loans which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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Syndicated loans may have a higher risk of loss than other loans we originate because we are not the lead lender and we have limited control over credit monitoring.

Over the last twelve years, we have pursued a focused program to participate in select syndicated loans (loans made by a group of lenders, including us, who share or participate in a specific loan) with a larger regional financial institution as the lead lender.

Over the last thirteen years, we have pursued a focused program to participate in select syndicated loans (loans made by a group of lenders, including us, who share or participate in a specific loan) with a larger regional financial institution as the lead lender.

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If our underwriting of these syndicated loans is not sufficient, our non-performing loans may increase and our earnings may decrease.

Curtailment of government guaranteed loan programs could affect a segment of our business, and government agencies may not honor their guarantees if we do not originate loans in compliance with their guidelines.

As of December 31, 2019 , $65.3 million , or 4.3% of our total loan portfolio, was comprised of loans where all or some portion of the loans were guaranteed through the SBA, USDA or FSA lending programs, and we intend to grow this segment of our portfolio in the future.

From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans.

In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan programs.

Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable.

Therefore, if these changes occur, the volume of loans to small business, industrial and agricultural borrowers of the types that now qualify for government guaranteed loans could decline.

Also, the profitability of these loans could decline.

In addition, while we follow the SBA's, USDA's and FSA's underwriting guidelines, our ability to do so depends on the knowledge and diligence of our employees and the effectiveness of controls we have established.

If our employees do not follow the SBA, USDA or FSA guidelines in originating loans and if our loan review and audit programs fail to identify and rectify such failures, the government agencies that guarantee these loans may refuse to honor their guarantee obligations and we may incur losses as a result.

If our nonperforming assets increase, our earnings will be adversely affected.

At December 31, 2020, our non-performing assets, which consist of non-performing loans and other real estate owned, were $30.9 million, or 1.25% of total assets.

Our non-performing assets adversely affect our net income in various ways:

• we record interest income only on the cash basis or cost-recovery method for nonaccrual loans and we do not record interest income for other real estate owned;

• we must provide for probable loan losses through a current period charge to the provision for loan losses;

• noninterest expense increases when we write down the value of properties in our other real estate owned portfolio to reflect changing market values;

• there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees;

• the resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.

If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of 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.

At December 31, 2020, our allowance for loan losses as a percentage of total loans, net of unearned income, was 1.33% and as a percentage of total non-performing loans was 85.53%.

The determination of the appropriate level of allowance is subject to judgment and requires us to make significant estimates of current credit risks and future trends, all of which are subject to material changes.

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.

Significant additions to the allowance would materially decrease net income.

Non-performing loans may increase and non-performing or delinquent loans may adversely affect future performance.

Any future credit deterioration, including as a result of COVID-19, could require us to increase our allowance for loan losses in the future.

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 significant increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a material adverse effect on our results of operations and financial condition.

Emphasis on the origination of short-term loans could expose us to increased lending risks.

At December 31, 2020, $1.4 billion, or 74.5% of our total loans consisted of short-term loans, defined as loans whose payments are typically based on ten to 20-year amortization schedules but have maturities typically ranging from one to five years.

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.

During an economic slow-down, we might incur significant losses as our loan portfolio matures.

The level of our commercial real estate loan portfolio subjects us to additional regulatory scrutiny.

The FDIC and the other federal bank regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending.

Under the guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations.

A financial institution may have a concentration in commercial real estate lending if, among other factors, (i) total reported loans for construction, land acquisition and development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multifamily and non-owner occupied, non-farm, non-residential properties, loans for construction, land acquisition and development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital.

Based on these factors, we have a concentration in loans of the type described in (ii), above, or 354.41% of our total capital at December 31, 2020.

The purpose of the guidance is to assist banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations.

The guidance states that management should 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.

Our bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us or that may result in a curtailment of our commercial real estate and multifamily lending and/or the requirement that we maintain higher levels of regulatory capital, either of which would adversely affect our loan originations and profitability.

We are subject to regulatory enforcement risk, reputation risk and litigation risk regarding our participation in the PPP, and we are subject to the risk that the SBA may not fund some or all PPP loan guarantees .

The CARES Act included the PPP as a loan program administered through the SBA.

Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to detailed qualifications and eligibility criteria.

Because of the short timeframe between the passing of the CARES Act and implementation of the PPP, some of the rules and guidance relating to PPP were issued after lenders began processing PPP applications.

Also, there was and continues to be uncertainty in the laws, rules and guidance relating to the PPP.

Since the opening of the PPP, several banks have been subject to litigation regarding the procedures used in processing PPP applications, and several banks have been subject to litigation regarding the payment of fees to agents that assisted borrowers in obtaining PPP loans.

In addition, some banks and borrowers have received negative media attention associated with PPP loans.

Although we believe that we have administered the PPP in accordance with all applicable laws, regulations and guidance, we may be exposed to litigation risk and negative media attention related to our participation in the PPP.

If any such litigation is not resolved in in our favor, it may result in significant financial liability to us or adversely affect our reputation.

In addition, litigation can be costly, regardless of outcome.

Any financial liability, litigation costs or reputational damage caused by PPP-related litigation or media attention could have a material adverse impact on our business, financial condition, and results of operations.

The PPP has also attracted interest from federal and state enforcement authorities, oversight agencies, regulators, and U.S.

Congressional committees.

State Attorneys General and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling us to rely on borrower certifications, and take more aggressive action against us for alleged violations of the provisions governing the PPP.

Federal and state regulators can impose or request that we consent to substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect our business, reputation, results of operation and financial condition, and thereby adversely affect your investment.

We also have credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which we originated, funded or serviced loans, including any issue with the eligibility of a borrower to receive a PPP loan.

In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced a PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

The foreclosure process may adversely impact our recoveries on non-performing loans.

The Judicial foreclosure process is protracted, which delays our ability to resolve non-performing loans through the sale of the underlying collateral.

The longer timelines were the result of the economic crisis, additional consumer protection initiatives related to the foreclosure process, increased documentary requirements and judicial scrutiny, and, both voluntary and mandatory programs under which lenders may consider loan modifications or other alternatives to foreclosure.

These reasons, historical issues at the largest mortgage loan servicers, and the legal and regulatory responses have impacted the foreclosure process and completion time of foreclosures for residential mortgage lenders.

This may result in a material adverse effect on collateral values and our ability to minimize our losses.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property.

During the ordinary course of business, we may foreclose on and take title to properties securing certain loans.

In doing so, there is a risk that hazardous or toxic substances could be found on these properties.

If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage.

Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property's value or limit our ability to use or sell the affected property.

In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards.

The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

Risks Related to Interest Rates

Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results of operations.

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Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside of our control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets.

We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.

While we attempt to invest a significant percentage of our assets in loans (our loan to deposit ratio was 82.3% at December 31, 2019 ), we invest a portion of our total assets ( 20.2% at December 31, 2019 ) in investment securities with the primary objectives of providing a source of liquidity, generating an appropriate return on funds invested, managing interest rate risk, meeting pledging requirements of our public funds deposits and meeting regulatory capital requirements.

At December 31, 2019 , the carrying value of our securities portfolio was $427.0 million .

Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities.

For example, fixed-rate securities are generally subject to decreases in market value when interest rates rise.

Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and instability in the credit markets.

Any of the foregoing factors could cause an other-than-temporary impairment in future periods and result in realized losses.

The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.

At December 31, 2019 , First Guaranty had no corporate debt security with other-than-temporary impairment.

In 2019 , no credit related impairment was charged to earnings and no non-credit related other-than-temporary impairment was recorded in other comprehensive income.

Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our business, financial condition and results of operations.

Risks Related to Liquidity

A lack of liquidity could adversely affect our operations and jeopardize our business, financial condition and results of operations.

Liquidity is essential to our business.

We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations.

An inability to raise funds through deposits, borrowings, the sale of our investment securities, the sale of loans and other sources could have a substantial negative effect on our liquidity.

Our most important source of funds is deposits.

Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff.

If customers move money out of bank deposits and into other investments such as money market funds, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.

As stated above, public funds are a sizeable portion of our deposits.

Loss of a large public funds depositor at the end of a contract would negatively impact liquidity.

Other primary sources of funds consist of cash flows from operations and maturities and sales of investment securities.

Additional liquidity is provided by the ability to borrow from the FHLB or the Federal Reserve.

We also may borrow funds from third-party lenders, such as other financial institutions.

Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

Our access to funding sources could also be affected by a decrease in the level of our business activity as a result of a downturn in our target markets or by one or more adverse regulatory actions against us.

Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.

Public funds deposits are an important source of funds for us and a reduced level of those deposits may hurt our profits.

Public funds deposits are a significant source of funds for our lending and investment activities.

At December 31, 2019 , $610.7 million , or 33.0% of our total deposits, consisted of public funds deposits from local government entities such as school districts, hospital districts, sheriff departments and other municipalities, which are collateralized by letters of credit from the Federal Home Loan Bank ("FHLB") and investment securities.

At December 31, 2020, $715.3 million, or 33.0% of our total deposits, consisted of public funds deposits from local government entities such as school districts, hospital districts, sheriff departments and other municipalities, which are collateralized by letters of credit from the Federal Home Loan Bank ("FHLB"), investment securities, and reciprocal deposit insurance programs.

Given our dependence on high-average balance public funds deposits as a source of funds, our inability to retain such funds could significantly and adversely affect our liquidity.

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If we are forced to pay higher rates on our public funds accounts to retain those funds, or if we are unable to retain such funds and we are forced to resort to other sources of funds for our lending and investment activities, such as borrowings from the FHLB, the interest expense associated with these other funding sources may be higher than the rates we are currently paying on our public funds deposits, which would adversely affect our net income.

Risks Related to Business Strategy

Our strategy of pursuing acquisitions exposes us to financial, execution and operational risks that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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The ability to successfully integrate such acquisitions into our consolidated operations will have a direct impact on our financial condition and results of operations.

Risks Related to Earnings

We depend primarily on net interest income for our earnings rather than noninterest income.

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In the event that one or more of these factors were to result in a decrease in our net interest income, we have limited sources of noninterest income to offset any decrease in our net interest income.

If our nonperforming assets increase, our earnings will be adversely affected.

At December 31, 2019 , our non-performing assets, which consist of non-performing loans and other real estate owned, were $21.9 million , or 1.04% of total assets.

Our non-performing assets adversely affect our net income in various ways:

we record interest income only on the cash basis or cost-recovery method for nonaccrual loans and we do not record interest income for other real estate owned;

we must provide for probable loan losses through a current period charge to the provision for loan losses;

noninterest expense increases when we write down the value of properties in our other real estate owned portfolio to reflect changing market values;

there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees;

the resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.

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.

In determining the amount of the allowance for loan losses, management reviews the loans and the loss and delinquency experience and evaluates economic conditions.

At December 31, 2019 , our allowance for loan losses as a percentage of total loans, net of unearned income, was 0.72% and as a percentage of total non-performing loans was 64.13% .

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.

Significant additions to the allowance would materially decrease net income.

Non-performing loans may increase and non-performing or delinquent loans may 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.

Emphasis on the origination of short-term loans could expose us to increased lending risks.

At December 31, 2019 , $1.1 billion , or 72.5% of our total loans consisted of short-term loans, defined as loans whose payments are typically based on ten to 20-year amortization schedules but have maturities typically ranging from one to five years.

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.

During an economic slow-down, we might incur significant losses as our loan portfolio matures.

We rely on our management team and our board of directors for the successful implementation of our business strategy.

Our success depends significantly on the continued service and skills of our senior management team and our board of directors, particularly Marshall T.

Reynolds, our Chairman, Alton B.

Lewis Jr., our President and Chief Executive Officer and Eric J.

Dosch, our Chief Financial Officer.

The implementation of our business and growth strategies also depends significantly on our ability to attract, motivate and retain highly qualified executives and directors.

The loss of services of one or more of these individuals could have a negative impact on our business because of their skills, years of industry experience and difficulty of promptly finding qualified replacement personnel.

We obtain a significant portion of our noninterest revenue through service charges on core deposit accounts, and regulations impacting service charges could reduce our fee income.

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A reduction in deposit account fee income could have a material adverse effect on our earnings.

Risks Related to Competition

We may be unable to successfully compete with others for business.

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The differences in resources 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.

Hurricanes or other adverse weather conditions 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, areas which are susceptible to hurricanes, tropical storms and other natural disasters and adverse weather conditions.

For example, Hurricane Katrina hit the greater New Orleans area in August 2005 causing widespread damage.

In August 2016, Louisiana experienced severe flooding which affected several of our markets.

Similar future events could potentially cause widespread property damage, require the relocation of an unprecedented number of residents and business operations, and severely disrupt normal economic activity in our market areas, which may have an adverse effect on our operations, loan originations and deposit base.

Moreover, our ability to compete effectively with financial institutions whose operations are not concentrated in areas affected by hurricanes or other adverse weather conditions or whose resources are greater than ours will depend primarily on our ability to continue normal business operations following such event.

The severity and duration of the effects of hurricanes or other adverse weather conditions 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.

The occurrence of any such event could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Operations

We face risks related to our operational, technological and organizational infrastructure.

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Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified.

Risks Related to Accounting

Changes in accounting policies or in accounting standards could materially affect how we report our financial condition and results of operations.

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The current expected credit loss model will require banks to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard.

This standard is effective for us for the annual and interim periods beginning after December 15, 2022.

This standard is effective for us beginning on January 1, 2023.

We are currently evaluating the impact of an adoption of this standard.

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If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment which would adversely affect our financial performance.

A lack of liquidity could adversely affect our operations and jeopardize our business, financial condition and results of operations.

Liquidity is essential to our business.

An inability to raise funds through deposits, borrowings, the sale of our investment securities, the sale of loans and other sources could have a substantial negative effect on our liquidity.

Our most important source of funds is deposits.

Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff.

As stated above, public funds are a sizeable portion of our deposits.

Loss of a large public funds depositor at the end of a contract would negatively impact liquidity.

Other primary sources of funds consist of cash flows from operations and maturities and sales of investment securities.

Additional liquidity is provided by the ability to borrow from the FHLB or the Federal Reserve.

We also may borrow funds from third-party lenders, such as other financial institutions.

Uncertainty surrounding the future of LIBOR (London Interbank Offer Rate) may affect the fair value and return on our financial instruments that use LIBOR as a reference rate.

We hold assets, liabilities, and derivatives that are indexed to the various tenors of LIBOR including but not limited to the one-month LIBOR, three-month LIBOR, one-year LIBOR, and the ten-year constant maturing swap rate.

The LIBOR yield curve is also utilized in the fair value calculation of many of these instruments.

The reform of major interest benchmarks led to the announcement of the United Kingdom’ s Financial Conduct Authority, the regulator of the LIBOR index, that LIBOR would not be supported in its current form after the end of 2021.

We believe the U.S.

financial sector will maintain an orderly and smooth transition to new interest rate benchmarks of which we will evaluate and adopt if appropriate.

While in the U.S., the Alternative Rates Committee of the FRB and Federal Reserve Bank of New York have identified the SOFR as an alternative U.S.

dollar reference interest rate, it is too early to predict the financial impact this rate index replacement may have, if at all.