First Guaranty Bancshares, Inc. 10-K

Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6, "Selected Financial Data" and our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under "Forward-Looking Statements," "Risk Factors" and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements. Special Note Regarding Forward-Looking Statements Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a Company's anticipated future financial performance. This act provides a safe harbor for such disclosure, which protects us from unwarranted litigation, if actual results are different from Management expectations. This discussion and analysis contains forward-looking statements and reflects Management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "may," "should," "expect," "anticipate," "intend," "plan," "continue," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of factors and uncertainties, including, but not limited to, changes in general economic conditions, either nationally or in our market areas, that are worse than expected; the impact of the COVID-19 pandemic; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities, if any; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans; changes in our financial condition or results of operations that reduce capital available to pay dividends; and changes in the financial condition or future prospects of issuers of securities that we own, which could cause our actual results and experience to differ from the anticipated results and expectations, expressed in such forward-looking statements. Overview First Guaranty Bancshares is a Louisiana corporation and a financial holding company headquartered in Hammond, Louisiana. Our wholly-owned subsidiary, First Guaranty Bank, a Louisiana-chartered commercial bank, provides personalized commercial banking services primarily to Louisiana and Texas customers through 34 banking facilities primarily located in the MSAs of Hammond, Baton Rouge, Lafayette, Shreveport-Bossier City, Lake Charles and Alexandria, Louisiana and Dallas-Fort Worth-Arlington and Waco, Texas. We emphasize personal relationships and localized decision making to ensure that products and services are matched to customer needs. 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. Total assets were $2.5 billion at December 31, 2020 and $2.1 billion at December 31, 2019. Total deposits were $2.2 billion at December 31, 2020 and $1.9 billion at December 31, 2019. Total loans were $1.8 billion at December 31, 2020, an increase of $318.6 million, or 20.9%, compared with $1.5 billion at December 31, 2019. Total shareholders' equity was $178.6 million and $166.0 million at December 31, 2020 and December 31, 2019, respectively. Net income was $20.3 million, $14.2 million and $14.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. We generate most of our revenues from interest income on loans, interest income on securities, sales of securities, ATM and debit card fees and service charges, commissions and fees. We incur interest expense on deposits and other borrowed funds and noninterest expense such as salaries and employee benefits and occupancy and equipment expenses. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowings which are used to fund those assets. Net interest income is our largest source of revenue. To evaluate net interest income, we measure and monitor: (1) yields on our loans and other interest-earning assets; (2) the costs of our deposits and other funding sources; (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. Changes in market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions, conditions in domestic and foreign financial markets and in 2020 the economic and social effects of the COVID-19 pandemic. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Louisiana, Texas and our other out-of-state market areas. During the extended period of historically low interest rates, we continue to evaluate our investments in interest-earning assets in relation to the impact such investments have on our financial condition, results of operations and shareholders' equity. -42- Financial highlights for 2020 and 2019: • Total assets at December 31, 2020 increased $355.9 million, or 16.8%, to $2.5 billion when compared with December 31, 2019. Total loans at December 31, 2020 were $1.8 billion, an increase of $318.6 million, or 20.9%, compared with December 31, 2019. Total deposits were $2.2 billion at December 31, 2020, an increase of $313.3 million, or 16.9% compared with December 31, 2019. Retained earnings were $57.4 million at December 31, 2020, an increase of $14.1 million compared to $43.3 million at December 31, 2019. Shareholders' equity was $178.6 million and $166.0 million at December 31, 2020 and December 31, 2019, respectively. • Net income for each of the years ended December 31, 2020 and 2019 was $20.3 million and $14.2 million, respectively. • Earnings per common share were $2.09 for the year ended December 31, 2020 and $1.47 for the year ended December 31, 2019. Total weighted average shares outstanding were 9,741,253 at December 31, 2020 compared to 9,695,131 at December 31, 2019. The increase in shares was due to the issuance of 54,130 shares of stock in a private placement in November 2019. • The allowance for loan losses was 1.33% of loans at December 31, 2020 compared to 0.72% at December 31, 2019. First Guaranty attributes the increase in the allowance to provisions made for the COVID-19 pandemic, for growth in the loan portfolio and other identified risks. Loan discounts related to acquisition accounting from the Union transaction was approximately $1.8 million at December 31, 2020. First Guaranty had $92.3 million at December 31, 2020 of SBA guaranteed PPP loans (as defined below) that have no related allowance due to the 100% government guarantee in accordance with regulatory guidance. • The provision for loan losses totaled $14.9 million for 2020 compared to $4.9 million in 2019. The impact of the COVID-19 pandemic, growth in the loan portfolio and other identified risks were the main factors that resulted in an increased provision for 2020 compared to 2019. • First Guaranty undertook several COVID-19 related actions during 2020 that began in the first quarter of 2020. First Guaranty increased on-balance sheet liquidity by approximately $100 million prior to March 31, 2020 through borrowings with the FHLB and brokered deposits. These borrowings remained at December 31, 2020. First Guaranty is participating in the SBA Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act authorized the SBA to guarantee loans under a new 7(a) loan program known as the PPP. As a qualified SBA lender, we were automatically authorized to originate PPP loans. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. First Guaranty funded over 900 loans under the SBA PPP program that totaled approximately $111.1 million at the peak of the program. Fees generated by the SBA PPP program were $3.4 million. $2.2 million in fees were recognized in 2020. $1.2 million in fees were deferred as of December 31, 2020. First Guaranty has processed forgiveness applications for PPP loans with payoffs of $19.0 million in the fourth quarter of 2020. First Guaranty also waived service related charges and other fees for several weeks following the onset of the COVID-19 crisis. • First Guaranty originally granted loan deferments to over 1,000 loans that totaled approximately $590 million as part of its COVID-19 related actions during 2020. These deferments were typically for 90 days. As of December 31, 2020, approximately $18.3 million of these loans remain on deferral status. • First Guaranty, in furtherance of the strategy adopted in March 2020, initiated a plan to manage for economic uncertainty by converting unrealized gains in the securities portfolio to realized gains in the fourth quarter of 2020. First Guaranty sold approximately $140 million in mortgage-backed securities and $150 million in corporate securities in October 2020. First Guaranty generated $12.1 million in pre-tax gains from the sales. First Guaranty has proceeded to reinvest the proceeds in securities and loans and subsequently reduced FHLB borrowings by $50.0 million in February 2021. • Net interest income for 2020 was $74.7 million compared to $61.7 million for 2019. • Noninterest income for 2020 was $23.8 million compared to $8.3 million for 2019. • The net interest margin was 3.35% for 2020 and 3.41% for 2019. First Guaranty attributed the decrease in the net interest margin to the significant actions related to COVID-19 that impacted balance sheet composition for both assets and liabilities along with decreased rates on assets and liabilities. Loans as a percentage of average interest earning assets increased to 74.7% at December 31, 2020 compared to 72.7% at December 31, 2019. • Investment securities totaled $238.5 million at December 31, 2020, a decrease of $188.0 million when compared to $426.5 million at December 31, 2019. Gains on the sale of securities were $14.8 million for 2020 as compared to losses of $0.2 million for 2019. At December 31, 2020, available for sale securities, at fair value, totaled $238.5 million, a decrease of $101.4 million when compared to $339.9 million at December 31, 2019. At December 31, 2020, held to maturity securities, at amortized cost, totaled $0, a decrease of $86.6 million when compared December 31, 2019. First Guaranty terminated its held to maturity securities portfolio in the first quarter of 2020 following the sale of certain securities previously designated as held to maturity. • Total loans net of unearned income were $1.8 billion at December 31, 2020 compared to $1.5 billion at December 31, 2019. Total loans net of unearned income are reduced by the allowance for loan losses which totaled $24.5 million at December 31, 2020 and $10.9 million at December 31, 2019. • Total impaired loans decreased $4.8 million to $15.9 million at December 31, 2020 compared to $20.7 million at December 31, 2019. • Nonaccrual loans increased $1.2 million to $15.6 million at December 31, 2020 compared to $14.4 million at December 31, 2019. -43- • Return on average assets was 0.87% and 0.76% for the years ended December 31, 2020 and 2019, respectively. Return on average common equity was 11.36% and 8.99% for 2020 and 2019, respectively. Return on average assets is calculated by dividing net income by average assets. Return on average common equity is calculated by dividing net income by average common equity. • Book value per common share was $18.33 as of December 31, 2020 compared to $17.04 as of December 31, 2019. Tangible book value per common share was $16.41 as of December 31, 2020 compared to $15.05 as of December 31, 2019. The increase in book value was due primarily to an increase in retained earnings, offset by a decrease in accumulated other comprehensive income ("AOCI"). AOCI is comprised of unrealized gains and losses on available for sale securities. • First Guaranty's Board of Directors declared cash dividends of $0.64 per common share in 2020. First Guaranty also declared cash dividends of $0.64 in 2019, which was the equivalent of $0.60 per common share after adjusting for the 10% common stock dividend paid in December 2019. First Guaranty has paid 110 consecutive quarterly dividends as of December 31, 2020. • First Guaranty terminated its At-The-Market Equity Offering program ("ATM Offering"). First Guaranty did not sell any shares of common stock under the ATM Offering during 2020 or 2019. First Guaranty renewed its shelf registration in the fourth quarter of 2020. • First Guaranty completed the data conversion with the Union Bancshares, Incorporated acquisition. Total one-time merger related costs were $0.5 million for 2020. The data conversion was completed on March 27, 2020. • First Guaranty currently has one new facility under construction in order to facilitate future expansion. This construction commitment totals $11.4 million with $11.1 million incurred as of December 31, 2020. -44- Application of Critical Accounting Policies Our accounting and reporting policies conform to generally accepted accounting principles in the United States 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 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, in the opinion of management, reflects the risks inherent in the existing loan portfolio and exists 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. The following are general credit risk factors that affect our loan portfolio segments. These factors do not encompass all risks associated with each loan category. Construction and land development loans have risks associated with interim construction prior to permanent financing and repayment risks due to the future sale of developed property. Farmland and agricultural loans have risks such as weather, government agricultural policies, fuel and fertilizer costs, and market price volatility. One- to four-family residential, multifamily, and consumer credits are strongly influenced by employment levels, consumer debt loads and the general economy. Non-farm non-residential loans include both owner-occupied real estate and non-owner occupied real estate. Common risks associated with these properties is the ability to maintain tenant leases and keep lease income at a level able to service required debt and operating expenses. Commercial and industrial loans generally have non-real estate secured collateral which requires closer monitoring than real estate collateral. 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. 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, we 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 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, and impaired. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Also, a specific reserve is allocated for our syndicated loans. The general component covers non-classified loans and special mention loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors include analysis of levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries, loan risk ratings, trends in volume and terms of loans, changes in lending policy, credit concentrations, portfolio stress test results, national and local economic trends including the impact of COVID-19, industry conditions, and other relevant factors. An unallocated component is maintained to cover uncertainties that could affect the estimate of probable losses. The allowance for loan losses is reviewed on a monthly basis. The monitoring of credit risk also extends to unfunded credit commitments, such as unused commercial credit lines and letters of credit. A reserve is established as needed for estimates of probable losses on such commitments. Other-Than-Temporary Impairment of Investment Securities . Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers the length of time and extent that fair value has been less than cost and the financial condition and near term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings. -45- Valuation of Goodwill, Intangible Assets and Other Purchase Accounting Adjustments. First Guaranty accounts for acquisitions in accordance with ASC Topic No. 805, Business Combinations, which requires the use of the acquisition method of accounting. Under this method, First Guaranty is required to record the assets acquired, including identified intangible assets, and liabilities assumed, at their respective fair values, 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 method for such intangible assets. In addition, business combinations typically result in recording goodwill. Intangible assets are comprised of goodwill, core deposit intangibles and loan servicing assets. Goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. Our goodwill is tested for impairment on an annual basis, or more often if events or circumstances indicate impairment may exist. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. If the reporting unit fair value is less than the carrying amount, a loss would be recognized in other noninterest expense to reduce the carrying amount. The qualitative test allows management to assess whether qualitative factors indicate that it is more likely than not that impairment exists. These qualitative indicators include factors such as earnings, share price, market conditions, etc. If the qualitative factors indicate that it is more likely than not that impairment exists, then the quantitative assessment would be necessary. The step one test compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of goodwill for that reporting unit exceeds the estimated fair value of that unit's goodwill, an impairment loss is recognized in an amount equal to the excess. First Guaranty concluded goodwill was not impaired as of October 1, 2020. Further, no events or changes in circumstances between October 1, 2020 and December 31, 2020 indicated that it was more likely than not the fair value of any reporting unit had been reduced below its carrying value. Goodwill impairment evaluations require management to utilize significant judgments and assumptions including, but not limited to, the general economic environment and banking industry, reporting unit future performance (i.e., forecasts), events or circumstances affecting a respective reporting unit (e.g., interest rate environment), and changes in First Guaranty's stock price, amongst other relevant factors. Management's judgments and assumptions are based on the best information available at the time. Results could vary in subsequent reporting periods if conditions differ substantially from the assumptions utilized in completing the evaluations. Identifiable intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or legal rights or because the assets are capable of being sold or exchanged either on their own or in combination with related contract, asset or liability. Our intangible assets primarily relate to core deposits and loan servicing assets related to the SBA loan portfolio. Management periodically evaluates whether events or circumstances have occurred that would result in impairment of value. -46- Financial Condition Assets. Our total assets were $2.5 billion at December 31, 2020, an increase of $355.9 million, or 16.8%, from total assets of $2.1 billion at December 31, 2019. Assets increased primarily due to increases in cash and cash equivalents of $232.2 million and net loans of $305.1 million, partially offset by a decrease in investment securities of $188.0 million at December 31, 2020 compared to December 31, 2019. Loans. Net loans increased $305.1 million, or 20.1%, to $1.8 billion at December 31, 2020 from $1.5 billion at December 31, 2019. Non-farm non-residential loan balances increased $207.6 million primarily due to new originations and the transition of construction and land development loans to permanent financing in the first quarter of 2020. Included in the new loan originations were the purchase of approximately $95.0 million in performing commercial real estate secured loans the majority of which were located outside of First Guaranty's Louisiana and Texas markets. The average size of these loans was $0.7 million with the largest credit totaling $4.9 million. These loans provide additional diversification to First Guaranty's portfolio. Commercial and industrial loans increased $84.8 million primarily due to new originations associated with the SBA PPP lending program that occurred in the second and third quarters of 2020. SBA PPP loans totaled $111.1 million at the end of the third quarter in 2020 which decreased to $92.3 million at December 31, 2020 as loans were subsequently processed for forgiveness and paid off by the SBA. Consumer and other loans increased $39.9 million primarily due to new originations in First Guaranty's commercial lease program. First Guaranty has continued to expand its commercial lease portfolio which generally have higher yields than commercial real estate loans but shorter average lives. First Guaranty's lease portfolio totaled $104.1 million at December 31, 2020 compared to $70.1 million at December 31, 2019. Multifamily loans increased $22.0 million primarily due to the conversion of existing construction loans to permanent financing. Farmland loans increased $4.1 million due to increases on agricultural loan commitments. Agricultural loans increased $1.6 million primarily due to seasonal activity. Construction and land development loans decreased $21.4 million principally due to paydowns and the conversion of interim construction loans to permanent financing that occurred in the first quarter of 2020. One-to four-family loans decreased $18.4 million primarily due to paydowns. First Guaranty had approximately 5.7% of funded and 2.5% of unfunded commitments in our loan portfolio to businesses engaged in support or service activities for oil and gas operations. First Guaranty's hotel and hospitality portfolio totaled $120.1 million at December 31, 2020. As part of the management of risks in our loan portfolio, First Guaranty had previously established an internal guidance limit of approximately $160.0 million for its hotel and hospitality portfolio. First Guaranty had $244.9 million in loans related to our Texas markets at December 31, 2020 which was an increase of $40.4 million or 19.8% from $204.5 million at December 31, 2019. First Guaranty continues to have significant loan growth associated with its Texas branches. We anticipate additional growth opportunities in Texas as it contains four major cities in Austin, Dallas, Houston, and San Antonio, plus the continued growth and development of these areas is exceeding that of other areas of the country. Syndicated loans at December 31, 2020 were $75.2 million, of which $29.3 million were shared national credits. Syndicated loans increased $35.3 million from $39.9 million at December 31, 2019. As of December 31, 2020, 71.4% of our loan portfolio was secured by real estate. The largest portion of our loan portfolio, at 44.6% as of December 31, 2020, was non-farm non-residential loans secured by real estate. Approximately 34.2% of the loan portfolio was based on a floating rate tied to the prime rate or LIBOR as of December 31, 2020. 74.5% of the loan portfolio is scheduled to mature within five years from December 31, 2020. Loan Portfolio Composition. The table below sets forth the balance of loans, excluding loans held for sale, outstanding by loan type as of the dates presented, and the percentage of each loan type to total loans. -47- At December 31, 2020 2019 2018 2017 2016 (in thousands except for %) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Real Estate: Construction & land development $ 150,841 8.2 % $ 172,247 11.3 % $ 124,644 10.1 % $ 112,603 9.8 % $ 84,239 8.9 % Farmland 26,880 1.4 % 22,741 1.5 % 18,401 1.5 % 25,691 2.2 % 21,138 2.2 % 1- 4 Family 271,236 14.7 % 289,635 18.9 % 172,760 14.1 % 158,733 13.8 % 135,211 14.2 % Multifamily 45,932 2.5 % 23,973 1.6 % 42,918 3.5 % 16,840 1.4 % 12,450 1.3 % Non-farm non-residential 824,137 44.6 % 616,536 40.3 % 586,263 47.7 % 530,293 46.1 % 417,014 43.9 % Total Real Estate 1,319,026 71.4 % 1,125,132 73.6 % 944,986 76.9 % 844,160 73.3 % 670,052 70.5 % Non-Real Estate: Agricultural 28,335 1.5 % 26,710 1.8 % 23,108 1.9 % 21,514 1.9 % 23,783 2.5 % Commercial and industrial 353,028 19.1 % 268,256 17.5 % 200,877 16.4 % 230,638 20.0 % 193,969 20.4 % Consumer and other 148,783 8.0 % 108,868 7.1 % 59,443 4.8 % 55,185 4.8 % 63,011 6.6 % Total Non-real Estate 530,146 28.6 % 403,834 26.4 % 283,428 23.1 % 307,337 26.7 % 280,763 29.5 % Total Loans Before Unearned Income 1,849,172 100.0 % 1,528,966 100.0 % 1,228,414 100.0 % 1,151,497 100.0 % 950,815 100.0 % Less: Unearned income (5,037) (3,476) (3,146) (2,483) (1,894) Total Loans Net of Unearned Income $ 1,844,135 $ 1,525,490 $ 1,225,268 $ 1,149,014 $ 948,921 Loan Portfolio Maturities . The following tables summarize the scheduled repayments of our loan portfolio at December 31, 2020 and 2019. Demand loans, 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. December 31, 2020 (in thousands) One Year or Less More Than One Year Through Five Years After Five Years Total Real Estate: Construction & land development $ 23,276 $ 111,615 $ 15,950 $ 150,841 Farmland 6,078 12,147 8,655 26,880 1- 4 family 37,604 65,011 168,621 271,236 Multifamily 5,030 29,127 11,775 45,932 Non-farm non-residential 105,623 494,690 223,824 824,137 Total Real Estate 177,611 712,590 428,825 1,319,026 Non-Real Estate: Agricultural 12,356 5,795 10,184 28,335 Commercial and industrial 40,484 293,984 18,560 353,028 Consumer and other 37,866 103,315 7,602 148,783 Total Non-Real Estate 90,706 403,094 36,346 530,146 Total Loans Before Unearned Income $ 268,317 $ 1,115,684 $ 465,171 $ 1,849,172 Less: unearned income (5,037) Total Loans Net of Unearned Income $ 1,844,135 -48- December 31, 2019 (in thousands) One Year or Less More Than One Year Through Five Years After Five Years Total Real Estate: Construction & land development $ 35,393 $ 124,715 $ 12,139 $ 172,247 Farmland 8,348 10,283 4,110 22,741 1- 4 family 43,155 93,457 153,023 289,635 Multifamily 1,385 12,028 10,560 23,973 Non-farm non-residential 124,905 316,767 174,864 616,536 Total Real Estate 213,186 557,250 354,696 1,125,132 Non-Real Estate: Agricultural 13,290 5,087 8,333 26,710 Commercial and industrial 71,508 149,667 47,081 268,256 Consumer and other 15,454 90,029 3,385 108,868 Total Non-Real Estate 100,252 244,783 58,799 403,834 Total Loans Before Unearned Income $ 313,438 $ 802,033 $ 413,495 $ 1,528,966 Less: unearned income (3,476) Total Loans Net of Unearned Income $ 1,525,490 -49- The following table sets forth the scheduled repayments of fixed and adjustable-rate loans at December 31, 2020 that are contractually due after December 31, 2021. Due After December 31, 2021 (in thousands) Fixed Floating Total One to five years 740,358 368,259 1,108,617 Over Five to 15 years 128,860 91,032 219,892 Over 15 years 146,830 92,325 239,155 Subtotal $ 1,016,048 $ 551,616 $ 1,567,664 Nonaccrual loans 15,576 Total $ 1,583,240 As of December 31, 2020, $305.0 million of floating rate loans were at their interest rate floor. At December 31, 2019, $153.3 million of floating rate loans were at the floor rate. Nonaccrual loans have been excluded from these totals. -50- Non-performing Assets. Non-performing assets consist of non-performing loans and other real-estate owned. Non-performing loans (including nonaccruing troubled debt restructurings described below) are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Loans are ordinarily placed on nonaccrual status when principal and interest is delinquent for 90 days or more. However, management may elect to continue the accrual when the estimated net available value of collateral is sufficient to cover the principal balance and accrued interest. It is our policy to discontinue the accrual of interest income on any loan for which we have reasonable doubt as to the payment of interest or principal. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Nonaccrual loans are returned to accrual status when the financial position of the borrower indicates there is no longer any reasonable doubt as to the payment of principal or interest. Other real estate owned consists of property acquired through formal foreclosure, in-substance foreclosure or by deed in lieu of foreclosure. -51- The following table shows the principal amounts and categories of our non-performing assets at December 31, 2020, 2019, 2018, 2017 and 2016. December 31, (in thousands) 2020 2019 2018 2017 2016 Nonaccrual loans: Real Estate: Construction and land development $ 621 $ 381 $ 311 $ 371 $ 551 Farmland 857 1,274 1,293 65 105 1- 4 family 2,227 2,759 2,246 1,953 2,242 Multifamily — — — — 5,014 Non-farm non-residential 7,449 4,646 864 3,758 2,753 Total Real Estate 11,154 9,060 4,714 6,147 10,665 Non-Real Estate: Agricultural 3,472 4,800 3,651 1,496 1,958 Commercial and industrial 701 327 317 4,826 8,070 Consumer and other 249 216 61 81 981 Total Non-Real Estate 4,422 5,343 4,029 6,403 11,009 Total nonaccrual loans 15,576 14,403 8,743 12,550 21,674 Loans 90 days and greater delinquent & still accruing: Real Estate: Construction and land development 1,000 48 — — 34 Farmland — — — — — 1- 4 family 4,980 923 26 — 145 Multifamily 366 — — — — Non-farm non-residential 4,699 1,603 — — — Total Real Estate 11,045 2,574 26 — 179 Non-Real Estate: Agricultural 67 — — 41 — Commercial and industrial 1,856 15 53 798 — Consumer and other 123 50 66 — — Total Non-Real Estate 2,046 65 119 839 — Total loans 90 days and greater delinquent & still accruing 13,091 2,639 145 839 179 Total non-performing loans $ 28,667 $ 17,042 $ 8,888 $ 13,389 $ 21,853 Other real estate owned and foreclosed assets: Real Estate: Construction and land development 311 669 241 304 — Farmland — — — — — 1- 4 family 131 559 120 23 71 Multifamily — — — — — Non-farm non-residential 1,798 3,651 777 954 288 Total Real Estate 2,240 4,879 1,138 1,281 359 Non-Real Estate: Agricultural — — — — — Commercial and industrial — — — — — Consumer and other — — — — — Total Non-Real estate — — — — — Total other real estate owned and foreclosed assets 2,240 4,879 1,138 1,281 359 Total non-performing assets $ 30,907 $ 21,921 $ 10,026 $ 14,670 $ 22,212 Non-performing assets to total loans 1.68 % 1.44 % 0.82 % 1.28 % 2.34 % Non-performing assets to total assets 1.25 % 1.04 % 0.55 % 0.84 % 1.48 % Non-performing loans to total loans 1.55 % 1.12 % 0.73 % 1.17 % 2.30 % -52- For the years ended December 31, 2020 and 2019, gross interest income which would have been recorded had the non-performing loans been current in accordance with their original terms amounted to $0.6 million and $0.9 million, respectively. We recognized $22,000 and $69,000 of interest income on such loans during the years ended December 31, 2020 and 2019, respectively. For the years ended December 31, 2020 and 2019, gross interest income which would have been recorded had the troubled debt restructured loans been current in accordance with their original terms amounted to $0.1 million and $0, respectively. We recognized $11,000 and $0 of interest income on such loans during the years ended December 31, 2020 and 2019, respectively. Non-performing assets were $30.9 million, or 1.25%, of total assets at December 31, 2020, compared to $21.9 million, or 1.04%, of total assets at December 31, 2019, which represented an increase in non-performing assets of $9.0 million. The increase in non-performing assets occurred as a result of several factors. Nonaccrual loans increased from $14.4 million at December 31, 2019 to $15.6 million at December 31, 2020. The increase in nonaccrual loans was concentrated primarily in non-farm non-residential loans. Non-performing assets included $3.6 million in loans with a government guarantee, or 11.8% of non-performing assets. These are structured as net loss guarantees in which up to 90% of loss exposure is covered. At December 31, 2020 loans 90 days and greater delinquent and still accruing totaled $13.1 million, an increase of $10.5 million from $2.6 million at December 31, 2019. The increase in loans 90 days or greater delinquent and still accruing was concentrated primarily in one-to four-family residential loans, non-farm non-residential loans and commercial and industrial loans. One-to-four family loans in the 90 day category included loans acquired from the Union acquisition that have contractually matured but have not been renewed due to operations issues following the acquisition. First Guaranty expects to satisfactorily renew the majority of these acquired loans and return them to performing status. Other real estate owned at December 31, 2020 totaled $2.2 million, a decrease of $2.6 million from $4.9 million at December 31, 2019. The largest piece of property in other real estate owned is a former retail shopping center that totals $2.0 million. First Guaranty established a reserve for other real estate owned losses in the third quarter of 2020. This reserve totaled $0.4 million at December 31, 2020. Total write downs and or reserves related to other real estate owned were $1.4 million in 2020 compared to $0.2 million in 2019. These expenses were included in other non-interest expense. At December 31, 2020, our largest non-performing assets were comprised of the following nonaccrual loans, 90 day plus and still accruing loans and other real estate owned: (1) a non-farm non-residential loan secured by a hotel that totaled $3.6 million that is classified as a troubled debt restructured loan or TDR; (2) a $2.0 million non-farm non-residential property included in other real estate owned; (3) a non-farm non-residential loan for $2.4 million secured by commercial real estate that has contractually matured and was 90 days past due and still accruing; (4) a non-farm non-residential loan secured by a hotel that totaled $1.8 million; (5) a non-farm non-residential loan secured by a sports facility that totaled $1.3 million which has a partial government guarantee; (6) a non-farm non-residential loan for $1.1 million secured by commercial real estate that has contractually matured and was 90 days past due and still accruing; (7) an agricultural/ farmland loan relationship that totaled $1.1 million; (8) an agricultural loan relationship that totaled $1.0 million; and (9) an agricultural loan relationship that totaled $1.0 million. The agricultural loans are partially guaranteed by the USDA Farm Service Agency. -53- Troubled Debt Restructuring. Another category of assets which contribute to our credit risk is troubled debt restructurings ("TDRs"). A TDR is a loan for which a concession has been granted to the borrower due to a deterioration of the borrower's financial condition. Such concessions may include reduction in interest rates, deferral of interest or principal payments, principal forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. We strive to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before such loan reaches nonaccrual status. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. TDRs that are not performing in accordance with their restructured terms and are either contractually 90 days past due or placed on nonaccrual status are reported as non-performing loans. Our policy provides that nonaccrual TDRs are returned to accrual status after a period of satisfactory and reasonable future payment performance under the terms of the restructuring. Satisfactory payment performance is generally no less than six consecutive months of timely payments and demonstrated ability to continue to repay. Under section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was signed into law on March 27, 2020 and subsequently modified by later legislation, financial institutions have the option to temporarily suspend certain requirements under U.S. generally accepted accounting principles related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. This provision allows a financial institution the option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. First Guaranty elected to adopt these provisions of the CARES Act. The following is a summary of loans restructured as TDRs at December 31, 2020, 2019 and 2018: At December 31, (in thousands) 2020 2019 2018 TDRs: In Compliance with Modified Terms $ — $ — $ 1,288 Past Due 30 through 89 days and still accruing — — — Past Due 90 days and greater and still accruing — — — Nonaccrual 3,591 — 304 Restructured Loans that subsequently defaulted — — — Total TDR $ 3,591 $ — $ 1,592 At December 31, 2020, First Guaranty had one outstanding TDR which was a $3.6 million non-farm non-residential loan secured by commercial real estate that is on nonaccrual. The restructuring of this loan was related to interest rate and amortization concessions. The loan is secured by a hotel facility. This loan was not eligible for a CARES act modification. -54- Classified Assets . Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the FDIC to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified as "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific allowance for loan losses is not warranted. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as "special mention" by our management. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover losses that were both probable and reasonable to estimate. General allowances represent allowances which have been established to cover accrued losses associated with lending activities that were both probable and reasonable to estimate, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific allowances. In connection with the filing of our periodic regulatory reports and in accordance with our classification of assets policy, we continuously assess the quality of our loan portfolio and we regularly review the problem loans in our loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the "watch list" initially because of emerging financial weaknesses even though the loan is currently performing as agreed, or delinquency status, or if the loan possesses weaknesses although currently performing. Management reviews the status of our loan portfolio delinquencies, by product types, with the full board of directors on a monthly basis. Individual classified loan relationships are discussed as warranted. If a loan deteriorates in asset quality, the classification is changed to "special mention," "substandard," "doubtful" or "loss" depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified "substandard." We also employ a risk grading system for our loans to help assure that we are not taking unnecessary and/or unmanageable risk. The primary objective of the loan risk grading system is to establish a method of assessing credit risk to further enable management to measure loan portfolio quality and the adequacy of the allowance for loan losses. Further, we contract with an external loan review firm to complete a credit risk assessment of the loan portfolio on a regular basis to help determine the current level and direction of our credit risk. The external loan review firm communicates the results of their findings to the Bank's audit committee. Any material issues discovered in an external loan review are also communicated to us immediately. The following table sets forth our amounts of classified loans and loans designated as special mention at December 31, 2020, 2019 and 2018. Classified assets totaled $50.1 million at December 31, 2020, and included $28.7 million of non-performing loans. At December 31, (in thousands) 2020 2019 2018 Classification of Loans: Substandard $ 50,062 $ 53,072 $ 46,792 Doubtful — — 523 Total Classified Assets $ 50,062 $ 53,072 $ 47,315 Special Mention $ 99,201 $ 24,083 $ 26,413 The decrease in classified assets at December 31, 2020 as compared to December 31, 2019 was due to a $3.0 million decrease in substandard loans. The decrease in substandard loans during 2020 was primarily due to paydowns of impaired loans. Substandard loans at December 31, 2020 consisted of $16.0 million in non-farm non-residential, $12.7 million in one- to four-family residential, $7.9 million in multifamily, $4.1 million in agricultural, $3.7 million in commercial and industrial, $1.0 million in construction and land development, $4.0 million in farmland, and the remaining $0.6 million comprised of consumer and other loans. Special mention loans increased by $75.1 million in 2020 primarily due to the downgrade of loans in the portfolio. The increase in special mention loans was primarily the result of loan relationships that were downgraded due to the COVID-19 pandemic or relationship specific issues. Special mention loans at December 31, 2020 were concentrated in the following at risk industries affected by the COVID-19 pandemic. Approximately $27.6 million in loans were associated with oil and gas related industries; $29.3 million were associated with hotels or hospitality industries, and $5.8 million were loans associated with childcare related services. These loan relationships accounted for $62.7 million or 63% of special mention loans at December 31, 2020. -55- Allowance for Loan Losses The allowance for loan losses is maintained to absorb potential losses in the loan portfolio. The allowance is increased by the provision for loan losses offset by recoveries of previously charged-off loans and is decreased by loan charge-offs. The provision is a charge to current expense to provide for current loan losses and to maintain the allowance commensurate with management's evaluation of the risks inherent in the loan portfolio. Various factors are taken into consideration when determining the amount of the provision and the adequacy of the allowance. These factors include but are not limited to: • past due and non-performing assets; • specific internal analysis of loans requiring special attention; • the current level of regulatory classified and criticized assets and the associated risk factors with each; • changes in underwriting standards or lending procedures and policies; • charge-off and recovery practices; • national and local economic and business conditions including the COVID-19 pandemic; • nature and volume of loans; • overall portfolio quality and portfolio stress test results; • adequacy of loan collateral; • quality of loan review system and degree of oversight by our board of directors; • competition and legal and regulatory requirements on borrowers; • examinations of the loan portfolio by federal and state regulatory agencies and examinations; and • review by our internal loan review department and independent accountants. The data collected from all sources in determining the adequacy of the allowance is evaluated on a regular basis by management with regard to current national and local economic trends, prior loss history, underlying collateral values, credit concentrations and industry risks. An estimate of potential loss on specific loans is developed in conjunction with an overall risk evaluation of the total loan portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available. The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, and impaired. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Also, a specific reserve is allocated for our syndicated loans, including shared national credits. The general component covers non-classified loans and special mention loans and is based on historical loss experience for the past three years adjusted for qualitative factors described above. An unallocated component is maintained to cover uncertainties that could affect the estimate of probable losses. The allowance for losses was $24.5 million at December 31, 2020 compared to $10.9 million at December 31, 2019. Our allowance level was significantly impacted by the continuing effects of the COVID-19 pandemic. -56- The balance in the allowance for loan losses is principally influenced by the provision for loan losses and by net loan loss experience. Additions to the allowance are charged to the provision for loan losses. Losses are charged to the allowance as incurred and recoveries on losses previously charged to the allowance are credited to the allowance at the time recovery is collected. The table below reflects the activity in the allowance for loan losses for the years indicated. At or For the Years Ended December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Balance at beginning of year $ 10,929 $ 10,776 $ 9,225 $ 11,114 $ 9,415 Charge-offs: Real Estate: Construction and land development (265) — — — — Farmland — — — — — 1- 4 family (154) (552) (99) (33) (244) Multifamily — — — — — Non-farm non-residential (550) (2,603) (404) (1,291) (1,373) Total Real Estate (969) (3,155) (503) (1,324) (1,617) Non-Real Estate: Agricultural (110) (40) (300) (162) (83) Commercial and industrial loans (265) (879) (179) (3,629) (579) Consumer and other (1,083) (1,190) (907) (1,247) (635) Total Non-Real Estate (1,458) (2,109) (1,386) (5,038) (1,297) Total charge-offs (2,427) (5,264) (1,889) (6,362) (2,914) Recoveries: Real Estate: Construction and land development — — 3 43 4 Farmland — — — — — 1- 4 family 39 39 90 92 45 Multifamily — — 20 40 401 Non-farm non-residential 178 5 89 85 16 Total Real Estate 217 44 202 260 466 Non-Real Estate: Agricultural 70 — 26 138 113 Commercial and industrial loans 128 267 1,642 30 146 Consumer and other 724 246 216 223 183 Total Non-Real Estate 922 513 1,884 391 442 Total recoveries 1,139 557 2,086 651 908 Net (charge-offs) recoveries (1,288) (4,707) 197 (5,711) (2,006) Provision for loan losses 14,877 4,860 1,354 3,822 3,705 Balance at end of year $ 24,518 $ 10,929 $ 10,776 $ 9,225 $ 11,114 Ratios: Net loan charge-offs to average loans 0.08 % 0.36 % (0.02) % 0.54 % 0.23 % Net loan charge-offs to loans at end of year 0.07 % 0.31 % (0.02) % 0.50 % 0.21 % Allowance for loan losses to loans at end of year 1.33 % 0.72 % 0.88 % 0.80 % 1.17 % Net loan charge-offs to allowance for loan losses 5.25 % 43.07 % (1.83) % 61.91 % 18.05 % Net loan charge-offs to provision charged to expense 8.66 % 96.85 % (14.55) % 149.42 % 54.14 % -57- A provision for loan losses of $14.9 million was made during the year ended December 31, 2020 as compared to $4.9 million for 2019. The provisions made in 2020 were taken to provide for current loan losses and to maintain the allowance proportionate to risks inherent in the loan portfolio. First Guaranty’s loan loss calculation method incorporates risk factors in the loan portfolio and the composition of the loan portfolio affects the final allowance calculation. The primary reason for the increase in the provison in 2020 compared to 2019 was due to the impact of the COVID-19 pandemic and due to growth in First Guaranty's loan portfolio and other identified risks. First Guaranty made provisions to the allowance during the year of $14.9 million with $4.6 million incurred during the first three quarters of the year and $10.3 million incurred in the final quarter of 2020. First Guaranty made adjustments to its allowance provisions as facts and circumstances evolved due to COVID-19. The actions taken at the onset of the pandemic such as loan payment deferrals under the CARES Act along with SBA PPP relief loans were considered to improve the financial capacity of First Guaranty loan customers. There was, however, significant uncertainty as to the duration of the relief. Economic conditions began to improve by the middle part of the third quarter as loan customers ended their payment deferral periods and resumed normal payments. Both Louisiana and Texas lifted or reduced several COVID-19 restrictions. First Guaranty also experienced strong loan growth. During the latter part of 2020, First Guaranty continued to experience strong loan growth but COVID-19 cases significantly increased that resulted in new economic uncertainty. Louisiana reinstituted restrictions that had previously been lifted. The qualitative and quantitative analysis of the loan portfolio resulted in an increased provision to the allowance as of a result of the new COVID-19 related economic uncertainty along with the increased loan growth. First Guaranty's qualitative and quantitative factors accounted for the changes in economic conditions driven by the COVID-19 pandemic. The key factors included the following: industry specific conditions, changes in loan risk ratings, lending policy, and national and local economic trends. First Guaranty continued to update its analysis of these factors throughout 2020. The loan portfolio factors in 2020 that primarily affected the allocation of the allowance included the following: • The loan portfolio risks that changed and affected the allocation of the allowance were due to the adjustments of certain qualitative factors to take into account the possible impact of COVID-19 and related economic conditions on borrowers' ability to repay loans and for allocations to impaired loans within their respective categories. First Guaranty increased allocations within its qualitative and quantitative factors to account for possible COVID-19 related losses. The largest provision allocation was associated with non-farm non-residential loans primarily those associated with the hospitality and hotel industries. • Construction and land development loans declined during 2020 as several loans transitioned to permanent financing. The majority of these loans are now included in the non-farm non-residential category as of December 31, 2020. The increase in the provision related to this portfolio in 2020 compared to 2019 was primarily related to changes in the qualitative analysis of the portfolio related to COVID-19. • One- to four-family residential loans decreased moderately in 2020. The provision increase related to this portfolio in 2020 compared to 2019 was related to changes in the qualitative analysis of the portfolio related to COVID-19. • Non-farm non-residential loans increased during 2020 with the largest increases during the third and fourth quarters. The growth in this portfolio contributed to the increased provision associated with this category along with the provisions previously noted for hospitality and hotel related loans. • Commercial and industrial loans increased during 2020. The majority of the increase was associated with SBA guaranteed PPP loans which do not have an allowance balance associated with them. The provision increase related to this portfolio in 2020 compared to 2019 was related to changes in the qualitative analysis of the portfolio related to COVID-19. • Consumer and other loans increased during 2020. The increase in the balance was concentrated in commercial leases. The provision made in 2020 was primarily related to qualitative analysis of the consumer portfolio related to COVID-19. • First Guaranty continues to monitor the acquired loans from the Union acquisition on November 7, 2019. Discounts on the acquired Union loans were approximately $1.8 million at December 31, 2020. -58- First Guaranty charged off $2.4 million in loan balances during the year ended December 31, 2020 as compared to $5.3 million for 2019. Recoveries totaled $1.1 million for the year ended December 31, 2020 and $0.6 million during 2019. The charged-off loan balances were concentrated in five loan relationships which totaled $1.0 million or 40.7% of the total charged off amount during the year ended December 31, 2020. The details of the $1.0 million in charged off loans were as follows: • First Guaranty charged off $0.1 million on a purchased consumer loan pool during 2020. This pool had a remaining principal balance of $0.7 million at December 31, 2020. • First Guaranty charged off $0.3 million on a non-farm non-residential loan relationship during the third quarter of 2020. This relationship had no remaining principal balance at December 31, 2020. • First Guaranty charged off $0.3 million on a construction and land development loan during the third quarter of 2020. This loan had a remaining principal balance of $0.3 million at December 31, 2020. • First Guaranty charged off $0.2 million on a non-farm non-residential loan during the third quarter of 2020. This loan had a remaining principal balance of $0.1 million at December 31, 2020. • First Guaranty charged off $0.1 million on a one- to four-family residential loan during the third quarter of 2020. This loan had no remaining principal balance at December 31, 2020. • Smaller loans and overdrawn deposit accounts comprised the remaining $1.4 million of charge-offs for 2020. -59- Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance for losses in other categories. At December 31, 2020 2019 (dollars in thousands) Allowance for Loan Losses Percent of Allowance to Total Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Allowance for Loan Losses Percent of Allowance to Total Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Real Estate: Construction and land development $ 1,029 4.2 % 8.2 % $ 423 3.9 % 11.3 % Farmland 462 1.9 % 1.4 % 50 0.4 % 1.5 % 1- 4 family 2,510 10.2 % 14.7 % 1,027 9.4 % 18.9 % Multifamily 978 4.0 % 2.5 % 1,038 9.5 % 1.6 % Non-farm non-residential 15,064 61.5 % 44.6 % 5,277 48.3 % 40.3 % Non-Real Estate: Agricultural 181 0.7 % 1.5 % 95 0.9 % 1.8 % Commercial and industrial 2,802 11.4 % 19.1 % 1,909 17.5 % 17.5 % Consumer and other 1,490 6.1 % 8.0 % 1,110 10.1 % 7.1 % Unallocated 2 — % — — — % — Total Allowance $ 24,518 100.0 % 100.0 % $ 10,929 100.0 % 100.0 % At December 31, 2018 2017 (dollars in thousands) Allowance for Loan Losses Percent of Allowance to Total Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Allowance for Loan Losses Percent of Allowance to Total Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Real Estate: Construction and land development $ 581 5.4 % 10.1 % $ 628 6.8 % 9.8 % Farmland 41 0.4 % 1.5 % 5 0.1 % 2.2 % 1- 4 family 911 8.5 % 14.1 % 1,078 11.7 % 13.8 % Multifamily 1,318 12.2 % 3.5 % 994 10.8 % 1.4 % Non-farm non-residential 4,771 44.3 % 47.7 % 2,811 30.4 % 46.1 % Non-Real Estate: Agricultural 339 3.1 % 1.9 % 187 2.0 % 1.9 % Commercial and industrial 1,909 17.7 % 16.4 % 2,377 25.8 % 20.0 % Consumer and other 891 8.3 % 4.8 % 1,125 12.2 % 4.8 % Unallocated 15 0.1 % — 20 0.2 % — Total Allowance $ 10,776 100.0 % 100.0 % $ 9,225 100.0 % 100.0 % -60- At December 31, 2016 (dollars in thousands) Allowance for Loan Losses Percent of Allowance to Total Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Real Estate: Construction and land development $ 1,232 11.1 % 8.9 % Farmland 19 0.2 % 2.2 % 1- 4 family 1,204 10.8 % 14.2 % Multifamily 591 5.3 % 1.3 % Non-farm non-residential 3,451 31.0 % 43.9 % Non-Real Estate: Agricultural 74 0.7 % 2.5 % Commercial and industrial 3,543 31.9 % 20.4 % Consumer and other 972 8.7 % 6.6 % Unallocated 28 0.3 % — Total Allowance $ 11,114 100.0 % 100.0 % -61- Investment Securities. Investment securities at December 31, 2020 totaled $238.5 million, a decrease of $188.0 million, or 44.1%, compared to $426.5 million at December 31, 2019. The entire investment portfolio consisted of available for sale securities at December 31, 2020. First Guaranty terminated its held to maturity portfolio in the first quarter of 2020 following the sale of certain securities previously designated as held to maturity. We purchase securities for our investment portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk and meet pledging requirements for public funds and borrowings. The securities portfolio consisted principally of U.S. Government and Government agency securities, agency mortgage-backed securities, corporate debt securities and municipal bonds. U.S. government agencies consist of FHLB, Federal Farm Credit Bank ("FFCB"), Freddie Mac and Fannie Mae obligations. Mortgage-backed securities that we purchase are issued by Freddie Mac and Fannie Mae. Management monitors the securities portfolio for both credit and interest rate risk. We generally limit the purchase of corporate securities to individual issuers to manage concentration and credit risk. Corporate securities generally have a maturity of 10 years or less. U.S. Government securities consist of U.S. Treasury bills that have maturities of less than 30 days. Government agency securities generally have maturities of 15 years or less. Agency mortgage backed securities have stated final maturities of 15 to 20 years. At December 31, 2020, the U.S. Government and Government agency securities and municipal bonds qualified as securities available to collateralize public funds. Securities pledged as collateral totaled $184.0 million at December 31, 2020 and $212.8 million at December 31, 2019. Our public funds deposits have a seasonal increase due to tax collections at the end of the year and the first quarter. We typically collateralize the seasonal public fund increases with short term instruments such as U.S. Treasuries or other agency backed securities. The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated. At December 31, 2020 2019 2018 (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Available for sale: U.S. Treasuries $ 3,000 $ 3,000 $ — $ — $ — $ — U.S. Government Agencies 169,986 169,658 16,380 16,393 146,911 141,389 Corporate debt securities 36,153 36,489 94,561 95,369 76,310 72,878 Municipal bonds 27,381 28,162 30,297 32,153 32,956 33,901 Collateralized mortgage obligations — — 16,400 16,397 918 904 Mortgage-backed securities 1,208 1,239 179,546 179,625 48,434 47,422 Total available for sale securities $ 237,728 $ 238,548 $ 337,184 $ 339,937 $ 305,529 $ 296,494 Held to maturity: U.S. Government Agencies — — 18,175 18,143 28,172 27,091 Municipal bonds — — 5,107 5,289 5,227 5,126 Mortgage-backed securities — — 63,297 63,385 74,927 72,623 Total held to maturity securities $ — $ — $ 86,579 $ 86,817 $ 108,326 $ 104,840 Our available for sale securities portfolio totaled $238.5 million at December 31, 2020, a decrease of $101.4 million, or 29.8%, compared to $339.9 million at December 31, 2019. The decrease was primarily due to the sale of securities and called bonds. First Guaranty had securities sales of $187.9 million in mortgage-backed securities, $168.9 million in corporate securities, $4.2 million in municipal securities and $2.2 million in U.S. Government agency securities. First Guaranty plans to reinvest the proceeds in securities and loans and reduce borrowings. First Guaranty had $14.1 million in U.S. Government agency securities and $15.4 million of corporate securities called during 2020 due to the decrease in interest rates. Our held to maturity securities portfolio had an amortized cost of $0 at December 31, 2020, a decrease of $86.6 million, or 100.0%, compared to December 31, 2019. First Guaranty terminated its held to maturity portfolio in the first quarter of 2020 following the sale of certain securities previously designated as held to maturity. -62- The following tables set forth the stated maturities and weighted average yields of our investment securities at December 31, 2020 and 2019. At December 31, 2020 One Year or Less More than One Year through Five Years More than Five Years through Ten Years More than Ten Years (in thousands except for %) Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Available for sale: U.S. Treasuries $ 3,000 — % $ — — % $ — — % $ — — % U.S. Government Agencies — — % — — % 29,958 1.2 % 139,700 2.0 % Corporate and other debt securities 5,633 3.5 % 2,038 4.3 % 27,762 4.9 % 1,056 5.5 % Municipal bonds 1,037 4.1 % 4,956 3.9 % 10,692 3.9 % 11,477 3.2 % Collateralized mortgage obligations — 2.0 % — — % — — % — — % Mortgage-backed securities — — % 3 0.9 % 3 2.0 % 1,233 1.0 % Total available for sale securities $ 9,670 2.5 % $ 6,997 4.0 % $ 68,415 3.1 % $ 153,466 2.1 % At December 31, 2019 One Year or Less More than One Year through Five Years More than Five Years through Ten Years More than Ten Years (in thousands except for %) Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Available for sale: U.S. Treasuries $ — — % $ — — % $ — — % $ — — % U.S. Government Agencies 2,096 1.8 % 4,647 2.2 % 149 2.0 % 9,501 2.9 % Corporate and other debt securities 640 3.4 % 24,860 3.1 % 68,129 3.6 % 1,740 4.7 % Municipal bonds 1,785 4.1 % 9,221 3.8 % 9,665 3.8 % 11,482 3.5 % Collateralized mortgage obligations — — % 55 2.1 % 5,567 2.2 % 10,775 2.2 % Mortgage-backed Securities — — % 416 2.0 % 1,393 2.2 % 177,816 2.5 % Total available for sale securities $ 4,521 2.9 % $ 39,199 3.1 % $ 84,903 3.5 % $ 211,314 2.6 % Held to maturity: U.S. Government Agencies 5,000 1.5 % 7,177 2.0 % 5,998 2.1 % — — % Municipal bonds 50 1.6 % 150 2.1 % 1,498 2.6 % 3,409 2.7 % Mortgage-backed securities — — % — — % 11,628 2.0 % 51,669 2.3 % Total held to maturity securities $ 5,050 1.5 % $ 7,327 2.0 % $ 19,124 2.1 % $ 55,078 2.4 % At December 31, 2020, $9.7 million, or 4.1%, of the securities portfolio was scheduled to mature in less than one year. Securities, not including mortgage-backed securities and collateralized mortgage obligations, with contractual maturity dates over 10 years totaled $152.2 million, or 63.8%, of the total portfolio at December 31, 2020. We closely monitor the investment portfolio's yield, duration, and maturity to ensure a satisfactory return. The average maturity of the securities portfolio is affected by call options that may be exercised by the issuer of the securities and are influenced by market interest rates. Prepayments of mortgages that collateralize mortgage-backed securities also affect the maturity of the securities portfolio. First Guaranty, in furtherance of the strategy adopted in March 2020, initiated a plan to manage for economic uncertainty caused by the COVID-19 pandemic by converting unrealized gains in the securities portfolio to realized gains in the fourth quarter of 2020. First Guaranty sold approximately $140 million in mortgage-backed securities and $150 million in corporate securities in October 2020. First Guaranty generated $12.1 million in pre-tax gains from the sales. First Guaranty has proceeded to reinvest the proceeds in securities and loans and subsequently reduced FHLB borrowings by $50.0 million in February 2021. -63- At December 31, 2020, the following table identifies the issuers, and the aggregate amortized cost and aggregate fair value of the securities of such issuers that exceeded 10% of our total shareholders' equity: At December 31, 2020 (in thousands) Amortized Cost Fair Value Freddie Mac 110,177 109,856 Federal Farm Credit Bank 54,263 54,279 Total $ 164,440 $ 164,135 -64- Deposits Managing the mix and pricing the maturities of deposit liabilities is an important factor affecting our ability to maximize our net interest margin. The strategies used to manage interest-bearing deposit liabilities are designed to adjust as the interest rate environment changes. We regularly assess our funding needs, deposit pricing and interest rate outlooks. From December 31, 2019 to December 31, 2020, total deposits increased $313.3 million, or 16.9%, to $2.2 billion. Noninterest-bearing demand deposits increased $85.5 million, or 26.2% to $411.4 million at December 31, 2020. The increase in noninterest-bearing demand deposits was primarily due to economic conditions associated with the CARES Act and the SBA PPP program. First Guaranty consumer and business customers have increased their deposits due to the receipt of stimulus funds and proceeds from SBA PPP program loans. Interest-bearing demand deposits increased $224.5 million, or 35.3%, to $860.4 million at December 31, 2020. The increase in interest-bearing demand deposits was primarily concentrated in individual, business, and public funds interest-bearing demand deposits. Savings deposits increased $33.7 million, or 25.0%, to $168.9 million at December 31, 2020, primarily related to increases in individual savings deposits. Time deposits decreased $30.4 million, or 4.0%, to $725.6 million at December 31, 2020, primarily due to decreases in business deposits. As we seek to strengthen our net interest margin and improve our earnings, attracting noninterest-bearing or lower cost deposits will be a primary emphasis. Management will continue to evaluate and update our product mix in its efforts to attract additional customers. We currently offer a number of deposit products that are competitively priced and designed to attract and retain customers with primary emphasis on noninterest-bearing deposits and other lower cost deposits. The following table sets forth the distribution of deposit accounts, by account type, for the dates indicated. For the Years Ended December 31, Total Deposits 2020 2019 2018 (in thousands except for %) Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate Noninterest-bearing Demand $ 393,734 19.2 % — % $ 262,379 15.7 % — % $ 252,531 16.3 % — % Interest-bearing Demand 722,433 35.3 % 0.8 % 592,113 35.4 % 1.8 % 556,528 35.9 % 1.5 % Savings 163,332 8.0 % 0.2 % 115,682 6.9 % 0.4 % 111,134 7.2 % 0.4 % Time 767,075 37.5 % 2.2 % 703,685 42.0 % 2.4 % 628,457 40.6 % 1.7 % Total Deposits $ 2,046,574 100.0 % 1.1 % $ 1,673,859 100.0 % 1.7 % $ 1,548,650 100.0 % 1.3 % For the Years Ended December 31, Individual and Business Deposits 2020 2019 2018 (in thousands except for %) Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate Noninterest-bearing Demand $ 382,940 27.5 % — % $ 256,099 23.7 % — % $ 246,550 26.7 % — % Interest-bearing Demand 280,587 20.1 % 1.0 % 241,290 22.3 % 1.4 % 204,405 22.1 % 1.1 % Savings 127,804 9.2 % 0.1 % 86,972 8.0 % 0.1 % 84,844 9.2 % 0.1 % Time 600,887 43.2 % 2.5 % 498,521 46.0 % 2.6 % 388,623 42.0 % 1.7 % Total Individual and Business Deposits $ 1,392,218 100.0 % 1.3 % $ 1,082,882 100.0 % 1.5 % $ 924,422 100.0 % 1.0 % For the Years Ended December 31, Public Fund Deposits 2020 2019 2018 (in thousands except for %) Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate Noninterest-bearing Demand $ 10,794 1.7 % — % $ 6,280 1.1 % — % $ 5,981 1.0 % — % Interest-bearing Demand 441,846 67.5 % 0.7 % 350,823 59.3 % 2.0 % 352,123 56.4 % 1.8 % Savings 35,528 5.4 % 0.4 % 28,710 4.9 % 1.6 % 26,290 4.2 % 1.4 % Time 166,188 25.4 % 1.1 % 205,164 34.7 % 2.1 % 239,834 38.4 % 1.7 % Total Public Fund Deposits $ 654,356 100.0 % 0.8 % $ 590,977 100.0 % 1.9 % $ 624,228 100.0 % 1.7 % -65- At December 31, 2020, public funds deposits totaled $715.3 million compared to $610.7 million at December 31, 2019. Public funds time deposits totaled $158.9 million at December 31, 2020 compared to $146.4 million at December 31, 2019. Public funds deposits increased due to seasonal fluctuations. We have developed a program for the retention and management of public funds deposits. Since the end of 2012, we have maintained public funds deposits in excess of $400.0 million. These deposits are from public entities such as school districts, hospital districts, sheriff departments and municipalities. The majority of these funds are under fiscal agency agreements with terms of three years or less. Deposits under fiscal agency agreements are generally stable but public entities may maintain the ability to negotiate term deposits on a specific basis including with other financial institutions. 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, by reciprocal deposit insurance programs, by Louisiana municipal bonds and by eligible government and government agency securities such as those issued by the FHLB, FFCB, Fannie Mae, and Freddie Mac. First Guaranty has been growing the proportion of its public funds portfolio that is collateralized by reciprocal deposit insurance as an alternative to pledging securities or utilizing FHLB letters of credit. First Guaranty initiated this strategy to more efficiently invest these deposits in higher yielding loans to improve the net interest margin and earnings. Total public funds collateralized by reciprocal deposit insurance programs increased to $217.7 million at December 31, 2020 compared to $86.1 million at December 31, 2019. The following table sets forth public funds as a percent of total deposits. At December 31, (in thousands except for %) 2020 2019 2018 Public Funds: Noninterest-bearing Demand $ 5,109 $ 9,944 $ 6,930 Interest-bearing Demand 514,416 424,732 364,692 Savings 36,862 29,570 26,903 Time 158,925 146,420 247,004 Total Public Funds $ 715,312 $ 610,666 $ 645,529 Total Deposits $ 2,166,318 $ 1,853,013 $ 1,629,622 Total Public Funds as a percent of Total Deposits 33.0 % 33.0 % 39.6 % At December 31, 2020, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $505.5 million. At December 31, 2020, approximately $234.5 million of our certificates of deposit greater than or equal to $100,000 had a remaining term greater than one year. The following table sets forth the maturity of the total certificates of deposit greater than or equal to $100,000 at December 31, 2020. (in thousands) December 31, 2020 Due in one year or less $ 270,939 Due after one year through three years 143,159 Due after three years 91,378 Total certificates of deposit greater than or equal to $100,000 $ 505,476 -66- Borrowings. First Guaranty maintains borrowing relationships with other financial institutions as well as the Federal Home Loan Bank on a short and long-term basis to meet liquidity needs. First Guaranty had $56.1 million in short-term borrowings outstanding at December 31, 2020 compared to $19.9 million outstanding at December 31, 2019. The short-term borrowings at December 31, 2020 were comprised of Federal Home Loan Bank advances of $50.0 million and repurchase agreements of $6.1 million. The $50.0 million short term Federal Home Loan Bank advance was the result of First Guaranty's COVID-19 related liquidity actions taken in the first quarter of 2020. Subsequent to December 31, 2020, First Guaranty redeemed this $50.0 million short term advance in February 2021. The long term Federal Home Loan Bank advance of $3.4 million and the repurchase agreements were assumed as a result of the Union acquisition in November 2019. First Guaranty has a line of credit for $6.5 million, with no outstanding balance at December 31, 2020. At December 31, 2020, we had $365.8 million in FHLB letters of credit outstanding obtained primarily for collateralizing public deposits. The following table sets forth information concerning balances and interest rates on our short-term borrowings at the dates and for the years indicated. At or For the Years Ended December 31, (in thousands except for %) 2020 2019 2018 Balance at end of year $ 56,121 $ 19,919 $ — Maximum month-end outstanding $ 57,048 $ 19,919 $ 37,000 Average daily outstanding $ 48,277 $ 3,320 $ 7,119 Total Weighted average rate during the year 0.95 % 2.00 % 2.21 % Weighted average rate at the end of the year 0.89 % 2.00 % — % First Guaranty had senior long-term debt totaling $42.4 million at December 31, 2020 and $48.6 million at December 31, 2019. First Guaranty also had junior subordinated debentures totaling $14.8 million at December 31, 2020 and $14.7 million at December 31, 2019. Shareholders' Equity Total shareholders' equity increased to $178.6 million at December 31, 2020 from $166.0 million at December 31, 2019. The increase in shareholders' equity was principally the result of an increase of $14.1 million in retained earnings offset by a decrease of $1.5 million in accumulated other comprehensive income. The decrease in accumulated other comprehensive income was primarily attributed to the decrease in unrealized gains on available for sale securities during the year ended December 31, 2020. The $14.1 million increase in retained earnings was due to net income of $20.3 million during the year ended December 31, 2020, partially offset by $6.2 million in cash dividends paid on shares of our common stock. -67- Results of Operations Performance Summary Year ended December 31, 2020 compared with year ended December 31, 2019. Net income for the year ended December 31, 2020 was $20.3 million, an increase of $6.1 million, or 42.7%, as compared to $14.2 million for the year ended December 31, 2019. The increase in net income of $6.1 million for the year ended December 31, 2020 was the result of several factors. First Guaranty experienced an increase in interest income associated with loans, increased noninterest income due to increased securities sales and lower interest expense. This was partially offset by an increase in the provision for loan losses and increased noninterest expense. Loan interest income increased due to the growth in First Guaranty's loan portfolio, including the loans acquired in the fourth quarter of 2019 in the Union acquisition and loan fees recognized as an adjustment to yield from the origination of the SBA guaranteed PPP loans. Noninterest income increased due to larger securities gains on sales for the year ended December 31, 2020 compared to losses on securities sales for the year ended December 31, 2019. Interest expense declined due to declines in market interest rates and First Guaranty's strategy to reduce interest expense. Interest expense declined during 2020 even after factoring in the additional deposit balances acquired from the Union acquisition, an increase in deposit balances associated with SBA PPP loans and stimulus payments, and additional borrowings associated with our COVID-19 contingency plans. Factors that partially offset income include increased noninterest expense primarily associated with the Union acquisition including one-time merger related expenses of $0.5 million paid in 2020 for the data conversion. The provision for loan losses increased to provide for current loan losses and to maintain the allowance proportionate to risks inherent in the loan portfolio, including risks emerging from the COVID-19 pandemic and portfolio growth. Earnings per common share for the years ended December 31, 2020 was $2.09 per common share, an increase of 42.2% or $0.62 per common share from $1.47 per common share for the year ended ended December 31, 2019. Earnings per share was affected by the increase in earnings. Year ended December 31, 2019 compared with year ended December 31, 2018. Net income for the year ended December 31, 2019 was $14.2 million, an increase of $28,000, or 0.2%, as compared to the year ended December 31, 2018. The increase in net income of $28,000 for the year ended December 31, 2019 was the result of several factors. First Guaranty experienced an increase in interest income associated with loans and increased noninterest income, partially offset by an increase in the provision for loan losses, increased interest expense and increased noninterest expense. Loan interest income increased due to the continued growth in First Guaranty's loan portfolio, an increase in the average yield on loans and due to the acquired loans from the Union acquisition. Noninterest income increased primarily as a result of gains on the sale of the guaranteed portion of SBA and USDA loans. Factors that partially offset this increase in income include increased interest expense and noninterest expense. The increase in interest expense was due to the rising interest rate environment, increased competition and due to the acquired deposits from the Union acquisition. Noninterest expense increased primarily due to expenses associated with the Union acquisition that included approximately $0.3 million in one-time merger related expenses, as well as expenses associated with additional compensation, occupancy and other operating expenses for the branch offices acquired in the Union acquisition. The provision for loan losses increased to provide for current loan losses and to maintain the allowance proprtionate to risks inherent in the loan portfolio. Earnings per common share for the years ended December 31, 2019 and December 31, 2018 was $1.47 per common share. -68- Net Interest Income Our operating results depend primarily on our net interest income, which is the difference between interest income earned on interest-earning assets, including loans and securities, and interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. Interest rate fluctuations, as well as changes in the amount and type of interest-earning assets and interest-bearing liabilities, combine to affect net interest income. Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities. It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds. A financial institution's asset and liability structure is substantially different from that of a non-financial company, in that virtually all assets and liabilities are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a financial institution's performance. The impact of interest rate changes depends on the sensitivity to the change of our interest-earning assets and interest-bearing liabilities. The effects of the low interest rate environment in recent years and our interest sensitivity position is discussed below. Year ended December 31, 2020 compared with year ended December 31, 2019 . Net interest income for the years ended December 31, 2020 and 2019 was $74.7 million and $61.7 million, respectively. The increase in net interest income for the year ended December 31, 2020 as compared to the prior year was primarily due to an increase in the average balance of our total interest-earning assets and a decrease in the average rate of our total interest-bearing liabilities, partially offset by a decrease in the average yield of our total interest-earning assets and by an increase in the average balance of our total interest-bearing liabilities. For the year ended December 31, 2020, the average balance of our total interest-earning assets increased by $417.3 million to $2.2 billion due to the assets acquired from the Union acquisition, COVID-19 related lending activities, including SBA PPP loans and loan growth. The average yield of our interest-earning assets decreased by 54 basis points to 4.52% from 5.06% for the year ended December 31, 2019 due to the general decline in market interest rates that affect the pricing of our assets and due to the increased lower yielding average cash balances on the balance sheet. For the year ended December 31, 2020, the average balance of our total interest-bearing liabilities increased by $310.9 million to $1.8 billion as our average deposits and average borrowings increased due to COVID-19 related contingency planning and government relief programs, and the average rate of our total interest-bearing liabilities decreased by 58 basis points to 1.48% from 2.06% for the year ended December 31, 2019 due to the decrease in market rates. As a result, our net interest rate spread increased four basis points to 3.04% for the year ended December 31, 2020 from 3.00% for the year ended December 31, 2019. Our net interest margin decreased six basis points to 3.35% for the year ended December 31, 2020 from 3.41% for the year ended December 31, 2019. Year ended December 31, 2019 compared with year ended December 31, 2018. Net interest income for the years ended December 31, 2019 and 2018 was $61.7 million and $57.0 million, respectively. The increase in net interest income for the year ended December 31, 2019 as compared to the prior year was primarily due to an increase in the average balance of our total interest-earning assets and an increase in the average yield of our total interest-earning assets, partially offset by the increase in the average balance of our total interest-bearing liabilities and an increase in the average rate of our total interest-bearing liabilities. For the year ended December 31, 2019, the average balance of our total interest-earning assets increased by $136.3 million to $1.8 billion, and the average yield of our interest-earning assets increased by 38 basis points to 5.06% from 4.68% for the year ended December 31, 2018. For the year ended December 31, 2019, the average balance of our total interest-bearing liabilities increased by $117.0 million to $1.5 billion, and the average rate of our total interest-bearing liabilities increased by 46 basis points to 2.06% from 1.60% for the year ended December 31, 2018. As a result, our net interest rate spread decreased eight basis points to 3.00% for the year ended December 31, 2019 from 3.08% for the years ended December 31, 2018. Our net interest margin remained stable at 3.41% for the year ended December 31, 2019 and 2018. -69- Interest Income Year ended December 31, 2020 compared with year ended December 31, 2019 . Interest income increased $9.0 million, or 9.9%, to $100.7 million for the year ended December 31, 2020 as compared to the prior year. First Guaranty's loan portfolio expanded during 2020 due to growth associated with the SBA PPP lending program and our other loan originations such as commercial leases and non-farm non-residential loans. These factors contributed to the increase in interest income as the average balance of our total interest-earning assets, both loans and securities, including assets from the Union acquisition increased, partially offset by a decrease in the average yield of interest-earning assets due to the decline in market interest rates. The average balance of our interest-earning assets increased $417.3 million to $2.2 billion for the year ended December 31, 2020 as compared to the prior year. The average yield of interest-earning assets decreased by 54 basis points to 4.52% for the year ended December 31, 2020 compared to 5.06% for the year ended December 31, 2019. Interest income on securities decreased $0.3 million to $9.5 million for the year ended December 31, 2020 as compared to the prior year primarily as a result of a decrease in the average yield on securities. The average balance of securities increased $31.7 million to $381.0 million for the year ended December 31, 2020 from $349.2 million for the year ended December 31, 2019 due to an increase in balances, particularly corporate securities, as part of First Guaranty's strategy initiated at the end of the first quarter in 2020 to provide earnings and liquidity during the COVID-19 pandemic. The average yield on securities decreased by 32 basis points to 2.49% for the year ended December 31, 2020 from 2.81% for the year ended December 31, 2019 due to the decrease in market interest rates. Interest income on loans increased $11.9 million, or 15.1%, to $90.8 million for the year ended December 31, 2020 as a result of an increase in the average balance of loans. The average balance of loans (excluding loans held for sale) increased by $347.4 million to $1.7 billion for the year ended December 31, 2020 from $1.3 billion for the year ended December 31, 2019 as a result of new loan originations, primarily SBA PPP loans, commercial leases, non-farm non-residential loans, and acquired loans from the Union acquisition. The average yield on loans (excluding loans held for sale) decreased by 53 basis points to 5.46% for the year ended December 31, 2020 from 5.99% for the year ended December 31, 2019 due to the decrease in market interest rates and the impact of SBA PPP loans which have a 1.0% interest rate. Year ended December 31, 2019 compared with year ended December 31, 2018. Interest income increased $13.3 million, or 16.9%, to $91.6 million for the year ended December 31, 2019 as compared to the prior year. First Guaranty continues to transition assets from lower yielding securities and interest-earning bank balances to higher yielding loans in order to increase interest income. The increase in interest income resulted primarily from an increase in the average balance of our total interest-earning assets principally as a result of the Union acquisition along with an increase in the average yield of interest-earning assets. The average balance of our interest-earning assets increased $136.3 million to $1.8 billion for the year ended December 31, 2019 as compared to the prior year. The average yield of interest-earning assets increased by 38 basis points to 5.06% for the year ended December 31, 2019 compared to 4.68% for the year ended December 31, 2018. Interest income on securities decreased $3.1 million to $9.8 million for the year ended December 31, 2019 as compared to the prior year primarily as a result of a decrease in the average balance of securities. The average balance of securities decreased $116.2 million to $349.2 million for the year ended December 31, 2019 from $465.4 million for the year ended December 31, 2018 due to a decrease in the average balance of our agency, mortgage-backed, corporate and municipal securities as a result of securities sales, calls and maturities. The average yield on securities increased by three basis points to 2.81% for the year ended December 31, 2019 from 2.78% for the year ended December 31, 2018 due to the rising interest rate environment for the majority of 2019. Interest income on loans increased $14.1 million, or 21.7%, to $78.9 million for the year ended December 31, 2019 as a result of an increase in the average balance of loans along with an increase in the average yield on loans. The average balance of loans (excluding loans held for sale) increased by $148.1 million to $1.3 billion for the year ended December 31, 2019 from $1.2 billion for the year ended December 31, 2018 as a result of new loan originations, purchased loans and loans acquired from the Union acquisition. The average yield on loans (excluding loans held for sale) increased by 44 basis points to 5.99% for the year ended December 31, 2019 from 5.55% for the year ended December 31, 2018 as a result of the rising interest rate environment for the majority of 2019. -70- Interest Expense Year ended December 31, 2020 compared with year ended December 31, 2019 . Interest expense decreased $3.9 million, or 13.2%, to $26.0 million for the year ended December 31, 2020 from $30.0 million for the year ended December 31, 2019 due primarily to a decrease in market interest rates partially offset by an increase in the average balance of interest-bearing liabilities. The average rate of interest-bearing demand deposits decreased by 92 basis points during the year ended December 31, 2020 to 0.84% as compared to 1.76% for the prior year. The decrease in the average rate on interest-bearing demand deposits was due to those deposits, primarily public funds NOW and DDA accounts and brokered money market deposits, whose rates are contractually tied to national index rates such as the U.S. Federal Funds rate or short-term U.S. Treasury rates that declined sharply beginning in the first quarter of 2020. The average rate of time deposits decreased 24 basis points during the year ended December 31, 2020 to 2.20% as compared to 2.44% for the prior year. The decrease in the average rate of time deposits was due to First Guaranty's strategy to reduce deposit costs by expanding non-interest bearing and lower cost interest bearing deposits that has provided an alternative to higher cost time deposits and has helped First Guaranty maintain liquidity while lowering rates on time deposits. Partially offsetting the decrease in interest expense was an increase in the average balance of interest-bearing liabilities, which increased $310.9 million during the year ended December 31, 2020 to $1.8 billion as compared to the prior year as a result of a $130.3 million increase in the average balance of interest-bearing demand deposits, a $69.5 million increase in the average balance of borrowings, a $63.4 million increase in the average balance of time deposits and a $47.7 million increase in the average balance of savings deposits. Year ended December 31, 2019 compared with year ended December 31, 2018. Interest expense increased $8.6 million, or 40.3%, to $30.0 million for the year ended December 31, 2019 from $21.4 million for the year ended December 31, 2018 due primarily to an increase in the average balance of interest-bearing deposits along with an increase in the average rate paid on interest-bearing deposits. The average balance of interest-bearing deposits increased by $115.4 million during the year ended December 31, 2019 to $1.4 billion as a result of a $75.2 million increase in the average balance of time deposits, a $35.6 million increase in the average balance of interest-bearing demand deposits and a $4.5 million increase in the average balance of savings deposits. The average rate of interest-bearing demand deposits increased by 23 basis points during the year ended December 31, 2019 to 1.76% as compared to the prior year. The increase in the average rate on interest-bearing demand deposits was due to those deposits, primarily public funds accounts and brokered money market deposits, whose rates are contractually tied to national index rates such as the U.S. Federal Funds rate or short term U.S. Treasury rates. The average rate of time deposits increased 74 basis points during the year ended December 31, 2019 to 2.44% as compared to the prior year. The increase in the average rate and average balance of time deposits was due to changes in market rates and the initiation of a deposit campaign by First Guaranty in order to fund future loan growth and diversify the deposit portfolio. First Guaranty initiated a deposit campaign in 2018 to grow time deposits generally with terms greater than two years. This strategy was designed to fund loan growth and increase long term funding for the Bank. Average Balances and Yields. The following table sets forth average balance sheet balances, average yields and costs, and certain other information for the years indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. Loans, net of unearned income, include loans held for sale. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. The net interest income yield presented below is calculated by dividing net interest income by average interest-earning assets and is a measure of the efficiency of the earnings from the 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. -71- December 31, 2020 December 31, 2019 December 31, 2018 (in thousands except for %) Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate Assets Interest-earning assets: Interest-earning deposits with banks(1) $ 182,339 $ 404 0.22 % $ 144,298 $ 2,956 2.05 % $ 39,005 $ 612 1.57 % Securities (including FHLB stock) 380,991 9,471 2.49 % 349,247 9,800 2.81 % 465,399 12,941 2.78 % Federal funds sold 678 1 0.08 % 592 1 0.25 % 531 1 0.23 % Loans held for sale 377 21 5.56 % 324 24 7.41 % 1,330 84 6.32 % Loans, net of unearned income 1,662,875 90,787 5.46 % 1,315,524 78,862 5.99 % 1,167,458 64,752 5.55 % Total interest-earning assets 2,227,260 100,684 4.52 % 1,809,985 91,643 5.06 % 1,673,723 78,390 4.68 % Noninterest-earning assets: Cash and due from banks 12,955 11,951 10,013 Premises and equipment, net 58,411 45,037 38,502 Other assets 49,859 15,256 13,805 Total Assets $ 2,348,485 $ 1,882,229 $ 1,736,043 Liabilities and Shareholders' Equity Interest-bearing liabilities: Demand deposits $ 722,433 6,089 0.84 % $ 592,113 10,447 1.76 % $ 556,528 8,531 1.53 % Savings deposits 163,332 268 0.16 % 115,682 527 0.46 % 111,134 407 0.37 % Time deposits 767,075 16,908 2.20 % 703,685 17,141 2.44 % 628,457 10,690 1.70 % Borrowings 110,292 2,752 2.50 % 40,766 1,851 4.54 % 39,150 1,738 4.44 % Total interest-bearing liabilities 1,763,132 26,017 1.48 % 1,452,246 29,966 2.06 % 1,335,269 21,366 1.60 % Noninterest-bearing liabilities: Demand deposits 393,734 262,379 252,531 Other 12,714 9,204 5,870 Total Liabilities 2,169,580 1,723,829 1,593,670 Shareholders' Equity 178,905 158,400 142,373 Total Liabilities and Shareholders' Equity $ 2,348,485 $ 1,882,229 $ 1,736,043 Net interest income $ 74,667 $ 61,677 $ 57,024 Net interest rate spread(2) 3.04 % 3.00 % 3.08 % Net interest-earning assets(3) $ 464,128 $ 357,739 $ 338,454 Net interest margin(4)(5) 3.35 % 3.41 % 3.41 % Average interest-earning assets to interest-bearing liabilities 126.32 % 124.63 % 125.35 % (1) Includes Federal Reserve balances reported in cash and due from banks on the consolidated balance sheets. (2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average total interest-earning assets. (5) The tax adjusted net interest margin was 3.36%, 3.42% and 3.42% for the years ended December 31, 2020, 2019 and 2018. A 21% tax rate was used to calculate the effect on securities income from tax exempt securities for the years ended December 31, 2020, 2019 and 2018. -72- Volume/Rate 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 years indicated. The table distinguishes between: (1) changes attributable to volume (changes in volume multiplied by the prior year's rate); (2) changes attributable to rate (change in rate multiplied by the prior year's volume) and (3) total increase (decrease) (the sum of the previous columns). Changes attributable to both volume and rate are allocated ratably between the volume and rate categories. For the Years Ended December 31, 2020 vs. 2019 Increase (Decrease) Due To For the Years Ended December 31, 2019 vs. 2018 Increase (Decrease) Due To (in thousands except for %) Volume Rate Increase/ Decrease Volume Rate Increase/ Decrease Interest earned on: Interest-earning deposits with banks $ 621 $ (3,173) $ (2,552) $ 2,105 $ 239 $ 2,344 Securities (including FHLB stock) 846 (1,175) (329) (3,259) 118 (3,141) Federal funds sold — — — — — — Loans held for sale 4 (7) (3) (72) 12 (60) Loans, net of unearned income 19,433 (7,508) 11,925 8,618 5,492 14,110 Total interest income 20,904 (11,863) 9,041 7,392 5,861 13,253 Interest paid on: Demand deposits 1,943 (6,301) (4,358) 570 1,346 1,916 Savings deposits 163 (422) (259) 18 102 120 Time deposits 1,473 (1,706) (233) 1,400 5,051 6,451 Borrowings 2,032 (1,131) 901 73 40 113 Total interest expense 5,611 (9,560) (3,949) 2,061 6,539 8,600 Change in net interest income $ 15,293 $ (2,303) $ 12,990 $ 5,331 $ (678) $ 4,653 Provision for Loan Losses A provision for loan losses is a charge to income in an amount that management believes is necessary to maintain an adequate allowance for loan losses. The provision is based on management's regular evaluation of current economic conditions in our specific markets as well as regionally and nationally, changes in the character and size of the loan portfolio, underlying collateral values securing loans, and other factors which deserve recognition in estimating loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. We recorded a $14.9 million provision for loan losses for the year ended December 31, 2020 compared to $4.9 million for 2019. The allowance for loan losses at December 31, 2020 was $24.5 million or 1.33% of total loans, compared to $10.9 million or 0.72% of total loans at December 31, 2019. The increase in the provision was attributable to the increase in the loan portfolio, the effects of the COVID-19 pandemic and charge-offs not previously provided for. Total charge-offs were $2.4 million for year ended December 31, 2020 and $5.3 million for 2019. We believe that the allowance is adequate to cover potential losses in the loan portfolio given the current economic conditions that are significantly influenced by the COVID-19 pandemic, and current expected net charge-offs and non-performing asset levels. We expect economic uncertainty to continue which may result in additional increases to the allowance for loan losses in future periods. For the year ended December 31, 2019, the provision for loan losses was $4.9 million compared to $1.4 million for 2018. The allowance for loan losses at December 31, 2019 was $10.9 million or 0.72% of total loans, compared to $10.8 million or 0.88% of total loans at December 31, 2018. The increase in the provision was attributed to additional provisions on loans evaluated individually for impairment. First Guaranty also received a $3.6 million negotiated payment in settlement of a commercial and industrial non-accrual loan on May 9, 2018. The payment resulted in a recovery of $1.6 million. The recovery impacted the allowance for loan losses and the end result was a negative provision for loan losses in the second quarter of 2018. The increase in the provision was also attributable to the increase in the balance of the loan portfolio and charge-offs not previously provided for. Substandard loans increased $6.3 million to $53.1 million at December 31, 2019 from $46.8 million at December 31, 2018. Doubtful loans decreased $0.5 million to $0 at December 31, 2019 from $0.5 million at December 31, 2018. The impaired loan portfolio did not suffer additional declines in estimated fair value requiring further provisions. We believe that the allowance is adequate to cover potential losses in the loan portfolio given the current economic conditions, and current expected net charge-offs and non-performing asset levels. -73- Noninterest Income. Our primary sources of recurring noninterest income are customer service fees, ATM and debit card fees, loan fees, gains on the sale of loans and available for sale securities and other service fees. Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method. Noninterest income totaled $23.8 million for the year ended December 31, 2020, an increase of $15.5 million from $8.3 million for the year ended December 31, 2019. The increase was primarily due to gains on the sale of securities. Net securities gains were $14.8 million for the year ended December 31, 2020 as compared to net securities losses of $0.2 million for 2019. The gains on securities sales occurred as First Guaranty sold investment securities in order to fund loan growth and convert unrealized gains into realized earnings as previously noted as part of First Guaranty's plan to manage for economic uncertainty. Service charges, commissions and fees totaled $2.6 million for the year ended December 31, 2020 as compared to $2.8 million for 2019. The decline in these fees for 2020 compared to 2019 was the result of waivers initially provided for during the beginning of the COVID-19 pandemic. ATM and debit card fees totaled $3.0 million for the year ended December 31, 2020 and $2.3 million for 2019. The increase in these fees can be attributed to growth from the Union acquisition and to changes in customer behavior associated with the COVID-19 pandemic as customers used their debit cards as an alternative to cash. Net gains on the sale of loans were $1.1 million for the year ended December 31, 2020 and $1.4 million for 2019. Other noninterest income totaled $2.3 million and $2.0 million for the years ended December 31, 2020 and 2019, respectively. Noninterest income totaled $8.3 million for the year ended December 31, 2019, an increase of $3.0 million from $5.3 million for the year ended December 31, 2018. The increase was primarily due to increased gains on the sale of the guaranteed portion of SBA and USDA loans along with lower losses on the sale of securities. Net securities losses were $0.2 million for the year ended December 31, 2019 as compared to net securities losses of $1.8 million for 2018. The losses on securities sales occurred as First Guaranty sold investment securities in order to fund loan growth. Service charges, commissions and fees totaled $2.8 million for the year ended December 31, 2019 as compared to $3.0 million for 2018. ATM and debit card fees totaled $2.3 million for the year ended December 31, 2019 and $2.1 million for 2018. Net gains on the sale of loans were $1.4 million for the year ended December 31, 2019 and $0.3 million for 2018. Other noninterest income totaled $2.0 million and $1.7 million for the years ended December 31, 2019 and 2018, respectively. Noninterest Expense Noninterest expense includes salaries and employee benefits, occupancy and equipment expense and other types of expenses. Noninterest expense totaled $58.0 million for the year ended December 31, 2020 and $47.2 million for the year ended December 31, 2019. Salaries and benefits expense totaled $29.6 million for the year ended December 31, 2020 and $25.0 million for the year ended December 31, 2019. The increase in salaries and benefits expense was primarily due to the increase in personnel expense from the Union acquisition, new hires and expenses associated with COVID-19. Occupancy and equipment expense increased to $7.7 million for the year ended December 31, 2020 from $6.1 million for the year ended December 31, 2019 due to the new offices acquired in the Union acquistion. Other noninterest expense totaled $20.7 million for the year ended December 31, 2020 and $16.1 million for 2019. The following are notable changes occured within noninterest expense. Marketing and public relations expense declined $0.4 million during 2020 primarily due to the impacts of COVID-19. Software expense and amortization increased $1.0 million in 2020 compared to 2019 due to the Union acquisition and the continued development of First Guaranty's loan and deposit platforms. The amortization of core deposits increased $0.3 million due to the Union acquisition. Net costs from other real estate owned and repossessions increased by $1.2 million as First Guaranty established a reserve for other real estate expense and wrote down other real estate properties. First Guaranty's regulatory assessment increased by $1.0 million in 2020 compared to 2019 due to the Union acquisition and the substantial growth in deposits associated with COVID-19. Noninterest expense includes salaries and employee benefits, occupancy and equipment expense and other types of expenses. Noninterest expense totaled $47.2 million for the year ended December 31, 2019 and $43.3 million for the year ended December 31, 2018. Salaries and benefits expense totaled $25.0 million for the year ended December 31, 2019 and $22.9 million for the year ended December 31, 2018. The increase in salaries and benefits expense was primarily due to the increase in personnel expense from the Union acquisition and new hires. Occupancy and equipment expense increased to $6.1 million for the year ended December 31, 2019 from $5.6 million for the year ended December 31, 2018 due to the new offices acquired in the Union acquistion. Other noninterest expense totaled $16.1 million for the year ended December 31, 2019 and $14.8 million for 2018. The following are notable changes within noninterest expense. Legal and professional fees increased approximately $0.3 million in 2019 compared to 2018 principally due to the Union acquisition. Data processing increased approximately $0.3 million principally due to the Union acquisition. -74- The following table presents, for the years indicated, the major categories of other noninterest expense: (in thousands) December 31, 2020 December 31, 2019 December 31, 2018 Other noninterest expense: Legal and professional fees $ 2,919 $ 2,648 $ 2,362 Data processing 2,465 1,972 1,692 ATM fees 1,332 1,217 1,214 Marketing and public relations 1,046 1,456 1,329 Taxes - sales, capital, and franchise 1,251 1,094 1,066 Operating supplies 921 674 562 Software expense and amortization 2,354 1,308 1,119 Travel and lodging 726 908 978 Telephone 256 193 208 Amortization of core deposits 712 390 545 Donations 393 603 380 Net costs from other real estate and repossessions 1,653 422 186 Regulatory assessment 1,716 683 941 Other 2,980 2,536 2,204 Total other expense $ 20,724 $ 16,104 $ 14,786 Income Taxes. The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other non-deductible expenses. The provision for income taxes for the years ended December 31, 2020, 2019 and 2018 was $5.2 million, $3.7 million and $3.5 million, respectively. The provision for income taxes in 2020 increased as compared to 2019 due to the increase in income before income taxes. First Guaranty's statutory tax rate was 21.0% for the years ended December 31, 2020, 2019 and 2018. Impact of Inflation Our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession. Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation. -75- Liquidity and Capital Resources Liquidity Liquidity refers to the ability or flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows us to have sufficient funds available to meet customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. Liquid assets include cash and due from banks, interest-earning demand deposits with banks, federal funds sold and available for sale investment securities. First Guaranty's cash and cash equivalents totaled $299.6 million at December 31, 2020 compared to $67.4 million at December 31, 2019 . Loans maturing within one year or less at December 31, 2020 totaled $265.9 million. At December 31, 2020, time deposits maturing within one year or less totaled $355.1 million. Time deposits maturing after one year through three years totaled $234.1 million at December 31, 2020 compared to $167.9 million at December 31, 2019. Time deposits maturing after three years totaled $136.5 million at December 31, 2020 compared to $243.4 million at December 31, 2019. First Guaranty increased interest-bearing deposits associated with brokered money market funds in order to increase on-balance sheet liquidity. Approximately $50.0 million of additional brokered money market funds were acquired in order to manage uncertainty associated with the COVID-19 crisis. First Guaranty's held to maturity ("HTM") investment securities portfolio at December 31, 2020 was $0 compared to $86.6 million or 20.3% of the investment portfolio at December 31, 2019. First Guaranty's available for sale ("AFS") portfolio was $238.5 million, or 100.0% of the investment portfolio at December 31, 2020 compared to $339.9 million, or 79.7% at December 31, 2019. The majority of the AFS portfolio was comprised of U.S. Treasuries, U.S. Government Agencies, mortgage backed securities, municipal bonds and investment grade corporate bonds. We believe these securities are readily marketable and enhance our liquidity. We maintained a net borrowing capacity at the FHLB totaling $161.2 million and $170.3 million at December 31, 2020 and December 31, 2019, respectively with $53.4 million and $16.6 million in FHLB advances outstanding at December 31, 2020 and December 31, 2019, respectively. At December 31, 2020, we had outstanding letters of credit from the FHLB in the amount of $365.8 million that were primarily used to collateralize public funds deposits. We also have a discount window line with the Federal Reserve Bank that totaled $29.0 million at December 31, 2020. First Guaranty had loans eligible to be pledged under the Federal Reserve's PPP lending facility that totaled $92.3 million at December 31, 2020. First Guaranty did not have any advances under this facility at December 31, 2020. We also maintain federal funds lines of credit at various correspondent banks with borrowing capacity of $100.5 million at December 31, 2020. We have a revolving line of credit for $6.5 million, with no outstanding balance at December 31, 2020 secured by a pledge of the Bank's common stock. Management believes there is sufficient liquidity to satisfy current operating needs. Capital Resources Our capital position is reflected in total shareholders' equity, subject to certain adjustments for regulatory purposes. Further, our capital base allows us to take advantage of business opportunities while maintaining the level of resources we deem appropriate to address business risks inherent in daily operations. Total shareholders' equity increased to $178.6 million at December 31, 2020 from $166.0 million at December 31, 2019. The increase in shareholders' equity was principally the result of an increase of $14.1 million in retained earnings offset by a decrease of $1.5 million in accumulated other comprehensive income. The $14.1 million increase in retained earnings was due to net income of $20.3 million during the year ended December 31, 2020, partially offset by $6.2 million in cash dividends paid on our common stock. The decrease in accumulated other comprehensive income was primarily attributed to the decrease in unrealized gains on available for sale securities during the year ended December 31, 2020. Capital Management We manage our capital to comply with our internal planning targets and regulatory capital standards administered by the Federal Reserve and the FDIC. We review capital levels on a monthly basis. We evaluate a number of capital ratios, including Tier 1 capital to total adjusted assets (the leverage ratio) and Tier 1 capital to risk-weighted assets. At December 31, 2020, First Guaranty Bank was classified as well-capitalized. First Guaranty Bank's capital conservation buffer was 4.22% at December 31, 2020. The following table presents First Guaranty Bank's capital ratios as of the indicated dates. "Well Capitalized Minimums" At December 31, 2020 "Well Capitalized Minimums" At December 31, 2019 Tier 1 Leverage Ratio 5.00 % 8.58 % 5.00 % 10.44 % Tier 1 Risk-based Capital Ratio 8.00 % 10.97 % 8.00 % 11.96 % Total Risk-based Capital Ratio 10.00 % 12.22 % 10.00 % 12.61 % Common Equity Tier One Capital 6.50 % 10.97 % 6.50 % 11.96 % -76- Off-balance sheet commitments We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers and to reduce our 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 our 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 we do for on-balance sheet instruments. Unless otherwise noted, collateral or other security is not required to support financial instruments with credit risk. The notional amounts of the financial instruments with off-balance sheet risk at December 31, 2020, 2019 and 2018 are as follows: Contract Amount (in thousands) December 31, 2020 December 31, 2019 December 31, 2018 Commitments to Extend Credit $ 154,047 $ 117,826 $ 108,348 Unfunded Commitments under lines of credit $ 169,151 $ 148,127 $ 122,212 Commercial and Standby letters of credit $ 11,728 $ 11,258 $ 6,912 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 our credit evaluation of the counterpart. Collateral requirements vary but may include accounts receivable, inventory, property, plant and equipment, residential real estate and commercial properties. Unfunded commitments under lines of credit are contractually obligated by us as long as the borrower is in compliance with the terms of the loan relationship. Unfunded lines of credit are typically operating lines of credit that adjust on a regular basis as a customer requires funding. There may be seasonal variations to the usage of these lines. At December 31, 2020, the largest concentrations of unfunded commitments were lines of credit associated with construction and land development loans and commercial and industrial loans. Commercial and standby 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 during the years ended December 31, 2020, 2019 and 2018. Contractual Obligations The following table summarizes our fixed and determinable contractual obligations and other funding needs by payment date at December 31, 2020. 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. Payments Due by Period: December 31, 2020 (in thousands) Less Than One Year One to Three Years Over Three Years Total Operating leases $ 141 $ 150 $ — $ 291 Software contracts 2,717 4,903 1,165 8,785 Time deposits 355,093 234,058 136,478 725,629 Short-term advances from Federal Home Loan Bank 50,000 — — 50,000 Repurchase agreements 1,406 1,993 2,722 6,121 Long-term advances from Federal Home Loan Bank — — 3,366 3,366 Senior long-term debt 4,531 12,082 25,795 42,408 Junior subordinated debentures — — 15,000 15,000 Total contractual obligations $ 413,888 $ 253,186 $ 184,526 $ 851,600 -77-