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 36 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, Waco, Texas and our new Mideast markets in Kentucky and West Virginia. 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 $2.9 billion at December 31, 2021 and $2.5 billion at December 31, 2020. Total deposits were $2.6 billion at December 31, 2021 and $2.2 billion at December 31, 2020. Total loans were $2.2 billion at December 31, 2021, an increase of $315.2 million, or 17.1%, compared with $1.8 billion at December 31, 2020. Total shareholders' equity was $223.9 million and $178.6 million at December 31, 2021 and December 31, 2020, respectively. Net income was $27.3 million, $20.3 million and $14.2 million for the years ended December 31, 2021, 2020 and 2019, 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 and 2021 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. -41- Financial highlights for 2021 and 2020: • Total assets increased $405.0 million, or 16.4%, to $2.9 billion at December 31, 2021 when compared with December 31, 2020. Total loans at December 31, 2021 were $2.2 billion, an increase of $315.2 million, or 17.1%, compared with December 31, 2020. Total deposits were $2.6 billion at December 31, 2021, an increase of $430.2 million, or 19.9% compared with December 31, 2020. Retained earnings were $56.7 million at December 31, 2021, an increase of $19.5 million compared to $37.1 million at December 31, 2020. Shareholders' equity was $223.9 million and $178.6 million at December 31, 2021 and December 31, 2020, respectively. • Net income for each of the years ended December 31, 2021 and 2020 was $27.3 million and $20.3 million, respectively. • Earnings per common share were $2.42 for the year ended December 31, 2021 and $1.90 for the year ended December 31, 2020. Total weighted average common shares outstanding were 10,716,796 at December 31, 2021 and December 31, 2020. • First Guaranty participated 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 and will forgive such loans. The program has been conducted in two phases which First Guaranty classifies as Round 1 loans (originated in 2020) and Round 2 loans (originated in 2021). As of December 31, 2021, First Guaranty had remaining Round 1 PPP loans of $12.7 million with deferred fees of $0.3 million and Round 2 PPP loans of $22.6 million with deferred fees of $1.1 million remaining. $2.0 million in PPP fees were recognized during 2021 compared to $2.2 million in PPP fees recognized in 2020. • The allowance for loan and lease losses was 1.11% of total loans at December 31, 2021 compared to 1.33% at December 31, 2020. First Guaranty attributes the decrease in the allowance as a percentage of loans to the improvement in factors related to the COVID-19 pandemic offset by growth in the loan portfolio identified risks. First Guaranty had acquisition related loan discounts that totaled approximately $1.4 million at December 31, 2021. First Guaranty had $35.4 million at December 31, 2021 of SBA guaranteed PPP loans that have no related allowance due to the 100% government guarantee in accordance with regulatory guidance. • First Guaranty had approximately $12.4 million of loans on deferral as of December 31, 2021 due to Hurricane Ida that impacted Southeast Louisiana on August 29, 2021. • The provision for loan losses totaled $2.1 million for 2021 compared to $14.9 million in 2020. The provision was primarily elevated in 2020 due to COVID-19 related economic conditions and due to growth in the loan portfolio. • Net interest income for 2021 was $89.6 million compared to $74.7 million for 2020. • Noninterest income for 2021 was $10.8 million compared to $23.8 million for 2020. Excluding the impact of securities gains, noninterest income for 2021 improved to $10.0 million from $9.0 million for 2020. The increase was primarily due to higher ATM and debit card fees. • The net interest margin was 3.44% for 2021 and 3.35% for 2020. First Guaranty attributed the increase in the net interest margin to an improved mix of loans compared to securities and cash along with continued reduction in First Guaranty's cost of funds. Loans as a percentage of average interest earning assets increased to 77.3% at December 31, 2021 compared to 74.7% at December 31, 2020. • Investment securities totaled $364.2 million at December 31, 2021, an increase of $125.6 million when compared to $238.5 million at December 31, 2020. Gains on the sale of securities were $0.7 million for 2021 as compared $14.8 million for 2020. At December 31, 2021, available for sale securities, at fair value, totaled $210.6 million, a decrease of $27.9 million when compared to $238.5 million at December 31, 2020. At December 31, 2021, held to maturity securities, at amortized cost, totaled $153.5 million as compared to $0 at December 31, 2020. • Total loans net of unearned income were $2.2 billion at December 31, 2021 compared to $1.8 billion at December 31, 2020. Total loans net of unearned income are reduced by the allowance for loan and lease losses which totaled $24.0 million at December 31, 2021 and $24.5 million at December 31, 2020. • Total impaired loans decreased $0.9 million to $15.0 million at December 31, 2021 compared to $15.9 million at December 31, 2020. • Nonaccrual loans increased $1.1 million to $16.7 million at December 31, 2021 compared to $15.6 million at December 31, 2020. • First Guaranty is a smaller reporting company and has delayed the adoption of ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments." First Guaranty uses the incurred loss model for the calculation of its allowance. • Return on average assets was 1.01% and 0.87% for the years ended December 31, 2021 and 2020, respectively. Return on average common equity was 14.06% and 11.36% for 2021 and 2020, 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 $17.81 as of December 31, 2021 compared to $16.66 as of December 31, 2020. Tangible book value per common share was $16.13 as of December 31, 2021 compared to $14.92 as of December 31, 2020. The increase in book value was due primarily to an increase in retained earnings partially offset by changes in accumulated other comprehensive income ("AOCI"). AOCI is comprised of unrealized gains and losses on available for sale securities. -42- • First Guaranty's Board of Directors declared cash dividends of $0.64 per common share in 2021, which was the equivalent of $0.60 per common share after adjusting for the 10% common stock dividend paid in December 2021. First Guaranty also declared cash dividends of $0.64 in 2020, which was the equivalent of $0.58 per common share after adjusting for the 10% common stock dividend paid in December 2021. First Guaranty has paid 114 consecutive quarterly dividends as of December 31, 2021. • On April 27, 2021, First Guaranty issued 34,500 shares of 6.75% Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock, par value $1,000 per share, with a liquidation preference of $1,000 per share through an underwritten public offering of 1,380,000 depositary shares, each representing a 1/40th ownership interest in a share of the Series A Preferred Stock. Total gross proceeds from the preferred stock offering were $34.5 million. The shares are listed on NASDAQ under the symbol FGBIP. The proceeds were used to redeem $13.3 million in senior debt and increase the bank subsidiary capital by $20.0 million effective April 30, 2021. First Guaranty paid preferred cash dividends of $1.4 million during 2021. Recent Developments As disclosed in previous filings by First Guaranty Bancshares, Inc., for approximately 15 years First Guaranty Bank, a subsidiary of First Guaranty Bancshares, Inc. has utilized an “Employee Stock Grant Program” to incentivize and reward bank employees for performance. Each quarter, the Board of Directors of First Guaranty Bank allocates a $75,000 payment to an attorney to be used to purchase, on the open market, shares of stock with First Guaranty Bancshares, Inc. The attorney receives nominations which come from managers throughout the Bank for awards to employees which range from clerical through top Management. An average of just over 100 employees receive awards, in full ownership with no vesting nor other requirements, each quarter with an average award of approximately 37 shares per employee awarded. The total cost of this program per year is approximately $300,000 with total shares awarded of approximately 15,000 shares. In addition, the same process is utilized by First Guaranty Bancshares, Inc. at the conclusion of each year for the grant of stock bonuses to members of Management of First Guaranty Bank, selected by the Board of Directors of First Guaranty Bancshares, Inc. Those awards have averaged approximately $275,000 or 12,500 shares per year. The SEC has requested information concerning this practice. No process has been instituted; only, a request for information. -43- Critical Accounting Estimates Our consolidated financial statements are prepared to conform to generally accepted accounting principles in the United States and with predominant accounting practices within the banking industry. Certain critical estimates require judgment and estimates which are used in the preparation of the financial statements and accompanying notes. We have identified the following critical accounting estimate that is critical to an understanding of our financial condition and results of operations. Allowance for Loan and Lease Losses. The allowance for loan and lease losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan and lease 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. 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 and lease 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 and lease 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 and lease 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. Loans acquired in a business combination are recorded at their estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. Acquired loans are segregated between those with deteriorated credit quality at acquisition and those deemed as performing. To make this determination, Management considers such factors as past due status, nonaccrual status, credit risk ratings, interest rates and collateral position. The fair value of acquired loans deemed performing is determined by discounting cash flows, both principal and interest, for each pool at prevailing market interest rates as well as consideration of inherent potential losses. The difference between the fair value and principal balances due at acquisition date, the fair value discount, is accreted into income over the estimated life of each loan pool. The fair value is estimated using an analysis of expected cash flows to be received from the loan and may include the use of third party appraisals to assist in the calculation. Performing acquired loans are subsequently evaluated for any required allowance at each reporting date. 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. First Guaranty typically receives appraisals from independent third parties to facilitate this calculation. 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. For example, in 2020 and 2021 economic conditions related to the COVID-19 pandemic resulted in a higher allocation within this component of the allowance to hotel loans. First Guaranty's commercial lease originations increased in 2021 which resulted in an increased allocation within this component of the allowance primarily related to the trend in increased volume. An unallocated component is maintained to cover uncertainties that could affect the estimate of probable losses. The allowance for loan and lease 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. -44- Financial Condition Assets Our total assets were $2.9 billion at December 31, 2021, an increase of $405.0 million, or 16.4%, from total assets of $2.5 billion at December 31, 2020. Assets increased primarily due to increases in net loans of $315.7 million and investment securities of $125.6 million, partially offset by a decrease in cash and cash equivalents of $37.7 million at December 31, 2021 compared to December 31, 2020. Loans Net loans increased $315.7 million, or 17.4%, to $2.1 billion at December 31, 2021 from $1.8 billion at December 31, 2020. Commercial lease loan balances increased $141.9 million primarily due to new lease originations. First Guaranty has continued to expand its commercial lease portfolio which generally have higher yields than commercial real estate loans but shorter average lives. Non-farm non-residential loan balances increased $62.3 million primarily due to new originations. Commercial and industrial loans increased $45.4 million primarily due to new originations. SBA PPP loans totaled $35.4 million at December 31, 2021 compared to $92.3 million at December 31, 2020. These totals are included in commercial and industrial loans. Round 1 SBA PPP loans decreased from $92.3 million at December 31, 2020 to $12.7 million at December 31, 2021 due to SBA loan forgiveness. Partially offsetting these payoffs were Round 2 SBA PPP loan originations with total balances net of forgiveness payments of $22.6 million at December 31, 2021. Construction and land development loans increased $23.5 million principally due to advances on existing construction lines and new originations. Multifamily loans increased $19.9 million primarily due to the conversion of existing construction loans to permanent financing. One-to four-family loans increased $17.1 million primarily due to new originations. Farmland loans increased $4.9 million due to increases on agricultural loan commitments. Consumer and other loans increased $3.5 million primarily due to new originations. Agricultural loans decreased $1.6 million primarily due to seasonal activity. First Guaranty had approximately 5.2% of funded and 2.4% 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 $182.8 million at December 31, 2021. As part of the management of risks in our loan portfolio, First Guaranty had previously established an internal guidance limit of approximately $187.0 million for its hotel and hospitality portfolio. First Guaranty had $257.8 million in loans related to our Texas markets at December 31, 2021 which was an increase of $12.9 million or 5.3% from $244.9 million at December 31, 2020. 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, 2021 were $47.4 million, of which $17.6 million were shared national credits. Syndicated loans decreased $27.8 million from $75.2 million at December 31, 2020. As of December 31, 2021, 66.8% of our loan portfolio was secured by real estate. The largest portion of our loan portfolio, at 40.9% as of December 31, 2021, was non-farm non-residential loans secured by real estate. Approximately 31.9% of the loan portfolio was based on a floating rate tied to the prime rate or LIBOR as of December 31, 2021. 77.3% of the loan portfolio is scheduled to mature within five years from December 31, 2021. First Guaranty had $53.6 million in loans that were priced off of the LIBOR index rate at December 31, 2021. As it is anticipated that LIBOR will be discontinued after 2021, First Guaranty is reviewing its loan documents to determine alternative reference rates and does not anticipate there will be a significant financial statement impact with the transition. -45- 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. At December 31, 2021 2020 2019 2018 2017 (in thousands except for %) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Real Estate: Construction & land development $ 174,334 8.1 % $ 150,841 8.2 % $ 172,247 11.3 % $ 124,644 10.1 % $ 112,603 9.8 % Farmland 31,810 1.5 % 26,880 1.4 % 22,741 1.5 % 18,401 1.5 % 25,691 2.2 % 1- 4 Family 288,347 13.3 % 271,236 14.7 % 289,635 18.9 % 172,760 14.1 % 158,733 13.8 % Multifamily 65,848 3.0 % 45,932 2.5 % 23,973 1.6 % 42,918 3.5 % 16,840 1.4 % Non-farm non-residential 886,407 40.9 % 824,137 44.6 % 616,536 40.3 % 586,263 47.7 % 530,293 46.1 % Total Real Estate 1,446,746 66.8 % 1,319,026 71.4 % 1,125,132 73.6 % 944,986 76.9 % 844,160 73.3 % Non-Real Estate: Agricultural 26,747 1.2 % 28,335 1.5 % 26,710 1.8 % 23,108 1.9 % 21,514 1.9 % Commercial and industrial 398,391 18.4 % 353,028 19.1 % 268,256 17.5 % 200,877 16.4 % 230,638 20.0 % Commercial leases 246,022 11.4 % 104,141 5.6 % 70,125 4.6 % 25,906 2.1 % 26,434 2.3 % Consumer and other 48,142 2.2 % 44,642 2.4 % 38,743 2.5 % 33,537 2.7 % 28,751 2.5 % Total Non-Real Estate 719,302 33.2 % 530,146 28.6 % 403,834 26.4 % 283,428 23.1 % 307,337 26.7 % Total Loans Before Unearned Income 2,166,048 100.0 % 1,849,172 100.0 % 1,528,966 100.0 % 1,228,414 100.0 % 1,151,497 100.0 % Less: Unearned income (6,689) (5,037) (3,476) (3,146) (2,483) Total Loans Net of Unearned Income $ 2,159,359 $ 1,844,135 $ 1,525,490 $ 1,225,268 $ 1,149,014 Loan Portfolio Maturities . The following tables summarize the scheduled repayments of our loan portfolio at December 31, 2021 and 2020. 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, 2021 (in thousands) One Year or Less More Than One Year Through Five Years More Than Five Years Through Fifteen Years After Fifteen Years Total Real Estate: Construction & land development $ 36,038 $ 134,546 $ 3,370 $ 380 $ 174,334 Farmland 5,985 13,461 1,977 10,387 31,810 1- 4 family 30,670 64,472 30,069 163,136 288,347 Multifamily 13,159 44,879 6,618 1,192 65,848 Non-farm non-residential 107,855 597,919 106,218 74,415 886,407 Total Real Estate 193,707 855,277 148,252 249,510 1,446,746 Non-Real Estate: Agricultural 10,467 6,426 4,196 5,658 26,747 Commercial and industrial 120,888 205,725 68,241 3,537 398,391 Commercial leases 30,690 215,332 — — 246,022 Consumer and other 8,552 31,608 3,410 4,572 48,142 Total Non-Real Estate 170,597 459,091 75,847 13,767 719,302 Total Loans Before Unearned Income $ 364,304 $ 1,314,368 $ 224,099 $ 263,277 $ 2,166,048 Less: Unearned income (6,689) Total Loans Net of Unearned Income $ 2,159,359 -46- December 31, 2020 (in thousands) One Year or Less More Than One Year Through Five Years More Than Five Years Through Fifteen Years After Fifteen Years Total Real Estate: Construction & land development $ 23,276 $ 111,615 $ 13,349 $ 2,601 $ 150,841 Farmland 6,078 12,147 2,156 6,499 26,880 1- 4 family 37,604 65,011 29,236 139,385 271,236 Multifamily 5,030 29,127 10,276 1,499 45,932 Non-farm non-residential 105,623 494,690 144,689 79,135 824,137 Total Real Estate 177,611 712,590 199,706 229,119 1,319,026 Non-Real Estate: Agricultural 12,356 5,795 5,664 4,520 28,335 Commercial and industrial 40,484 293,984 14,789 3,771 353,028 Commercial leases 29,503 74,638 — — 104,141 Consumer and other 8,363 28,677 2,406 5,196 44,642 Total Non-Real Estate 90,706 403,094 22,859 13,487 530,146 Total Loans Before Unearned Income $ 268,317 $ 1,115,684 $ 222,565 $ 242,606 $ 1,849,172 Less: unearned income (5,037) Total Loans Net of Unearned Income $ 1,844,135 -47- The following table sets forth the scheduled repayments of fixed and adjustable-rate loans at December 31, 2021 that are contractually due after December 31, 2022. Due After December 31, 2022 (in thousands) Fixed Floating Total One to five years 926,640 385,509 1,312,149 Over Five to 15 years 114,976 106,579 221,555 Over 15 years 179,522 78,987 258,509 Subtotal $ 1,221,138 $ 571,075 $ 1,792,213 Nonaccrual loans 16,715 Total $ 1,808,928 As of December 31, 2021, $349.1 million of floating rate loans were at their interest rate floor. At December 31, 2020, $305.0 million of floating rate loans were at the floor rate. Nonaccrual loans have been excluded from these totals. -48- 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. The following table shows the principal amounts and categories of our non-performing assets at December 31, 2021, 2020, 2019, 2018 and 2017. -49- December 31, (in thousands) 2021 2020 2019 2018 2017 Nonaccrual loans: Real Estate: Construction and land development $ 530 $ 621 $ 381 $ 311 $ 371 Farmland 787 857 1,274 1,293 65 1- 4 family 2,861 2,227 2,759 2,246 1,953 Multifamily — — — — — Non-farm non-residential 8,733 7,449 4,646 864 3,758 Total Real Estate 12,911 11,154 9,060 4,714 6,147 Non-Real Estate: Agricultural 2,302 3,472 4,800 3,651 1,496 Commercial and industrial 699 701 327 317 4,826 Commercial leases — — — — — Consumer and other 803 249 216 61 81 Total Non-Real Estate 3,804 4,422 5,343 4,029 6,403 Total nonaccrual loans 16,715 15,576 14,403 8,743 12,550 Loans 90 days and greater delinquent & still accruing: Real Estate: Construction and land development 246 1,000 48 — — Farmland — — — — — 1- 4 family 514 4,980 923 26 — Multifamily 162 366 — — — Non-farm non-residential 281 4,699 1,603 — — Total Real Estate 1,203 11,045 2,574 26 — Non-Real Estate: Agricultural — 67 — — 41 Commercial and industrial 23 1,856 15 53 798 Commercial leases — — — — — Consumer and other 19 123 50 66 — Total Non-Real Estate 42 2,046 65 119 839 Total loans 90 days and greater delinquent & still accruing 1,245 13,091 2,639 145 839 Total non-performing loans $ 17,960 $ 28,667 $ 17,042 $ 8,888 $ 13,389 Other real estate owned and foreclosed assets: Real Estate: Construction and land development — 311 669 241 304 Farmland — — — — — 1- 4 family 817 131 559 120 23 Multifamily — — — — — Non-farm non-residential 1,255 1,798 3,651 777 954 Total Real Estate 2,072 2,240 4,879 1,138 1,281 Non-Real Estate: Agricultural — — — — — Commercial and industrial — — — — — Commercial leases — — — — — Consumer and other — — — — — Total Non-Real estate — — — — — Total other real estate owned and foreclosed assets 2,072 2,240 4,879 1,138 1,281 Total non-performing assets $ 20,032 $ 30,907 $ 21,921 $ 10,026 $ 14,670 Non-performing assets to total loans 0.93 % 1.68 % 1.44 % 0.82 % 1.28 % Non-performing assets to total assets 0.70 % 1.25 % 1.04 % 0.55 % 0.84 % Non-performing loans to total loans 0.83 % 1.55 % 1.12 % 0.73 % 1.17 % Nonaccrual loans to total loans 0.77 % 0.84 % 0.94 % 0.71 % 1.09 % Allowance for loan and lease losses to nonaccrual loans 143.76 % 157.41 % 75.88 % 123.25 % 73.51 % -50- For the years ended December 31, 2021 and 2020, gross interest income which would have been recorded had the non-performing loans been current in accordance with their original terms amounted to $0.8 million and $0.6 million, respectively. We recognized $0.1 million and $22,000 of interest income on such loans during the years ended December 31, 2021 and 2020, respectively. For the years ended December 31, 2021 and 2020, gross interest income which would have been recorded had the troubled debt restructured loans been current in accordance with their original terms amounted to $0.2 million and $0.1 million, respectively. We recognized $0.2 million and $11,000 of interest income on such loans during the years ended December 31, 2021 and 2020, respectively. Non-performing assets were $20.0 million, or 0.70%, of total assets at December 31, 2021, compared to $30.9 million, or 1.25%, of total assets at December 31, 2020, which represented a decrease in non-performing assets of $10.9 million. The decrease in non-performing assets occurred primarily due to a reduction in 90 day past due and still accruing loans and other real estate owned offset by an increase in nonaccrual loans. Nonaccrual loans increased from $15.6 million at December 31, 2020 to $16.7 million at December 31, 2021. The increase in nonaccrual loans was concentrated primarily in non-farm non-residential loans. Non-performing assets included $2.6 million in loans with a government guarantee, or 13.2% of non-performing assets. These are structured as net loss guarantees in which up to 90% of loss exposure is covered. At December 31, 2021 loans 90 days and greater delinquent and still accruing totaled $1.2 million, a decrease of $11.8 million or 90 percent from $13.1 million at December 31, 2020. The decrease 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, commercial and industrial loans and construction and land development loans. One-to-four family loans in the 90 day category included loans acquired from the Union acquisition that contractually matured but had not been renewed due to operations issues following the acquisition. First Guaranty initiated a sustained effort that resulted in satisfactorily renewing the majority of these acquired loans and returning them to performing status. Other real estate owned at December 31, 2021 totaled $2.1 million, a decrease of $0.2 million from $2.2 million at December 31, 2020. The largest piece of property in other real estate owned is a retail shopping center that totals $1.7 million. First Guaranty has a reserve for other real estate owned losses. This reserve totaled $0.5 million at December 31, 2021 compared to $0.4 million at December 31, 2020. Total write downs and or reserves related to other real estate owned were $0.6 million in 2021 compared to $1.4 million in 2020. These expenses were included in other non-interest expense. At December 31, 2021, 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 $3.4 million that is classified as a troubled debt restructured loan or TDR; (2) a non-farm non-residential loan secured by a childcare facility that totaled $1.8 million; (3) a $1.7 million non-farm non-residential property included in other real estate owned; (4) a non-farm non-residential loan secured by a mobile home facility that totaled $1.3 million; (5) a non-farm non-residential loan secured by a waste treatment facility that totaled $0.9 million; and (6) an agricultural/farmland loan relationship that totaled $0.9 million. The agricultural loan is partially guaranteed by the USDA Farm Service Agency. -51- 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, 2021, 2020 and 2019: At December 31, (in thousands) 2021 2020 2019 TDRs: In Compliance with Modified Terms $ — $ — $ — Past Due 30 through 89 days and still accruing — — — Past Due 90 days and greater and still accruing — — — Nonaccrual 3,382 3,591 — Restructured Loans that subsequently defaulted — — — Total TDR $ 3,382 $ 3,591 $ — At December 31, 2021, First Guaranty had one outstanding TDR which was a $3.4 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. -52- 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 and lease 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 and lease 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, 2021, 2020 and 2019. Classified assets totaled $53.4 million at December 31, 2021, and included $18.0 million of non-performing loans. At December 31, (in thousands) 2021 2020 2019 Classification of Loans: Substandard $ 53,353 $ 50,062 $ 53,072 Doubtful — — — Total Classified Assets $ 53,353 $ 50,062 $ 53,072 Special Mention $ 138,718 $ 99,201 $ 24,083 The increase in classified assets at December 31, 2021 as compared to December 31, 2020 was due to a $3.3 million increase in substandard loans. Substandard loans at December 31, 2021 consisted of $18.8 million in non-farm non-residential, $9.8 million in one- to four-family residential, $8.8 million in commercial and industrial, $7.0 million in multifamily, $4.1 million in farmland, $2.7 million in agricultural, $1.1 million in construction and land development, and the remaining $1.0 million comprised of consumer and other loans. Special mention loans increased by $39.5 million in 2021 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 ongoing economic conditions associated with COVID-19 or relationship specific issues. The increase was concentrated with hotel loans. First Guaranty anticipates upgrading several loan relationships from special mention to pass status in the upcoming quarters. -53- Allowance for Loan and Lease Losses The allowance for loan and lease 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, loan concentrations 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 $24.0 million at December 31, 2021 compared to $24.5 million at December 31, 2020. -54- The balance in the allowance for loan and lease 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 and lease losses for the years indicated. At or For the Years Ended December 31, (dollars in thousands) 2021 2020 2019 2018 2017 Balance at beginning of year $ 24,518 $ 10,929 $ 10,776 $ 9,225 $ 11,114 Charge-offs: Real Estate: Construction and land development (92) (265) — — — Farmland — — — — — 1- 4 family (266) (154) (552) (99) (33) Multifamily (12) — — — — Non-farm non-residential (1,020) (550) (2,603) (404) (1,291) Total Real Estate (1,390) (969) (3,155) (503) (1,324) Non-Real Estate: Agricultural (149) (110) (40) (300) (162) Commercial and industrial loans (89) (265) (879) (179) (3,629) Commercial leases — — — — (802) Consumer and other (1,494) (1,083) (1,190) (907) (445) Total Non-Real Estate (1,732) (1,458) (2,109) (1,386) (5,038) Total charge-offs (3,122) (2,427) (5,264) (1,889) (6,362) Recoveries: Real Estate: Construction and land development — — — 3 43 Farmland 90 — — — — 1- 4 family 44 39 39 90 92 Multifamily — — — 20 40 Non-farm non-residential 7 178 5 89 85 Total Real Estate 141 217 44 202 260 Non-Real Estate: Agricultural 17 70 — 26 138 Commercial and industrial loans 96 128 267 1,642 30 Commercial leases 4 388 — — — Consumer and other 320 336 246 216 223 Total Non-Real Estate 437 922 513 1,884 391 Total recoveries 578 1,139 557 2,086 651 Net (charge-offs) recoveries (2,544) (1,288) (4,707) 197 (5,711) Provision for loan losses 2,055 14,877 4,860 1,354 3,822 Balance at end of year $ 24,029 $ 24,518 $ 10,929 $ 10,776 $ 9,225 Ratios: Net loan charge-offs to average loans 0.13 % 0.08 % 0.36 % (0.02) % 0.54 % Net loan charge-offs to loans at end of year 0.12 % 0.07 % 0.31 % (0.02) % 0.50 % Allowance for loan and lease losses to loans at end of year 1.11 % 1.33 % 0.72 % 0.88 % 0.80 % Net loan charge-offs to allowance for loan and lease losses 10.59 % 5.25 % 43.07 % (1.83) % 61.91 % Net loan charge-offs to provision charged to expense 123.80 % 8.66 % 96.85 % (14.55) % 149.42 % -55- A provision for loan losses of $2.1 million was made during the year ended December 31, 2021 as compared to $14.9 million for 2020. The provisions made in 2021 were taken to provide for current loan losses and to maintain the allowance proportionate to risks inherent in the loan portfolio. First Guaranty’s incurred loan loss calculation method incorporates risk factors in the loan portfolio such as historical loss rates along with qualitative and quantitative factors. The composition of the loan portfolio affects the final allowance calculation. First Guaranty attributes the primary decrease in the provision was due to economic improvement in 2021 as compared to the COVID-19 uncertainty and economic conditions present in 2020. First Guaranty's qualitative and quantitative factors accounted for the changes in economic conditions driven by the COVID-19 pandemic in both 2020 and 2021. The key factors included the following: industry specific conditions, loan growth, changes in specific concentrations, 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 and 2021. The loan portfolio factors in 2021 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 changes in historical loss rates, adjustments of certain qualitative factors to take into account the current estimated 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 adjusted allocations within its qualitative and quantitative factors to account for changes in potential COVID-19 related losses. Loan portfolio risks associated with COVID-19 declined in 2021 compared to 2020. • Construction and land development loans increased during 2021 due to advances on existing construction lines of credit and new loan originations. Several loans previously in this category moved to permanent financing and are now included in the multifamily loan category as of December 31, 2021. The provision decrease related to this portfolio was due to changes in the qualitative analysis of the portfolio related to COVID-19 and improving economic conditions. • One-to-four family residential loans increased during 2021. The provision decrease related to this portfolio was due to changes in the qualitative analysis of the portfolio related to COVID-19 and improving economic conditions. • Multifamily loans increased during 2021. The provision related to this portfolio remained in line with the related provision from 2020 as improved economic conditions reduced portfolio risk even as the portfolio increased by $19.9 million during 2021. • Non-farm non-residential loans increased during 2021. The provision decrease related to this portfolio was due to changes in the qualitative analysis of the portfolio related to COVID-19 and historical loss rates. First Guaranty continues to maintain a significant allowance for hotel loans based on qualitative factors primarily related to COVID-19 and related credit ratings for hotel loans. The associated allowance for hotels did decline in 2021 compared to 2020 due to improved economic conditions. • Commercial and industrial loans increased during 2021. The provision decrease related to this portfolio was due to the changes in historical loss rates and changes in the qualitative analysis of the portfolio related to COVID-19 and improving economic conditions. • Commercial leases increased during 2021. The increase in the related loan loss allowance balance was due primarily to the increased balances associated with commercial leases. Commercial leases grew during 2021 from $104.1 million at December 31, 2020 to $246.0 million at December 31, 2021. • First Guaranty continues to monitor the acquired loans from the Union acquisition on November 7, 2019. Discounts on the acquired Union loans were approximately $1.4 million at December 31, 2021. First Guaranty charged off $3.1 million in loan balances during the year ended December 31, 2021 as compared to $2.4 million for 2020. Recoveries totaled $0.6 million for the year ended December 31, 2021 and $1.1 million during 2020. The charged-off loan balances were concentrated in two loan relationships which totaled $1.0 million or 31.0% of the total charged off amount during the year ended December 31, 2021. The details of the $1.0 million in charged off loans were as follows: • First Guaranty charged off $0.6 million on a non-farm non-residential loan secured by a waste treatment facility during the fourth quarter of 2021. This loan had a remaining principal balance of $0.9 million at December 31, 2021. • First Guaranty charged off $0.4 million on a non-farm non-residential loan secured by a mobile home facility during the fourth quarter of 2021. This loan had a remaining principal balance of $1.3 million at December 31, 2021. • Smaller loans and overdrawn deposit accounts comprised the remaining $2.1 million of charge-offs for 2021. -56- Allocation of Allowance for Loan and Lease Losses. The following tables set forth the allowance for loan and lease losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan and lease 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, 2021 2020 (dollars in thousands) Allowance for Loan and Lease Losses Percent of Allowance to Total Allowance for Loan and Lease Losses Percent of Loans in Each Category to Total Loans Allowance for Loan and Lease Losses Percent of Allowance to Total Allowance for Loan and Lease Losses Percent of Loans in Each Category to Total Loans Real Estate: Construction and land development $ 769 3.2 % 8.1 % $ 1,029 4.2 % 8.2 % Farmland 478 2.0 % 1.5 % 462 1.9 % 1.4 % 1- 4 family 1,921 8.0 % 13.3 % 2,510 10.2 % 14.7 % Multifamily 940 3.9 % 3.0 % 978 4.0 % 2.5 % Non-farm non-residential 12,730 53.0 % 40.9 % 15,064 61.5 % 44.6 % Non-Real Estate: Agricultural 183 0.8 % 1.2 % 181 0.7 % 1.5 % Commercial and industrial 2,363 9.8 % 18.4 % 2,802 11.4 % 19.1 % Commercial leases 2,486 10.3 % 11.4 % 583 2.4 % 5.6 % Consumer and other 1,371 5.7 % 2.2 % 907 3.7 % 2.4 % Unallocated 788 3.3 % — 2 — % — Total Allowance $ 24,029 100.0 % 100.0 % $ 24,518 100.0 % 100.0 % At December 31, 2019 2018 (dollars in thousands) Allowance for Loan and Lease Losses Percent of Allowance to Total Allowance for Loan and Lease Losses Percent of Loans in Each Category to Total Loans Allowance for Loan and Lease Losses Percent of Allowance to Total Allowance for Loan and Lease Losses Percent of Loans in Each Category to Total Loans Real Estate: Construction and land development $ 423 3.9 % 11.3 % $ 581 5.4 % 10.1 % Farmland 50 0.4 % 1.5 % 41 0.4 % 1.5 % 1- 4 family 1,027 9.4 % 18.9 % 911 8.5 % 14.1 % Multifamily 1,038 9.5 % 1.6 % 1,318 12.2 % 3.5 % Non-farm non-residential 5,277 48.3 % 40.3 % 4,771 44.3 % 47.7 % Non-Real Estate: Agricultural 95 0.9 % 1.8 % 339 3.1 % 1.9 % Commercial and industrial 1,909 17.5 % 17.5 % 1,909 17.7 % 16.4 % Commercial leases 568 5.1 % 4.6 % 262 2.4 % 2.1 % Consumer and other 542 5.0 % 2.5 % 629 5.9 % 2.7 % Unallocated — — % — 15 0.1 % — Total Allowance $ 10,929 100.0 % 100.0 % $ 10,776 100.0 % 100.0 % -57- At December 31, 2017 (dollars in thousands) Allowance for Loan and Lease Losses Percent of Allowance to Total Allowance for Loan and Lease Losses Percent of Loans in Each Category to Total Loans Real Estate: Construction and land development $ 628 6.8 % 9.8 % Farmland 5 0.1 % 2.2 % 1- 4 family 1,078 11.7 % 13.8 % Multifamily 994 10.8 % 1.4 % Non-farm non-residential 2,811 30.4 % 46.1 % Non-Real Estate: Agricultural 187 2.0 % 1.9 % Commercial and industrial 2,377 25.8 % 20.0 % Commercial leases 805 8.7 % 2.3 % Consumer and other 320 3.5 % 2.5 % Unallocated 20 0.2 % — Total Allowance $ 9,225 100.0 % 100.0 % The following table presents net charge-offs during the period to average loans outstanding: December 31, 2021 December 31, 2020 (in thousands except for %) Net Charge-offs Average Loans Outstanding 1 Net Charge-offs During Period to Average Loans Outstanding Net Charge-offs Average Loans Outstanding 1 Net Charge-offs During Period to Average Loans Outstanding Real Estate: Construction & land development $ (92) $ 168,269 (0.1) % $ (265) $ 139,516 (0.2) % Farmland 90 28,596 0.3 % — 25,536 — % 1- 4 Family (222) 281,835 (0.1) % (115) 278,561 — % Multifamily (12) 95,936 — % — 35,293 — % Non-farm non-residential (1,013) 845,428 (0.1) % (372) 727,965 (0.1) % Non-Real Estate: Agricultural (132) 30,888 (0.4) % (40) 30,791 (0.1) % Commercial and industrial 7 357,746 — % (137) 349,138 — % Commercial leases 4 220,747 — % 388 80,268 0.5 % Consumer and other (1,174) 43,957 (2.7) % (747) 42,288 (1.8) % 1 Average loans outstanding was calculated using the trailing four quarters total for loans. -58- Investment Securities Investment securities at December 31, 2021 totaled $364.2 million, an increase of $125.6 million, or 52.7%, compared to $238.5 million at December 31, 2020. 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, 2021, the U.S. Government and Government agency securities and municipal bonds qualified as securities available to collateralize public funds. Securities pledged as collateral totaled $234.9 million at December 31, 2021 and $184.0 million at December 31, 2020. 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, 2021 2020 2019 (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 116,733 116,110 169,986 169,658 16,380 16,393 Corporate debt securities 79,344 78,225 36,153 36,489 94,561 95,369 Municipal bonds 15,543 15,699 27,381 28,162 30,297 32,153 Collateralized mortgage obligations — — — — 16,400 16,397 Mortgage-backed securities 576 586 1,208 1,239 179,546 179,625 Total available for sale securities $ 212,196 $ 210,620 $ 237,728 $ 238,548 $ 337,184 $ 339,937 Held to maturity: U.S. Government Agencies 153,536 150,585 — — 18,175 18,143 Municipal bonds — — — — 5,107 5,289 Mortgage-backed securities — — — — 63,297 63,385 Total held to maturity securities $ 153,536 $ 150,585 $ — $ — $ 86,579 $ 86,817 Our available for sale securities portfolio totaled $210.6 million at December 31, 2021, a decrease of $27.9 million, or 11.7%, compared to $238.5 million at December 31, 2020. The decrease was primarily due to the sale of securities, called bonds, and the transfer of AFS securities to the HTM portfolio in the first quarter of 2021. Our held to maturity securities portfolio had an amortized cost of $153.5 million at December 31, 2021, compared to $0 at December 31, 2020. The held to maturity portfolio was terminated in the first quarter of 2002 due to economic conditions associated with COVID-19. -59- The following tables set forth the stated maturities and weighted average yields of our investment securities at December 31, 2021 and 2020. At December 31, 2021 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 — — % — — % 116,110 2.3 % Corporate and other debt securities — — % 348 5.7 % 77,877 2.9 % — — % Municipal bonds 643 3.3 % 3,411 3.2 % 3,513 3.9 % 8,132 3.6 % Mortgage-backed securities — — % 2 0.8 % 6 1.4 % 578 1.4 % Total available for sale securities $ 643 3.3 % $ 3,761 3.5 % $ 81,396 3.0 % $ 124,820 2.4 % Held to maturity: U.S. Government Agencies $ — — % $ — — % $ 19,445 1.6 % $ 134,091 2.3 % Total held to maturity securities $ — — % $ — — % $ 19,445 1.6 % $ 134,091 2.3 % 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, 2021, $0.6 million, or 0.2%, 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 $258.3 million, or 70.9%, of the total portfolio at December 31, 2021. 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 mortgage-backed securities and corporate securities in October 2020. First Guaranty generated $12.2 million in pre-tax gains in the fourth quarter of 2020. First Guaranty has proceeded to reinvest the proceeds in securities and loans and subsequently reduced FHLB borrowings by $50.0 million in February 2021. At December 31, 2021, 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, 2021 (in thousands) Amortized Cost Fair Value Federal Home Loan Bank $ 33,333 $ 33,071 Freddie Mac 95,230 93,401 Federal Farm Credit Bank 142,279 140,807 Total $ 270,842 $ 267,279 -60- 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, 2020 to December 31, 2021, total deposits increased $430.2 million, or 19.9%, to $2.6 billion. Noninterest-bearing demand deposits increased $121.2 million, or 29.4% to $532.6 million at December 31, 2021. The increase in noninterest-bearing demand deposits was due to growth of compensating balances associated with new loan originations, economic conditions associated with the CARES Act, proceeds from the SBA PPP program, and additional stimulus payments made due to pandemic relief to First Guaranty's consumer and business customers. Interest-bearing demand deposits increased $415.2 million, or 48.3%, to $1,275.5 million at December 31, 2021. The increase in interest-bearing demand deposits was primarily concentrated in public funds interest-bearing demand deposits. Included in the increase in interest-bearing demand deposits were public funds time deposits that converted into interest-bearing deposits that were primarily collateralized by reciprocal deposit insurance. Savings deposits increased $32.8 million, or 19.4%, to $201.7 million at December 31, 2021, primarily related to increases in individual savings deposits. Time deposits decreased $139.0 million, or 19.2%, to $586.7 million at December 31, 2021, primarily due to the transition of several public funds customers from time deposits to interest-bearing deposits. As we seek to strengthen our net interest margin and improve our earnings, attracting non-interest-bearing or lower cost deposits will be a primary emphasis. Management will continue to evaluate and update our product mix and related technology 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. In the year 2022, First Guaranty has approximately $236.5 million in non-public funds time deposits that are scheduled to mature and represent an opportunity for repricing to more favorable market terms. This includes approximately $89.5 million in one year time deposits at an average rate of 0.56%, $41.1 million in two year time deposits at an average rate of 1.22%, and approximately $77.1 million in greater than two year time deposits at an average rate of 2.61% that are scheduled to mature in the year 2022. First Guaranty has over $200 million in time deposits with average rates in excess of 3.00% that are scheduled to mature during 2022 through 2024 with the majority of the maturities in 2023 and 2024. First Guaranty expects to renew the majority of these time deposits at lower market rates. 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 2021 2020 2019 (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 $ 477,802 19.8 % — % $ 393,734 19.2 % — % $ 262,379 15.7 % — % Interest-bearing Demand 1,082,922 45.0 % 0.7 % 722,433 35.3 % 0.8 % 592,113 35.4 % 1.8 % Savings 191,967 8.0 % 0.1 % 163,332 8.0 % 0.2 % 115,682 6.9 % 0.4 % Time 655,025 27.2 % 2.0 % 767,075 37.5 % 2.2 % 703,685 42.0 % 2.4 % Total Deposits $ 2,407,716 100.0 % 0.8 % $ 2,046,574 100.0 % 1.1 % $ 1,673,859 100.0 % 1.7 % For the Years Ended December 31, Individual and Business Deposits 2021 2020 2019 (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 $ 471,371 29.7 % — % $ 382,940 27.5 % — % $ 256,099 23.7 % — % Interest-bearing Demand 390,481 24.6 % 1.0 % 280,587 20.1 % 1.0 % 241,290 22.3 % 1.4 % Savings 154,560 9.8 % 0.1 % 127,804 9.2 % 0.1 % 86,972 8.0 % 0.1 % Time 569,924 35.9 % 2.2 % 600,887 43.2 % 2.5 % 498,521 46.0 % 2.6 % Total Individual and Business Deposits $ 1,586,336 100.0 % 1.0 % $ 1,392,218 100.0 % 1.3 % $ 1,082,882 100.0 % 1.5 % For the Years Ended December 31, Public Fund Deposits 2021 2020 2019 (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 $ 6,431 0.8 % — % $ 10,794 1.7 % — % $ 6,280 1.1 % — % Interest-bearing Demand 692,441 84.3 % 0.5 % 441,846 67.5 % 0.7 % 350,823 59.3 % 2.0 % Savings 37,407 4.5 % 0.2 % 35,528 5.4 % 0.4 % 28,710 4.9 % 1.6 % Time 85,101 10.4 % 0.8 % 166,188 25.4 % 1.1 % 205,164 34.7 % 2.1 % Total Public Fund Deposits $ 821,380 100.0 % 0.5 % $ 654,356 100.0 % 0.8 % $ 590,977 100.0 % 1.9 % -61- At December 31, 2021, public funds deposits totaled $957.9 million compared to $715.3 million at December 31, 2020. Public funds time deposits totaled $31.4 million at December 31, 2021 compared to $158.9 million at December 31, 2020. The decline in public funds time deposits was the result of certain deposits moving into demand or money market deposits from time deposits. Public funds deposits increased due to new balances from existing customers along with First Guaranty's expansion of its public funds deposits program in the Texas market. 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 expanded 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 continues to grow 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 $496.4 million at December 31, 2021 compared to $217.7 million at December 31, 2020. The following table sets forth public funds as a percent of total deposits. At December 31, (in thousands except for %) 2021 2020 2019 Public Funds: Noninterest-bearing Demand $ 5,919 $ 5,109 $ 9,944 Interest-bearing Demand 882,156 514,416 424,732 Savings 38,432 36,862 29,570 Time 31,365 158,925 146,420 Total Public Funds $ 957,872 $ 715,312 $ 610,666 Total Deposits $ 2,596,492 $ 2,166,318 $ 1,853,013 Total Public Funds as a percent of Total Deposits 36.9 % 33.0 % 33.0 % At December 31, 2021, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $250,000 was approximately $159.1 million. At December 31, 2021, approximately $80.3 million of our certificates of deposit greater than or equal to $250,000 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 $250,000 at December 31, 2021. (in thousands) December 31, 2021 Due in one year or less $ 78,804 Due after one year through three years 73,409 Due after three years 6,864 Total certificates of deposit greater than or equal to $250,000 $ 159,077 The total amount of our uninsured deposits (deposits in excess of $250,000, as calculated in accordance with FDIC regulations) were estimated at $667.5 million at December 31, 2021. The following table sets forth the maturity of certificates of deposits greater than $250,000 at December 31, 2021. (in thousands) December 31, 2021 Three months or less $ 22,525 Three to six months 16,434 Six months to one year 30,605 One to three years 57,580 More than three years 6,683 Total certificates of deposit greater than $250,000 $ 133,827 -62- 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 $6.4 million in short-term borrowings outstanding at December 31, 2021 compared to $56.1 million outstanding at December 31, 2020. The short-term borrowings at December 31, 2021 were comprised of repurchase agreements of $6.4 million. The advances outstanding at December 31, 2020 were comprised of a short-term advance that was originated in response to the COVID-19 pandemic that totaled $50.0 million and a long-term advance that totaled $3.4 million. First Guaranty paid off the short-term advance acquired in response to the COVID-19 pandemic during the first quarter of 2021. First Guaranty participated in the Federal Reserve Paycheck Protection Program Liquidity Facility ("PPPLF") in the second quarter of 2021. These borrowings were paid off during the third quarter of 2021. First Guaranty has a long term FHLB advance that was acquired from the Union transaction that totaled $3.2 million at December 31, 2021 compared to $3.4 million at December 31, 2020. First Guaranty had available lines of credit of $26.5 million, with no outstanding balance at December 31, 2021. At December 31, 2021, we had $250.7 million in FHLB letters of credit outstanding obtained primarily for collateralizing public deposits. The decline in the usage of FHLB letters of credit is due to First Guaranty utilizing reciprocal deposit insurance programs as an alternative collateralization solution to FHLB letters of credit. 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 %) 2021 2020 2019 Balance at end of year $ 6,439 $ 56,121 $ 19,919 Maximum month-end outstanding $ 56,369 $ 57,048 $ 19,919 Average daily outstanding $ 10,458 $ 48,277 $ 3,320 Weighted average rate during the year 1.40 % 0.95 % 2.00 % Weighted average rate at the end of the year 2.23 % 0.89 % 2.00 % First Guaranty had senior long-term debt totaling $25.2 million at December 31, 2021 and $42.4 million at December 31, 2020. First Guaranty paid off $13.3 million in senior long-term debt using proceeds from its preferred stock capital offering during the second quarter of 2021. First Guaranty also had junior subordinated debentures totaling $14.8 million at December 31, 2021 and December 31, 2020. Shareholders' Equity Total shareholders' equity increased to $223.9 million at December 31, 2021 from $178.6 million at December 31, 2020. The increase in shareholders' equity was principally the result of an increase of $33.1 million in preferred stock and an increase of $19.5 million in retained earnings, partially offset by a decrease of $7.3 million in accumulated other comprehensive income. The $33.1 million increase in preferred stock was the result of the issuance of 34,500 shares of non-cumulative perpetual preferred stock on April 27, 2021. The $19.5 million increase in retained earnings was due to net income of $27.3 million during the year ended December 31, 2021, partially offset by $6.4 million in cash dividends paid on shares of our common stock and $1.4 million in cash dividends paid on shares of our preferred stock. The decrease in accumulated other comprehensive income was primarily attributed to the increase in unrealized losses on available for sale securities during the year ended December 31, 2021. -63- Results of Operations Performance Summary Year ended December 31, 2021 compared with year ended December 31, 2020. Net income for the year ended December 31, 2021 was $27.3 million, an increase of $7.0 million, or 34.3%, as compared to $20.3 million for the year ended December 31, 2020. The increase in net income of $7.0 million for the year ended December 31, 2021 was the result of several factors. First Guaranty experienced an increase in interest income associated with loans, a decrease in interest expense and a decrease in the provision for loan losses. This was partially offset by a decrease in interest income associated with securities, a decrease in noninterest income and an increase in noninterest expense. Loan interest income increased due to the growth in First Guaranty's loan portfolio, including loan fees recognized as an adjustment to yield from the origination of the SBA guaranteed PPP loans. Interest expense declined due to declines in market interest rates and First Guaranty's plan to reduce interest expense by increasing core deposits. Interest expense declined in 2021 even after factoring in an increase in deposit balances associated with SBA PPP loans and stimulus payments, and additional borrowings associated with our COVID-19 contingency plans. First Guaranty attributes the primary decrease in the provision to economic improvement in 2021 as compared to the COVID-19 uncertainty and economic conditions present in 2020. Factors that partially offset the increase in net income included decreased securities interest income due to the decrease in average balance of the investment portfolio. Noninterest income decreased primarily due to lower securities gains. Noninterest expense increased primarily due to increased personnel expenses, higher occupancy and equipment expenses, software expense, marketing and public relations expenses, legal fees, ATM fees, taxes and higher regulatory assessments due to increased deposit balances. Earnings per common share for the years ended December 31, 2021 was $2.42 per common share, an increase of 27.4% or $0.52 per common share from $1.90 per common share for the year ended December 31, 2020 (as adjusted for the 10% stock dividend in December 2021). Earnings per share was affected by the increase in earnings. 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 $1.90 per common share, an increase of 41.8% or $0.56 per common share from $1.34 per common share for the year ended December 31, 2019 (as adjusted for the 10% stock dividend in December 2021). Earnings per share was affected by the increase in earnings. -64- 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. First Guaranty’s assets and liabilities are generally most affected by changes in the Federal Funds rate, LIBOR rate, short term Treasury rates such as one month and three month Treasury bills, and longer term Treasury rates such as the U.S. ten year Treasury rate. Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities. There may also be a time lag in the effect of interest rate changes on assets and 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 changing interest rate environment in recent periods and our interest sensitivity position is discussed below. Year ended December 31, 2021 compared with year ended December 31, 2020 . Net interest income for the years ended December 31, 2021 and 2020 was $89.6 million and $74.7 million, respectively. The increase in net interest income for the year ended December 31, 2021 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 an increase in the average balance of our total interest-bearing liabilities. For the year ended December 31, 2021, the average balance of our total interest-earning assets increased by $379.4 million to $2.6 billion due to increased cash and due average balances, and strong growth in commercial leases and our other loan portfolios. The average yield of our interest-earning assets decreased by 23 basis points to 4.29% from 4.52% for the year ended December 31, 2020 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, 2021, the average balance of our total interest-bearing liabilities increased by $249.3 million to $2.0 billion due to the growth in low cost deposits and the average rate of our total interest-bearing liabilities decreased by 37 basis points to 1.11% from 1.48% for the year ended December 31, 2020 due to the decrease in market rates. As a result, our net interest rate spread increased 14 basis points to 3.18% for the year ended December 31, 2021 from 3.04% for the year ended December 31, 2020. Our net interest margin increased nine basis points to 3.44% for the year ended December 31, 2021 from 3.35% for the year ended December 31, 2020. 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. -65- Interest Income Year ended December 31, 2021 compared with year ended December 31, 2020 . Interest income increased $11.2 million, or 11.2%, to $111.9 million for the year ended December 31, 2021 as compared to the prior year. First Guaranty's loan portfolio expanded during 2021 due to growth associated with our loan originations, including commercial leases. These factors contributed to the increase in interest income as the average balance of our total interest-earning assets, primarily associated with loans, 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 $379.4 million to $2.6 billion for the year ended December 31, 2021 as compared to the prior year. The average yield of interest-earning assets decreased by 23 basis points to 4.29% for the year ended December 31, 2021 compared to 4.52% for the year ended December 31, 2020. Interest income on securities decreased $1.2 million to $8.2 million for the year ended December 31, 2021 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 $48.4 million to $332.6 million for the year ended December 31, 2021 from $381.0 million for the year ended December 31, 2020 primarily due to a decrease in the average balance of our mortgage-backed securities and corporate securities portfolios compared to the prior year. The average yield on securities decreased by one basis point to 2.48% for the year ended December 31, 2021 from 2.49% for the year ended December 31, 2020 due to the decrease in market interest rates. Interest income on loans increased $12.5 million, or 13.8%, to $103.4 million for the year ended December 31, 2021 as a result of an increase in the average balance of loans. The average balance of loans (excluding loans held for sale) increased by $351.2 million to $2.0 billion for the year ended December 31, 2021 from $1.7 billion for the year ended December 31, 2020 as a result of new loan originations. The average yield on loans (excluding loans held for sale) decreased by 33 basis points to 5.13% for the year ended December 31, 2021 from 5.46% for the year ended December 31, 2020 due to the decrease in market interest rates and the impact of SBA PPP loans which have a 1.00% interest rate. 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. -66- Interest Expense Year ended December 31, 2021 compared with year ended December 31, 2020 . Interest expense decreased $3.7 million, or 14.3%, to $22.3 million for the year ended December 31, 2021 from $26.0 million for the year ended December 31, 2020 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 17 basis points during the year ended December 31, 2021 to 0.67% as compared to 0.84% for the prior year. The decrease 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 that declined during the current period. The average rate of time deposits decreased 23 basis points during the year ended December 31, 2021 to 1.97% as compared to 2.20% for the prior year. The decrease in the average rate of time deposits was due to a significant decline in market interest rates primarily associated with the economic conditions from the COVID-19 pandemic. Partially offsetting the decrease in interest expense was an increase in the average balance of interest-bearing liabilities, which increased $249.3 million during the year ended December 31, 2021 to $2.0 billion as compared to the prior year as a result of a $360.5 million increase in the average balance of interest-bearing demand deposits, a $28.6 million increase in the average balance of savings deposits, which were partially offset by a $112.1 million decrease in the average balance of time deposits and a $27.7 million decrease in the average balance of borrowings. 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. 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. -67- December 31, 2021 December 31, 2020 December 31, 2019 (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) $ 258,916 $ 316 0.12 % $ 182,339 $ 404 0.22 % $ 144,298 $ 2,956 2.05 % Securities (including FHLB stock) 332,566 8,248 2.48 % 380,991 9,471 2.49 % 349,247 9,800 2.81 % Federal funds sold 1,052 — — % 678 1 0.08 % 592 1 0.25 % Loans held for sale 16 — — % 377 21 5.56 % 324 24 7.41 % Loans, net of unearned income (6) 2,014,095 103,353 5.13 % 1,662,875 90,787 5.46 % 1,315,524 78,862 5.99 % Total interest-earning assets 2,606,645 111,917 4.29 % 2,227,260 100,684 4.52 % 1,809,985 91,643 5.06 % Noninterest-earning assets: Cash and due from banks 15,077 12,955 11,951 Premises and equipment, net 59,739 58,411 45,037 Other assets 26,551 49,859 15,256 Total Assets $ 2,708,012 $ 2,348,485 $ 1,882,229 Liabilities and Shareholders' Equity Interest-bearing liabilities: Demand deposits $ 1,082,922 7,237 0.67 % $ 722,433 6,089 0.84 % $ 592,113 10,447 1.76 % Savings deposits 191,967 204 0.11 % 163,332 268 0.16 % 115,682 527 0.46 % Time deposits 655,025 12,893 1.97 % 767,075 16,908 2.20 % 703,685 17,141 2.44 % Borrowings 82,565 1,965 2.38 % 110,292 2,752 2.50 % 40,766 1,851 4.54 % Total interest-bearing liabilities 2,012,479 22,299 1.11 % 1,763,132 26,017 1.48 % 1,452,246 29,966 2.06 % Noninterest-bearing liabilities: Demand deposits 477,802 393,734 262,379 Other 10,619 12,714 9,204 Total Liabilities 2,500,900 2,169,580 1,723,829 Shareholders' Equity 207,112 178,905 158,400 Total Liabilities and Shareholders' Equity $ 2,708,012 $ 2,348,485 $ 1,882,229 Net interest income $ 89,618 $ 74,667 $ 61,677 Net interest rate spread(2) 3.18 % 3.04 % 3.00 % Net interest-earning assets(3) $ 594,166 $ 464,128 $ 357,739 Net interest margin(4)(5) 3.44 % 3.35 % 3.41 % Average interest-earning assets to interest-bearing liabilities 129.52 % 126.32 % 124.63 % (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 3.44%, 3.36% and 3.42% for the years ended December 31, 2021, 2020 and 2019. A 21% tax rate was used to calculate the effect on securities income from tax exempt securities for the years ended December 31, 2021, 2020 and 2019. (6) Includes loan fees of $7.2 million, $6.3 million and $3.5 million for the years ended December 31, 2021, 2020 and 2019. PPP loan fee income of $2.0 million and $2.2 million was recognized for the years ended December 31, 2021 and 2020, respectively. -68- 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, 2021 vs. 2020 Increase (Decrease) Due To For the Years Ended December 31, 2020 vs. 2019 Increase (Decrease) Due To (in thousands except for %) Volume Rate Increase/ Decrease Volume Rate Increase/ Decrease Interest earned on: Interest-earning deposits with banks $ 133 $ (221) $ (88) $ 621 $ (3,173) $ (2,552) Securities (including FHLB stock) (1,201) (22) (1,223) 846 (1,175) (329) Federal funds sold — (1) (1) — — — Loans held for sale (10) (11) (21) 4 (7) (3) Loans, net of unearned income 18,278 (5,712) 12,566 19,433 (7,508) 11,925 Total interest income 17,200 (5,967) 11,233 20,904 (11,863) 9,041 Interest paid on: Demand deposits 2,594 (1,446) 1,148 1,943 (6,301) (4,358) Savings deposits 42 (106) (64) 163 (422) (259) Time deposits (2,317) (1,698) (4,015) 1,473 (1,706) (233) Borrowings (664) (123) (787) 2,032 (1,131) 901 Total interest expense (345) (3,373) (3,718) 5,611 (9,560) (3,949) Change in net interest income $ 17,545 $ (2,594) $ 14,951 $ 15,293 $ (2,303) $ 12,990 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 and lease 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 $2.1 million provision for loan losses for the year ended December 31, 2021 compared to $14.9 million for 2020. The allowance for loan losses at December 31, 2021 was $24.0 million or 1.11% of total loans, compared to $24.5 million or 1.33% of total loans at December 31, 2020. The decrease in the provision was attributable to economic improvement in 2021 as compared to the COVID-19 uncertainty and economic conditions present in 2020. Total charge-offs were $3.1 million for year ended December 31, 2021 and $2.4 million for 2020. 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 due to the ongoing COVID-19 pandemic to continue which may result in additional increases to the allowance for loan losses in future periods. For the year ended December 31, 2020, the provision for loan losses was $14.9 million 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. -69- 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 $10.8 million for the year ended December 31, 2021, a decrease of $13.0 million from $23.8 million for the year ended December 31, 2020. The decrease was primarily due to decreased gains on the sale of securities. Net securities gains were $0.7 million for the year ended December 31, 2021 as compared to net securities gains of $14.8 million for 2020. 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 $2.7 million for the year ended December 31, 2021 as compared to $2.6 million for 2020. ATM and debit card fees totaled $3.6 million for the year ended December 31, 2021 and $3.0 million for 2020. The increase in these fees can be attributed 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 $0.9 million for the year ended December 31, 2021 and $1.1 million for 2020. Other noninterest income totaled $2.8 million and $2.3 million for the years ended December 31, 2021 and 2020, respectively. 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 Expense Noninterest expense includes salaries and employee benefits, occupancy and equipment expense and other types of expenses. Noninterest expense totaled $63.9 million for the year ended December 31, 2021 and $58.0 million for the year ended December 31, 2020. Salaries and benefits expense totaled $32.2 million for the year ended December 31, 2021 and $29.6 million for the year ended December 31, 2020. The increase in salaries and benefits expense was primarily due to the increase in personnel expense from new hires. Occupancy and equipment expense increased to $8.7 million for the year ended December 31, 2021 from $7.7 million for the year ended December 31, 2020 due to the new facilities put into service during 2021. Other noninterest expense totaled $23.0 million for the year ended December 31, 2021 and $20.7 million for 2020. The following are notable changes occurred within noninterest expense. Marketing and public relations expense increased $0.7 million during 2021 compared to 2020 as these expenses were lower during 2020 primarily due to the impacts of COVID-19. Tax expense increased primarily due to higher capital taxes in 2021. Software expense and amortization increased $0.7 million in 2021 compared to 2021 due to the continued development of First Guaranty's loan and deposit platforms. First Guaranty's regulatory assessment increased by $0.2 million in 2021 compared to 2020 due to the growth in deposits. Data processing expense declined in 2021 compared to 2020 as First Guaranty did not have data conversion expenses in 2021 related to the Union merger. 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 acquisition. 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 that occurred 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. -70- The following table presents, for the years indicated, the major categories of other noninterest expense: (in thousands) December 31, 2021 December 31, 2020 December 31, 2019 Other noninterest expense: Legal and professional fees $ 3,375 $ 2,919 $ 2,648 Data processing 1,794 2,465 1,972 ATM fees 1,760 1,332 1,217 Marketing and public relations 1,711 1,046 1,456 Taxes - sales, capital, and franchise 1,755 1,251 1,094 Operating supplies 853 921 674 Software expense and amortization 3,071 2,354 1,308 Travel and lodging 826 726 908 Telephone 398 256 193 Amortization of core deposits 764 712 390 Donations 564 393 603 Net costs from other real estate and repossessions 801 1,653 422 Regulatory assessment 1,945 1,716 683 Other 3,391 2,980 2,536 Total other expense $ 23,008 $ 20,724 $ 16,104 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, 2021, 2020 and 2019 was $7.2 million, $5.2 million and $3.7 million, respectively. The provision for income taxes in 2021 increased as compared to 2020 due to the increase in income before income taxes. First Guaranty's statutory tax rate was 21.0% for the years ended December 31, 2021, 2020 and 2019. 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. -71- 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 $261.9 million at December 31, 2021 compared to $299.6 million at December 31, 2020 . Loans maturing within one year or less at December 31, 2021 totaled $357.1 million compared to $265.9 million at December 31, 2020. At December 31, 2021, time deposits maturing within one year or less totaled $267.0 compared to $355.1 million at December 31, 2020. Time deposits maturing after one year through three years totaled $269.7 million at December 31, 2021 compared to $234.1 million at December 31, 2020. Time deposits maturing after three years totaled $50.0 million at December 31, 2021 compared to $136.5 million at December 31, 2020. First Guaranty's held to maturity ("HTM") investment securities portfolio at December 31, 2021 was $153.5 million or 42.2% of the investment portfolio compared to $0 at December 31, 2020. First Guaranty's available for sale ("AFS") portfolio was $210.6 million, or 57.8% of the investment portfolio at December 31, 2021 compared to $238.5 million, or 100.0% at December 31, 2020. 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 $456.3 million and $161.2 million at December 31, 2021 and December 31, 2020, respectively with $3.2 million and $53.4 million in FHLB advances outstanding at December 31, 2021 and December 31, 2020, respectively. The advances outstanding at December 31, 2020 were comprised of a short-term advance that was originated in response to the COVID-19 pandemic that totaled $50.0 million and a long-term advance that totaled $3.4 million. First Guaranty paid off the short-term advance acquired in response to the COVID-19 pandemic during the first quarter of 2021. In the second quarter of 2021, First Guaranty increased liquidity by utilizing a $49.4 million advance under the Federal Reserve PPPLF. First Guaranty redeemed the PPPLF advance during the third quarter of 2021 as the additional liquidity was not required. At December 31, 2021, First Guaranty maintained the $3.2 million long-term FHLB advance acquired from the Union acquisition. The change in borrowing capacity with the Federal Home Loan Bank was due to changes in the value that First Guaranty receives on pledged collateral and due to First Guaranty's usage of the line. First Guaranty has increasingly transitioned public funds deposits into reciprocal deposit programs for collateralization as an alternative to FHLB letters of credit. At December 31, 2021, we had outstanding letters of credit from the FHLB in the amount of $250.7 million that were primarily used to collateralize public funds deposits. We also maintain federal funds lines of credit at various correspondent banks with borrowing capacity of $100.5 million and two revolving lines of credit totaling $26.5 million secured by a pledge of the Bank's common stock, with no outstanding balance at December 31, 2021. We also have a discount window line with the Federal Reserve Bank that totaled $14.2 million at December 31, 2021. First Guaranty had loans eligible to be pledged under the Federal Reserve's PPP lending facility that totaled $35.4 million at December 31, 2021. First Guaranty did not have any advances under this facility at December 31, 2021. 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 $223.9 million at December 31, 2021 from $178.6 million at December 31, 2020. The increase in shareholders' equity was principally the result of an increase of $33.1 million in preferred stock and an increase of $19.5 million in retained earnings, partially offset by a decrease of $7.3 million in accumulated other comprehensive income. The $33.1 million increase in preferred stock was the result of the issuance of 34,500 shares of non-cumulative perpetual preferred stock on April 27, 2021. The $19.5 million increase in retained earnings was due to net income of $27.3 million during the year ended December 31, 2021, partially offset by $6.4 million in cash dividends paid on our common stock and $1.4 million in cash dividends paid on shares of our preferred stock. The decrease in accumulated other comprehensive income was primarily attributed to the increase in unrealized losses on available for sale securities during the year ended December 31, 2021. -72- 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, 2021, First Guaranty Bank was classified as well-capitalized. First Guaranty Bank's capital conservation buffer was 3.22% at December 31, 2021. The following table presents First Guaranty Bank's capital ratios as of the indicated dates. "Well Capitalized Minimums" At December 31, 2021 "Well Capitalized Minimums" At December 31, 2020 Tier 1 Leverage Ratio 5.00 % 8.71 % 5.00 % 8.58 % Tier 1 Risk-based Capital Ratio 8.00 % 10.22 % 8.00 % 10.97 % Total Risk-based Capital Ratio 10.00 % 11.22 % 10.00 % 12.22 % Common Equity Tier One Capital 6.50 % 10.22 % 6.50 % 10.97 % 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, 2021, 2020 and 2019 are as follows: Contract Amount (in thousands) December 31, 2021 December 31, 2020 December 31, 2019 Commitments to Extend Credit $ 198,444 $ 154,047 $ 117,826 Unfunded Commitments under lines of credit $ 250,231 $ 169,151 $ 148,127 Commercial and Standby letters of credit $ 13,787 $ 11,728 $ 11,258 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, 2021, 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, 2021, 2020 and 2019. -73-