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 our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. A discussion regarding significant changes in our financial condition from December 31, 2020 to December 31, 2021 and our results of operations for the year ended December 31, 2021 can be found under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 16, 2022, which is available on the SEC's website at www.sec.gov and First Guaranty's website, www.fgb.net 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. 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 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 $3.2 billion at December 31, 2022 and $2.9 billion at December 31, 2021. Total deposits were $2.7 billion at December 31, 2022 and $2.6 billion at December 31, 2021. Total loans were $2.5 billion at December 31, 2022, an increase of $359.7 million, or 16.7%, compared with $2.2 billion at December 31, 2021. Total shareholders' equity was $235.0 million and $223.9 million at December 31, 2022 and December 31, 2021, respectively. Net income was $28.9 million and $27.3 million for the years ended December 31, 2022 and 2021, 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. -40- Financial highlights for 2022 and 2021: • Total assets increased $273.2 million, or 9.5%, to $3.2 billion at December 31, 2022 when compared with December 31, 2021. Total loans at December 31, 2022 were $2.5 billion, an increase of $359.7 million, or 16.7%, compared with December 31, 2021. Total deposits were $2.7 billion at December 31, 2022, an increase of $127.3 million, or 4.9% compared with December 31, 2021. Retained earnings were $76.4 million at December 31, 2022, an increase of $19.7 million compared to $56.7 million at December 31, 2021. Shareholders' equity was $235.0 million and $223.9 million at December 31, 2022 and December 31, 2021, respectively. • Net income for each of the years ended December 31, 2022 and 2021 was $28.9 million and $27.3 million, respectively. • Earnings per common share were $2.48 for the year ended December 31, 2022 and $2.42 for the year ended December 31, 2021. Total weighted average common shares outstanding were 10,716,796 at December 31, 2022 and December 31, 2021. • 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, 2022, First Guaranty had remaining Round 1 PPP loans of $2.0 million with deferred fees of $16,000 and Round 2 PPP loans of $3.9 million with deferred fees of $16,000 remaining. $1.3 million in PPP fees were recognized during 2022 compared to $2.0 million in PPP fees recognized in 2021. • The allowance for loan and lease losses was 0.93% of total loans at December 31, 2022 compared to 1.11% at December 31, 2021. 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 $1.1 million at December 31, 2022. First Guaranty had $5.9 million at December 31, 2022 of SBA guaranteed PPP loans that have no related allowance due to the 100% government guarantee in accordance with regulatory guidance. • The provision for loan losses totaled $3.7 million for 2022 compared to $2.1 million in 2021. • Net interest income for 2022 was $100.0 million compared to $89.6 million for 2021. • Noninterest income for 2022 was $11.0 million compared to $10.8 million for 2021. Excluding the impact of securities gains, noninterest income for 2022 improved to $11.0 million from $10.0 million for 2021. The increase was primarily due to higher gains on loan sales. • The net interest margin was 3.47% for 2022 and 3.44% for 2021. The increase was driven by an increase in loan yields, including loan fees, which increased more than the cost of liabilities. Loans as a percentage of average interest earning assets increased to 79.8% at December 31, 2022 compared to 77.3% at December 31, 2021. • Investment securities totaled $451.5 million at December 31, 2022, an increase of $87.4 million when compared to $364.2 million at December 31, 2021. Losses on the sale of securities were $17,000 for 2022 as compared to gains of $0.7 million for 2021. At December 31, 2022, available for sale securities, at fair value, totaled $131.5 million, a decrease of $79.2 million when compared to $210.6 million at December 31, 2021. At December 31, 2022, held to maturity securities, at amortized cost, totaled $320.1 million as compared to $153.5 million at December 31, 2021. During the first quarter of 2022, First Guaranty designated $165.8 million of AFS securities for HTM status. • Total loans net of unearned income were $2.5 billion at December 31, 2022 compared to $2.2 billion at December 31, 2021. Total loans net of unearned income are reduced by the allowance for loan and lease losses which totaled $23.5 million at December 31, 2022 and $24.0 million at December 31, 2021. • Total impaired loans increased $4.4 million to $19.4 million at December 31, 2022 compared to $15.0 million at December 31, 2021. • Nonaccrual loans decreased $3.1 million to $13.6 million at December 31, 2022 compared to $16.7 million at December 31, 2021. • First Guaranty is a smaller reporting company and delayed the adoption of ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments" ("CECL"). First Guaranty used the incurred loss model for the calculation of its allowance for December 31, 2022. First Guaranty adopted ASU 2016-13 effective January 1, 2023. • Return on average assets was 0.97% and 1.01% for the years ended December 31, 2022 and 2021, respectively. Return on average common equity was 13.64% and 14.06% for 2022 and 2021, respectively. Return on average assets is calculated by dividing net income by average assets. Return on average common equity is calculated by dividing net income by average common equity. • Book value per common share was $18.84 as of December 31, 2022 compared to $17.81 as of December 31, 2021. Tangible book value per common share was $17.23 as of December 31, 2022 compared to $16.13 as of December 31, 2021. 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, including unrealized losses on available for sale securities at the time of transfer to held to maturity. -41- • First Guaranty's Board of Directors declared cash dividends of $0.64 per common share in 2022. First Guaranty also declared cash dividends of $0.64 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 has paid 118 consecutive quarterly dividends on its common stock as of December 31, 2022. • First Guaranty paid preferred cash dividends of $2.3 million during 2022. The preferred stock was issued in April of 2021. Recent Developments Legal Settlement First Guaranty was a defendant in a lawsuit alleging overpayment on a loan related to a disputed interest rate. First Guaranty settled this lawsuit in February of 2023 for $0.6 million. Lone Star Acquisition On January 6, 2023, we entered into a definitive agreement to acquire Lone Star Bank, a Texas state-chartered bank with its main office in Houston, Texas. Under the terms of the agreement, we will acquire all of the issued and outstanding shares of Lone Star Bank common stock in exchange solely for shares of First Guaranty common stock through the merger of Lone Star Bank with and into First Guaranty Bank, with First Guaranty Bank surviving the merger. Based on December 31, 2022 financials, the combined financial institution would have approximately $3.2 billion in total assets, $2.5 billion in total loans, and $2.8 billion in total deposits following the close of the merger. As a result of the proposed merger, First Guaranty Bank will acquire four banking locations in Texas: two locations in Houston and two locations west of Houston along the I-10 corridor in Sealy and Columbus. Employee Stock Grant Program 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. First Guaranty has provided the requested information. -42- 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. 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. -43- Financial Condition Assets Our total assets were $3.2 billion at December 31, 2022, an increase of $273.2 million, or 9.5%, from total assets of $2.9 billion at December 31, 2021. Assets increased primarily due to increases in net loans of $360.2 million and investment securities of $87.4 million, partially offset by a decrease in cash and cash equivalents of $178.7 million at December 31, 2022 compared to December 31, 2021. Loans Net loans increased $360.2 million, or 16.9%, to $2.5 billion at December 31, 2022 from $2.1 billion at December 31, 2021. Non-farm non-residential loan balances increased $106.5 million primarily due to new originations. One-to four-family loans increased $78.0 million primarily due to new originations. Commercial lease loan balances increased $71.6 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. Construction and land development loans increased $58.8 million principally due to advances on existing construction lines and new originations. Multifamily loans increased $53.9 million primarily due to the conversion of existing construction loans to permanent financing. Agricultural loans increased $12.3 million primarily due to seasonal activity. Consumer and other loans decreased $0.3 million primarily due to payoffs. Farmland loans decreased $7.0 million due to decreases on agricultural loan commitments. Commercial and industrial loans decreased $13.1 million primarily due to payoffs. SBA PPP loans totaled $5.9 million at December 31, 2022 compared to $35.4 million at December 31, 2021. These totals are included in commercial and industrial loans. Round 1 SBA PPP loans decreased from $12.7 million at December 31, 2021 to $2.0 million at December 31, 2022 due to SBA loan forgiveness and payments received. Round 2 SBA PPP loans decreased from $22.6 million at December 31, 2021 to $3.9 million at December 31, 2022 due to SBA loan forgiveness and payments received. First Guaranty had approximately 4.8% of funded and 2.3% 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 $160.2 million at December 31, 2022. As part of the management of risks in our loan portfolio, First Guaranty had previously established an internal guidance limit of approximately $200.0 million for its hotel and hospitality portfolio. First Guaranty had $333.8 million in loans related to our Texas markets at December 31, 2022 which was an increase of $76.0 million or 29.5% from $257.8 million at December 31, 2021. 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. First Guaranty had $210.9 million in loans related to our new Mideast markets in Kentucky and West Virginia at December 31, 2022. Syndicated loans at December 31, 2022 were $88.3 million, of which $26.6 million were shared national credits. Syndicated loans increased $40.9 million from $47.4 million at December 31, 2021. As of December 31, 2022, 68.7% of our loan portfolio was secured by real estate. The largest portion of our loan portfolio, at 39.3% as of December 31, 2022, was non-farm non-residential loans secured by real estate. Approximately 39.8% of the loan portfolio was based on a floating rate tied to the prime rate or LIBOR as of December 31, 2022. 64.0% of the loan portfolio is scheduled to mature within five years from December 31, 2022. First Guaranty had $47.7 million in loans that were priced off of the LIBOR index rate at December 31, 2022. As it is anticipated that LIBOR will be discontinued after June 30, 2023, First Guaranty is reviewing its loan documents to determine alternative reference rates such as the Secured Overnight Financing Rate ("SOFR") and does not anticipate there will be a significant financial statement impact with the transition. -44- Loan Portfolio Maturities . The following tables summarize the scheduled repayments of our loan portfolio at December 31, 2022. 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, 2022 (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 $ 42,650 $ 107,567 $ 53,976 $ 28,898 $ 233,091 Farmland 3,314 7,927 2,163 11,419 $ 24,823 1- 4 family 47,797 50,661 38,500 229,372 $ 366,330 Multifamily 6,247 31,228 23,815 58,495 $ 119,785 Non-farm non-residential 113,271 515,994 138,047 225,617 $ 992,929 Total Real Estate 213,279 713,377 256,501 553,801 1,736,958 Non-Real Estate: Agricultural 12,957 6,496 9,135 10,457 39,045 Commercial and industrial 93,187 222,840 62,425 6,827 385,279 Commercial leases 46,052 271,522 — — 317,574 Consumer and other 9,164 31,077 3,220 4,403 47,864 Total Non-Real Estate 161,360 531,935 74,780 21,687 789,762 Total Loans Before Unearned Income $ 374,639 $ 1,245,312 $ 331,281 $ 575,488 $ 2,526,720 Less: Unearned income (7,643) Total Loans Net of Unearned Income $ 2,519,077 The following table sets forth the scheduled repayments of fixed and adjustable-rate loans at December 31, 2022 that are contractually due after December 31, 2022. Due After December 31, 2022 (in thousands) Fixed Floating Total One year or less $ 234,921 137,203 372,124 One to five years 900,960 339,894 1,240,854 Over five to 15 years 114,425 216,251 330,676 Over 15 years 261,209 308,291 569,500 Subtotal $ 1,511,515 $ 1,001,639 $ 2,513,154 Nonaccrual loans 13,566 Total $ 2,526,720 Included in floating rate loans are loans that adjust to a floating rate following an initial fixed rate period. The initial fixed rate periods are typically one, three, or five year periods. -45- 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, 2022 and 2021. -46- December 31, (in thousands) 2022 2021 Nonaccrual loans: Real Estate: Construction and land development $ 225 $ 530 Farmland 290 787 1- 4 family 3,826 2,861 Multifamily — — Non-farm non-residential 3,746 8,733 Total Real Estate 8,087 12,911 Non-Real Estate: Agricultural 1,622 2,302 Commercial and industrial 819 699 Commercial leases 1,799 — Consumer and other 1,239 803 Total Non-Real Estate 5,479 3,804 Total nonaccrual loans 13,566 16,715 Loans 90 days and greater delinquent & still accruing: Real Estate: Construction and land development 427 246 Farmland — — 1- 4 family 332 514 Multifamily 157 162 Non-farm non-residential 103 281 Total Real Estate 1,019 1,203 Non-Real Estate: Agricultural — — Commercial and industrial 123 23 Commercial leases — — Consumer and other — 19 Total Non-Real Estate 123 42 Total loans 90 days and greater delinquent & still accruing 1,142 1,245 Total non-performing loans $ 14,708 $ 17,960 Other real estate owned and foreclosed assets: Real Estate: Construction and land development — — Farmland — — 1- 4 family 113 817 Multifamily — — Non-farm non-residential — 1,255 Total Real Estate 113 2,072 Non-Real Estate: Agricultural — — Commercial and industrial — — Commercial leases — — Consumer and other — — Total Non-Real estate — — Total other real estate owned and foreclosed assets 113 2,072 Total non-performing assets $ 14,821 $ 20,032 Non-performing assets to total loans 0.59 % 0.93 % Non-performing assets to total assets 0.47 % 0.70 % Non-performing loans to total loans 0.58 % 0.83 % Nonaccrual loans to total loans 0.54 % 0.77 % Allowance for loan and lease losses to nonaccrual loans 173.36 % 143.76 % -47- For the years ended December 31, 2022 and 2021, gross interest income which would have been recorded had the non-performing loans been current in accordance with their original terms amounted to $0.5 million and $0.8 million, respectively. We recognized $0.2 million and $0.1 million of interest income on such loans during the years ended December 31, 2022 and 2021, respectively. For the years ended December 31, 2022 and 2021, gross interest income which would have been recorded had the troubled debt restructured loans been current in accordance with their original terms amounted to $0.1 million and $0.2 million, respectively. We recognized $0.1 million and $0.2 million of interest income on such loans during the years ended December 31, 2022 and 2021, respectively. Non-performing assets were $14.8 million, or 0.47%, of total assets at December 31, 2022, compared to $20.0 million, or 0.70%, of total assets at December 31, 2021, which represented a decrease in non-performing assets of $5.2 million. The decrease in non-performing assets occurred primarily due to a reduction in nonaccrual loans, 90 days or greater delinquent and still accruing, other real estate owned. Contributing to the decrease was a sale of a $3.4 million real estate secured nonaccrual loan in the second quarter of 2022. This loan was previously reported as a TDR. A real estate secured loan in the amount of $1.7 million was returned to performing status from nonaccrual. A $0.5 million real estate secured loan was returned to performing status from nonaccrual. Both of these loans demonstrated satisfactory payment performance in order to be returned to performing status. First Guaranty sold smaller OREO properties during 2022 which also contributed to the reduction in non-performing assets. Nonaccrual loans decreased from $16.7 million at December 31, 2021 to $13.6 million at December 31, 2022. The decrease in nonaccrual loans was concentrated primarily in non-farm non-residential, agricultural, farmland and construction and land development loans. Non-performing assets included $1.0 million in loans with a government guarantee, or 6.69% of non-performing assets. These are structured as net loss guarantees in which up to 90% of loss exposure is covered. At December 31, 2022 loans 90 days and greater delinquent and still accruing totaled $1.1 million, a decrease of $0.1 million or 8.3% from $1.2 million at December 31, 2021. The decrease in loans 90 days or greater delinquent and still accruing was concentrated primarily in one-to four-family residential, non-farm non-residential and consumer and other loans. Other real estate owned at December 31, 2022 totaled $0.1 million, a decrease of $2.0 million from $2.1 million at December 31, 2021. The decrease was primarily due to a retail shopping center property with a net book value of $1.1 million being sold in October 2022. The sale of other smaller properties resulted in an additional reduction of $1.0 million. At December 31, 2022, our largest non-performing assets were comprised of the following nonaccrual loans: (1) a commercial lease loan that totaled $1.8 million; (2) a non-farm non-residential loan secured by a mobile home facility that totaled $1.3 million; (3) a non-farm nonresidential loan that totaled $1.1 million. This loan was originated for the sale of other real estate owned, the previously mentioned retail shopping center, and was included in nonaccrual until establishment of a satisfactory payment history by the borrower; (4) a non-farm non-residential loan secured by a waste treatment facility that totaled $0.9 million; and (5) an agricultural/farmland loan relationship that totaled $0.9 million. The agricultural loan is partially guaranteed by the USDA Farm Service Agency. -48- 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. At December 31, 2022, First Guaranty had one outstanding TDR which was a $1.1 million farmland loan. The restructuring of this loan was related to interest rate and amortization concessions. The TDR at December 31, 2021 was a $3.4 million non-farm non-residential loan secured by commercial real estate that was on nonaccrual. The restructuring of this loan was related to interest rate and amortization concessions. The loan was secured by a hotel facility. This loan was not eligible for a CARES Act modification. This loan was subsequently sold in the second quarter of 2022. The TDR requirements became inapplicable to First Guaranty upon our adoption of CECL on January 1, 2023. -49- 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 decrease in classified assets at December 31, 2022 as compared to December 31, 2021 was due to a $10.6 million decrease in substandard loans. Substandard loans at December 31, 2022 consisted of $9.8 million in one- to four-family residential, $9.0 million in non-farm non-residential, $8.3 million in commercial and industrial, $5.1 million in farmland, $4.0 million in agricultural, $2.3 million in multifamily, $1.8 million in commercial leases, $0.8 million in construction and land development, and the remaining $1.6 million comprised of consumer and other loans. Special mention loans decreased by $108.4 million in 2022. The decrease in special mention loans was primarily the result of the upgrade of several loan relationships from special mention to pass status. The largest industry type was associated with hotel loans. First Guaranty had previously moved several hotel relationships to special mention following the onset of the COVID-19 pandemic. -50- 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 loan and lease losses was $23.5 million at December 31, 2022 compared to $24.0 million at December 31, 2021. -51- 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) 2022 2021 Balance at beginning of year $ 24,029 $ 24,518 Charge-offs: Real Estate: Construction and land development (65) (92) Farmland — — 1- 4 family (94) (266) Multifamily — (12) Non-farm non-residential (603) (1,020) Total Real Estate (762) (1,390) Non-Real Estate: Agricultural (460) (149) Commercial and industrial loans (563) (89) Commercial leases (150) — Consumer and other (4,151) (1,494) Total Non-Real Estate (5,324) (1,732) Total charge-offs (6,086) (3,122) Recoveries: Real Estate: Construction and land development 340 — Farmland — 90 1- 4 family 76 44 Multifamily 452 — Non-farm non-residential 349 7 Total Real Estate 1,217 141 Non-Real Estate: Agricultural 133 17 Commercial and industrial loans 91 96 Commercial leases 5 4 Consumer and other 473 320 Total Non-Real Estate 702 437 Total recoveries 1,919 578 Net (charge-offs) recoveries (4,167) (2,544) Provision for loan losses 3,656 2,055 Balance at end of year $ 23,518 $ 24,029 Ratios: Net loan charge-offs to average loans 0.18 % 0.13 % Net loan charge-offs to loans at end of year 0.17 % 0.12 % Allowance for loan and lease losses to loans at end of year 0.93 % 1.11 % Net loan charge-offs to allowance for loan and lease losses 17.72 % 10.59 % Net loan charge-offs to provision charged to expense 113.98 % 123.80 % -52- A provision for loan losses of $3.7 million was made during the year ended December 31, 2022 as compared to $2.1 million for 2021. The provisions made in 2022 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. The loan portfolio factors in 2022 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 changes in other market conditions, loan concentrations including those related to commercial real estate and loan relationships and related economic conditions on borrowers' ability to repay loans and for allocations to impaired loans within their respective categories. • Construction and land development loans increased during 2022 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, 2022. The allowance increase related to this portfolio was due to growth in the portfolio along with changes in the qualitative analysis of the portfolio related to economic conditions. • One-to-four family residential loans increased during 2022. The allowance 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 2022. The allowance related to this portfolio decreased due to improving economic conditions. • Non-farm non-residential loans increased by $106.5 million during 2022. The allowance decrease related to this portfolio was due to the sale of an impaired loan with a specific reserve, the payoff of a substandard loan, and improved credit quality in this portfolio. There was growth in the portfolio along with 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. Special mention loans in this category declined which also contributed to a reduction in the related allowance. • Commercial and industrial loans decreased during 2022. The allowance 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 economic conditions. • Commercial leases increased during 2022. The allowance increase 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 due to growth in the portfolio. Commercial leases grew during 2022 from $246.0 million at December 31, 2021 to $317.6 million at December 31, 2022. • First Guaranty continues to monitor the acquired loans from prior acquisitions. Discounts on the acquired loans were approximately $1.1 million at December 31, 2022. First Guaranty charged off $6.1 million in loan balances during the year ended December 31, 2022 as compared to $3.1 million for 2021. Recoveries totaled $1.9 million for the year ended December 31, 2022 and $0.6 million during 2021. The details of the $6.1 million in charged-off loans were as follows: 1. First Guaranty charged off $1.9 million in consumer loans related to Hurricane Ida relief loans during 2022. These loans were originated in the Fall of 2021 following Hurricane Ida that impacted Southeast Louisiana on August 29, 2021. 2. First Guaranty charged off $0.4 million on a non-farm non-residential loan during the second quarter of 2022. This loan was subsequently sold in the second quarter of 2022. 3. First Guaranty charged off $0.3 million on an agricultural loan during the third quarter of 2022. This loan had no remaining principal balance at December 31, 2022. 4. First Guaranty charged off $0.2 million on a commercial lease loan during the third quarter of 2022. This loan had no remaining principal balance at December 31, 2022. 5. Smaller loans and overdrawn deposit accounts comprised the remaining $3.3 million of charge-offs for 2022. -53- 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, 2022 2021 (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 $ 1,232 5.2 % 9.2 % $ 769 3.2 % 8.1 % Farmland 83 0.4 % 1.0 % 478 2.0 % 1.5 % 1- 4 family 1,761 7.5 % 14.5 % 1,921 8.0 % 13.3 % Multifamily 746 3.2 % 4.7 % 940 3.9 % 3.0 % Non-farm non-residential 9,280 39.5 % 39.3 % 12,730 53.0 % 40.9 % Non-Real Estate: Agricultural 240 1.0 % 1.5 % 183 0.8 % 1.2 % Commercial and industrial 2,194 9.3 % 15.3 % 2,363 9.8 % 18.4 % Commercial leases 4,879 20.7 % 12.6 % 2,486 10.3 % 11.4 % Consumer and other 2,506 10.7 % 1.9 % 1,371 5.7 % 2.2 % Unallocated 597 2.5 % — 788 3.3 % — Total Allowance $ 23,518 100.0 % 100.0 % $ 24,029 100.0 % 100.0 % The following table presents net charge-offs during the period to average loans outstanding: December 31, 2022 December 31, 2021 (in thousands except for %) Net (Charge-offs) Recoveries Average Loans Outstanding 1 Net Charge-offs During Period to Average Loans Outstanding Net (Charge-offs) Recoveries Average Loans Outstanding 1 Net Charge-offs During Period to Average Loans Outstanding Real Estate: Construction & land development $ 275 $ 203,364 0.1 % $ (92) $ 168,269 (0.1) % Farmland — 27,343 — % 90 28,596 0.3 % 1- 4 Family (18) 330,752 — % (222) 281,835 (0.1) % Multifamily 452 103,194 0.4 % (12) 95,936 — % Non-farm non-residential (254) 957,858 — % (1,013) 845,428 (0.1) % Non-Real Estate: Agricultural (327) 38,175 (0.9) % (132) 30,888 (0.4) % Commercial and industrial (472) 390,183 (0.1) % 7 357,746 — % Commercial leases (145) 273,367 (0.1) % 4 220,747 — % Consumer and other (3,678) 48,301 (7.6) % (1,174) 43,957 (2.7) % 1 Average loans outstanding was calculated using the trailing four quarters total for loans. -54- Investment Securities Investment securities at December 31, 2022 totaled $451.5 million, an increase of $87.4 million, or 24.0%, compared to $364.2 million at December 31, 2021. 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, 2022, the U.S. Government and Government agency securities and municipal bonds qualified as securities available to collateralize public funds. Securities pledged as collateral totaled $260.8 million at December 31, 2022 and $234.9 million at December 31, 2021. 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. Our available for sale securities portfolio totaled $131.5 million at December 31, 2022, a decrease of $79.2 million, or 37.6%, compared to $210.6 million at December 31, 2021. The decrease was primarily due to the transfer of AFS securities to the HTM portfolio in the first quarter of 2022 of $165.8 million that was partially offset by purchases. Our held to maturity securities portfolio had an amortized cost of $320.1 million at December 31, 2022, compared to $153.5 million at December 31, 2021. The increase was primarily due to the transfer of AFS securities to the HTM portfolio in the first quarter of 2022. The following tables set forth the stated maturities and weighted average yields of our investment securities at December 31, 2022. At December 31, 2022 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 $ 49,885 0.6 % $ 48,615 1.0 % $ — — % $ — — % U.S. Government Agencies — — % — — % — — % — 2.3 — % Corporate debt securities — — % — — % 15,998 5.4 % — — % Municipal bonds 1,026 2.8 % 3,049 3.5 % 3,131 4.4 % 7,141 3.5 % Mortgage-backed securities — — % — — % 5 3.0 % 2,608 4.0 % Total available for sale securities $ 50,911 0.6 % $ 51,664 1.1 % $ 19,134 5.2 % $ 9,749 3.7 % Held to maturity: U.S. Government Agencies $ — — % $ — — % $ 19,458 1.6 % $ 245,574 2.5 % Corporate debt securities $ — — % $ 402 20.6 % $ 54,634 3.2 % $ — — % Total held to maturity securities $ — — % $ 402 20.6 % $ 74,092 2.8 % $ 245,574 2.5 % At December 31, 2022, $50.9 million, or 11.3%, 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 $252.7 million, or 56.0%, of the total portfolio at December 31, 2022. 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. -55- 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, 2021 to December 31, 2022, total deposits increased $127.3 million, or 4.9%, to $2.7 billion. Noninterest-bearing demand deposits decreased $8.2 million, or 1.5% to $524.4 million at December 31, 2022. The increase in noninterest-bearing demand deposits was primarily due to growth of compensating balances associated with new loan originations, existing loan customers, and new customers as part of First Guaranty's efforts to increase lower cost deposits. Interest-bearing demand deposits increased $184.7 million, or 14.5%, to $1.5 billion at December 31, 2022. The increase in interest-bearing demand deposits was primarily concentrated in public funds interest-bearing demand deposits. Savings deposits increased $4.1 million, or 2.0%, to $205.8 million at December 31, 2022, primarily related to increases in individual savings deposits. Time deposits decreased $53.3 million, or 9.1%, to $533.4 million at December 31, 2022, primarily due to decreases in consumer and business time 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. 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 2022 2021 (in thousands except for %) Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate Noninterest-bearing Demand $ 552,786 20.7 % — % $ 477,802 19.8 % — % Interest-bearing Demand 1,362,396 50.9 % 1.6 % 1,082,922 45.0 % 0.7 % Savings 212,329 7.9 % 0.4 % 191,967 8.0 % 0.1 % Time 546,776 20.5 % 2.0 % 655,025 27.2 % 2.0 % Total Deposits $ 2,674,287 100.0 % 1.2 % $ 2,407,716 100.0 % 0.8 % For the Years Ended December 31, Individual and Business Deposits 2022 2021 (in thousands except for %) Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate Noninterest-bearing Demand $ 544,948 32.9 % — % $ 471,371 29.7 % — % Interest-bearing Demand 424,257 25.7 % 2.1 % 390,481 24.6 % 1.0 % Savings 170,571 10.3 % 0.1 % 154,560 9.8 % 0.1 % Time 514,167 31.1 % 2.0 % 569,924 35.9 % 2.2 % Total Individual and Business Deposits $ 1,653,943 100.0 % 1.2 % $ 1,586,336 100.0 % 1.0 % For the Years Ended December 31, Public Fund Deposits 2022 2021 (in thousands except for %) Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate Noninterest-bearing Demand $ 7,838 0.8 % — % $ 6,431 0.8 % — % Interest-bearing Demand 938,139 91.9 % 1.3 % 692,441 84.3 % 0.5 % Savings 41,758 4.1 % 1.9 % 37,407 4.5 % 0.2 % Time 32,609 3.2 % 1.4 % 85,101 10.4 % 0.8 % Total Public Fund Deposits $ 1,020,344 100.0 % 1.4 % $ 821,380 100.0 % 0.5 % -56- At December 31, 2022, public funds deposits totaled $1.1 billion compared to $957.9 million at December 31, 2021. Public funds time deposits totaled $32.4 million at December 31, 2022 compared to $31.4 million at December 31, 2021. Public funds deposits increased due to new balances from existing customers that was primarily attributed to seasonal fluctuations. First Guaranty has developed a program for the retention and management of public funds deposits. Since the end of 2012, First Guaranty has 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 $576.3 million at December 31, 2022 compared to $496.4 million at December 31, 2021. The following table sets forth public funds as a percent of total deposits. At December 31, (in thousands except for %) 2022 2021 Public Funds: Noninterest-bearing Demand $ 11,730 $ 5,919 Interest-bearing Demand 1,022,760 882,156 Savings 46,354 38,432 Time 32,427 31,365 Total Public Funds $ 1,113,271 $ 957,872 Total Deposits $ 2,723,792 $ 2,596,492 Total Public Funds as a percent of Total Deposits 40.9 % 36.9 % At December 31, 2022, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $250,000 was approximately $155.0 million. At December 31, 2022, approximately $65.5 million of our certificates of deposit greater than or equal to $250,000 had a remaining term greater than one year. The total amount of our uninsured deposits (deposits in excess of $250,000, as calculated in accordance with FDIC regulations) was estimated at $384.5 million at December 31, 2022. This total excludes public funds deposits that are collateralized by securities or FHLB letters of credit. The following table sets forth the maturity of certificates of deposits greater than $250,000 at December 31, 2022. (in thousands) December 31, 2022 Three months or less $ 16,534 Three to six months 10,530 Six months to one year 50,600 One to three years 49,794 More than three years 6,013 Total certificates of deposit greater than $250,000 $ 133,471 -57- 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 $146.4 million in short-term borrowings outstanding at December 31, 2022 compared to $6.4 million outstanding at December 31, 2021. The short-term borrowings at December 31, 2022 were comprised of short-term Federal Home Loan Bank advances of $120.0 million, a line of credit of $20.0 million with an outstanding balance of $20.0 million and repurchase agreements of $6.4 million. The short-term borrowings outstanding at December 31, 2021 were comprised of repurchase agreements of $6.4 million. First Guaranty had available lines of credit of $26.5 million, with $20.0 million outstanding at December 31, 2022. A net availability of $6.5 million remained. At December 31, 2022, we had $388.6 million in FHLB letters of credit outstanding obtained primarily for collateralizing public deposits compared to $250.7 million at December 31, 2021. First Guaranty had senior long-term debt totaling $21.9 million at December 31, 2022 and $25.2 million at December 31, 2021. First Guaranty had a long-term FHLB advance that was acquired from the Union transaction that totaled $3.2 million at December 31, 2021. This advance was paid off during the first quarter of 2022. First Guaranty also had subordinated debt totaling $15.0 million at December 31, 2022 and $14.8 million at December 31, 2021. Shareholders' Equity Total shareholders' equity increased to $235.0 million at December 31, 2022 from $223.9 million at December 31, 2021. The increase in shareholders' equity was principally the result of an increase of $19.7 million in retained earnings, partially offset by an increase of $8.6 million in accumulated other comprehensive loss. The $19.7 million increase in retained earnings was due to net income of $28.9 million during the year ended December 31, 2022, partially offset by $6.9 million in cash dividends paid on shares of our common stock and $2.3 million in cash dividends paid on shares of our preferred stock. The increase in accumulated other comprehensive loss was primarily attributed to the increase in unrealized losses on available for sale securities during the year ended December 31, 2022. -58- Results of Operations A discussion regarding significant changes in our financial condition from December 31, 2020 to December 31, 2021 and our results of operations for the year ended December 31, 2021 can be found under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 16, 2022, which is available on the SEC’s website at www.sec.gov and on our website, www.fgb.net. Performance Summary Year ended December 31, 2022 compared with year ended December 31, 2021. Net income for the year ended December 31, 2022 was $28.9 million, an increase of $1.6 million, or 5.8%, as compared to $27.3 million for the year ended December 31, 2021. The increase in net income of $1.6 million for the year ended December 31, 2022 was the result of several factors. First Guaranty experienced an increase in interest income and an increase in noninterest income. This was partially offset by an increase in interest expense, an increase in the provision for loan losses 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. Securities interest income increased due to an increase in the average balance of the investment portfolio. Noninterest income increased primarily due to gains on the sale of loans during the third quarter of 2022. Factors that partially offset the increase in net income included an increase in interest expense due to increases in volume and market interest rates. The increase in the provision was related to growth in the loan portfolio and due to elevated charge-offs as compared to the same period in 2021. Noninterest expense increased primarily due to increased personnel expenses, software expense, legal and professional fees, travel expense and capital taxes. Earnings per common share for the years ended December 31, 2022 was $2.48 per common share, an increase of 2.5% or $0.06 per common share from $2.42 per common share for the year ended December 31, 2021. Earnings per share was affected by the increase in earnings. 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. These rates increased in 2022 due to the impact of inflation and the Federal Reserves actions to reduce inflation by increasing interest rates. 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, 2022 compared with year ended December 31, 2021 . Net interest income for the years ended December 31, 2022 and 2021 was $100.0 million and $89.6 million, respectively. The increase in net interest income for the year ended December 31, 2022 as compared to the prior year was primarily due to an increase in the average balance of our total interest-earning assets and an increase in the average yield of our total interest-earning assets, partially offset by an increase in the average balance of our total interest-bearing liabilities and an increase in the average rate of our total interest-bearing liabilities. For the year ended December 31, 2022, the average balance of our total interest-earning assets increased by $274.5 million to $2.9 billion due to increased securities balances, and strong growth in our loan portfolio. The average yield of our interest-earning assets increased by 45 basis points to 4.74% from 4.29% for the year ended December 31, 2021 due to an improved mix of higher yielding assets. For the year ended December 31, 2022, the average balance of our total interest-bearing liabilities increased by $185.0 million to $2.2 billion due to the growth in low cost deposits and the average rate of our total interest-bearing liabilities increased by 55 basis points to 1.66% from 1.11% for the year ended 2021. The rise in market interest rates, particularly associated with Treasury rates, contributed to the increase in our liabilities cost. Treasury rates increased as the Federal Reserve increased rates to address rising inflation during 2022. As a result, our net interest rate spread decreased 10 basis points to 3.08% for the year ended December 31, 2022 from 3.18% for the year ended December 31, 2021. Our net interest margin increased three basis points to 3.47% for the year ended December 31, 2022 from 3.44% for the year ended December 31, 2021. -59- Interest Income Year ended December 31, 2022 compared with year ended December 31, 2021 . Interest income increased $24.7 million, or 22.0%, to $136.6 million for the year ended December 31, 2022 as compared to the prior year. First Guaranty's loan portfolio expanded during 2022 due to growth associated with our loan originations. These factors contributed to the increase in interest income as the average balance of our total interest-earning assets, primarily associated with loans, increased, and the average yield of interest-earning assets increased. The average balance of our interest-earning assets increased $274.5 million to $2.9 billion for the year ended December 31, 2022 as compared to the prior year. The average yield of interest-earning assets increased by 45 basis points to 4.74% for the year ended December 31, 2022 compared to 4.29% for the year ended December 31, 2021. Interest income on securities increased $1.0 million to $9.3 million for the year ended December 31, 2022 as compared to the prior year primarily as a result of an increase in average balances. The average balance of securities increased $119.6 million to $452.2 million for the year ended December 31, 2022 from $332.6 million for the year ended December 31, 2021 primarily due to an increase in the average balance of our U.S. Treasuries securities portfolio compared to the prior year. The average yield on securities decreased by 43 basis points to 2.05% for the year ended December 31, 2022 from 2.48% for the year ended December 31, 2021 due to the increase in lower yielding Treasury securities. Interest income on loans increased $22.6 million, or 21.9%, to $126.0 million for the year ended December 31, 2022 as a result of an increase in the average balance and average yield of loans. The average balance of loans (excluding loans held for sale) increased by $284.2 million to $2.3 billion for the year ended December 31, 2022 from $2.0 billion for the year ended December 31, 2021 as a result of new loan originations. The average yield on loans (excluding loans held for sale) increased by 35 basis points to 5.48% for the year ended December 31, 2022 from 5.13% for the year ended December 31, 2021 due to the improved mix of loans along with an increase in market interest rates. Interest Expense Year ended December 31, 2022 compared with year ended December 31, 2021 . Interest expense increased $14.2 million, or 63.8%, to $36.5 million for the year ended December 31, 2022 from $22.3 million for the year ended December 31, 2021 due primarily to an increase in market interest rates and due to an increase in the average balance of interest-bearing liabilities. The average rate of interest-bearing demand deposits increased by 90 basis points during the year ended December 31, 2022 to 1.57% as compared to 0.67% for the prior year. The increase in market interest rates, particularly U.S. Treasury rates, contributed to the increase in rates paid on interest-bearing demand deposits. Treasury rates increased as the Federal Reserve increased rates to address increased inflation in the U.S. economy. The average rate of time deposits decreased two basis points during the year ended December 31, 2022 to 1.95% as compared to 1.97% for the prior year. The decrease in the average rate of time deposits was due to First Guaranty's efforts to reprice maturing time deposits to more attractive rates. The average balance of interest-bearing liabilities increased by $185.0 million during the year ended December 31, 2022 to $2.2 billion. This increase was a result of a $279.5 million increase in the average balance of interest-bearing demand deposits, a $20.4 million increase in the average balance of savings deposits, which were partially offset by a $108.2 million decrease in the average balance of time deposits and a $6.6 million decrease in the average balance of borrowings. 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. -60- December 31, 2022 December 31, 2021 (in thousands except for %) Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate Assets Interest-earning assets: Interest-earning deposits with banks(1) $ 130,406 $ 1,324 1.02 % $ 258,916 $ 316 0.12 % Securities (including FHLB stock) 452,213 9,250 2.05 % 332,566 8,248 2.48 % Federal funds sold 256 — — % 1,052 — — % Loans held for sale — — % 16 — — % Loans, net of unearned income (6) 2,298,273 126,002 5.48 % 2,014,095 103,353 5.13 % Total interest-earning assets 2,881,148 136,576 4.74 % 2,606,645 111,917 4.29 % Noninterest-earning assets: Cash and due from banks 18,833 15,077 Premises and equipment, net 58,197 59,739 Other assets 29,509 26,551 Total Assets $ 2,987,687 $ 2,708,012 Liabilities and Shareholders' Equity Interest-bearing liabilities: Demand deposits $ 1,362,396 21,419 1.57 % $ 1,082,922 7,237 0.67 % Savings deposits 212,329 915 0.43 % 191,967 204 0.11 % Time deposits 546,776 10,682 1.95 % 655,025 12,893 1.97 % Borrowings 75,962 3,518 4.63 % 82,565 1,965 2.38 % Total interest-bearing liabilities 2,197,463 36,534 1.66 % 2,012,479 22,299 1.11 % Noninterest-bearing liabilities: Demand deposits 552,786 477,802 Other 9,669 10,619 Total Liabilities 2,759,918 2,500,900 Shareholders' Equity 227,769 207,112 Total Liabilities and Shareholders' Equity $ 2,987,687 $ 2,708,012 Net interest income $ 100,042 $ 89,618 Net interest rate spread(2) 3.08 % 3.18 % Net interest-earning assets(3) $ 683,685 $ 594,166 Net interest margin(4)(5) 3.47 % 3.44 % Average interest-earning assets to interest-bearing liabilities 131.11 % 129.52 % (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 3.48% and 3.44% for the years ended December 31, 2022 and 2021. A 21% tax rate was used to calculate the effect on securities income from tax exempt securities for the years ended December 31, 2022 and 2021. (6) Includes loan fees of $7.8 million and $7.2 million for the years ended December 31, 2022 and 2021. PPP loan fee income of $1.3 million and $2.0 million was recognized for the years ended December 31, 2022 and 2021, respectively. -61- 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, 2022 vs. 2021 Increase (Decrease) Due To (in thousands except for %) Volume Rate Increase/ Decrease Interest earned on: Interest-earning deposits with banks $ (230) $ 1,238 $ 1,008 Securities (including FHLB stock) 2,618 (1,616) 1,002 Federal funds sold — — — Loans held for sale — — — Loans, net of unearned income 15,254 7,395 22,649 Total interest income 17,642 7,017 24,659 Interest paid on: Demand deposits 2,273 11,909 14,182 Savings deposits 23 688 711 Time deposits (2,115) (96) (2,211) Borrowings (169) 1,722 1,553 Total interest expense 12 14,223 14,235 Change in net interest income $ 17,630 $ (7,206) $ 10,424 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 $3.7 million provision for loan losses for the year ended December 31, 2022 compared to $2.1 million for 2021. The allowance for loan losses at December 31, 2022 was $23.5 million or 0.93% of total loans, compared to $24.0 million or 1.11% of total loans at December 31, 2021. Total charge-offs were $6.1 million for year ended December 31, 2022 and $3.1 million for 2021. We believe that the allowance is adequate to cover potential losses in the loan portfolio given the current economic conditions. -62- 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 $11.0 million for the year ended December 31, 2022, an increase of $0.2 million from $10.8 million for the year ended December 31, 2021. The increase was primarily due to increased gains on the sale of loans. First Guaranty sold a loan with a government guarantee in the third quarter of 2022. The loan had a principal balance of $24.7 million with a guaranteed balance of $19.8 million. Net securities losses were $17,000 for the year ended December 31, 2022 as compared to net securities gains of $0.7 million for 2021. The losses on securities sales primarily occurred as First Guaranty sold investment securities in order to fund loan growth and manage interest rate risk. Service charges, commissions and fees totaled $3.2 million for the year ended December 31, 2022 as compared to $2.7 million for 2021. ATM and debit card fees totaled $3.4 million for the year ended December 31, 2022 and $3.6 million for 2021. Net gains on the sale of loans were $1.8 million for the year ended December 31, 2022 and $0.9 million for 2021. Other noninterest income totaled $2.7 million and $2.8 million for the years ended December 31, 2022 and 2021, respectively. Noninterest Expense Noninterest expense includes salaries and employee benefits, occupancy and equipment expense and other types of expenses. Noninterest expense totaled $71.0 million for the year ended December 31, 2022 and $63.9 million for the year ended December 31, 2021. Salaries and benefits expense totaled $36.7 million for the year ended December 31, 2022 and $32.2 million for the year ended December 31, 2021. The increase was primarily due to the increase in personnel expense from new hires including those in the Mideast market. Occupancy and equipment expense increased to $8.9 million for the year ended December 31, 2022 from $8.7 million for the year ended December 31, 2021. Other noninterest expense totaled $25.4 million for the year ended December 31, 2022 and $23.0 million for 2021. The following table presents, for the years indicated, the major categories of other noninterest expense: (in thousands) December 31, 2022 December 31, 2021 Other noninterest expense: Legal and professional fees $ 4,159 $ 3,375 Data processing 1,596 1,794 ATM fees 1,750 1,760 Marketing and public relations 1,747 1,711 Taxes - sales, capital, and franchise 1,949 1,755 Operating supplies 728 853 Software expense and amortization 4,191 3,071 Travel and lodging 1,236 826 Telephone 406 398 Amortization of core deposits 696 764 Donations 638 564 Net costs from other real estate and repossessions 393 801 Regulatory assessment 1,997 1,945 Other 3,888 3,391 Total other expense $ 25,374 $ 23,008 -63- 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, 2022 and 2021 was $7.5 million and $7.2 million, respectively. The provision for income taxes in 2022 increased as compared to 2021 due to the increase in income before income taxes. First Guaranty's statutory tax rate was 21.0% for the years ended December 31, 2022 and 2021. 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 deflation. 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. The Federal Reserve increased interest rates during 2022 to address rising inflation in the U.S. The impact of rising interest rates associated with inflation impacted First Guaranty's net interest income and net interest margin along with the value of its financial assets. Selected Financial Data The following table presents consolidated selected financial data for First Guaranty. It does not purport to be complete and is qualified in its entirety by more detailed financial information and the audited consolidated financial statements contained elsewhere in this annual report. At or For the Years Ended December 31, (in thousands except for %) 2022 2021 2020 2019 2018 Year End Balance Sheet Data: Investment securities $ 451,526 $ 364,156 $ 238,548 $ 426,516 $ 405,303 Federal funds sold $ 423 $ 183 $ 702 $ 914 $ 549 Loans, net of unearned income $ 2,519,077 $ 2,159,359 $ 1,844,135 $ 1,525,490 $ 1,225,268 Allowance for loan and lease losses $ 23,518 $ 24,029 $ 24,518 $ 10,929 $ 10,776 Total assets $ 3,151,347 $ 2,878,120 $ 2,473,078 $ 2,117,216 $ 1,817,211 Total deposits $ 2,723,792 $ 2,596,492 $ 2,166,318 $ 1,853,013 $ 1,629,622 Borrowings $ 183,369 $ 49,635 $ 116,630 $ 86,747 $ 34,538 Shareholders' equity $ 234,991 $ 223,889 $ 178,591 $ 166,035 $ 147,284 Common shareholders' equity $ 201,933 $ 190,831 $ 178,591 $ 166,035 $ 147,284 Performance Ratios and Other Data: Return on average assets 0.97 % 1.01 % 0.87 % 0.76 % 0.82 % Return on average common equity 13.64 % 14.06 % 11.36 % 8.99 % 9.98 % Return on average tangible assets (1) 0.99 % 1.04 % 0.90 % 0.78 % 0.85 % Return on average tangible common equity (1) 15.31 % 15.98 % 13.08 % 9.68 % 10.77 % Net interest margin 3.47 % 3.44 % 3.35 % 3.41 % 3.41 % Average loans to average deposits 85.94 % 83.65 % 81.25 % 78.59 % 75.39 % Efficiency ratio (2) 63.94 % 63.63 % 58.95 % 67.48 % 69.46 % Efficiency ratio (excluding amortization of intangibles and securities transactions) (2) 63.30 % 63.32 % 68.44 % 66.77 % 66.63 % Full time equivalent employees (year end) 472 470 429 431 346 (Footnotes follow on next page) -64- At or For the Years Ended December 31, (in thousands except for % and share data) 2022 2021 2020 2019 2018 Capital Ratios: Average shareholders' equity to average assets 7.62 % 7.65 % 7.62 % 8.42 % 8.20 % Average tangible equity to average tangible assets (3) 7.08 % 7.02 % 6.86 % 8.02 % 7.86 % Common shareholders' equity to total assets 6.41 % 6.63 % 7.22 % 7.84 % 8.10 % Tangible common equity to tangible assets (3) 5.89 % 6.04 % 6.51 % 6.99 % 7.79 % Income Data: Interest income $ 136,576 $ 111,917 $ 100,684 $ 91,643 $ 78,390 Interest expense $ 36,534 $ 22,299 $ 26,017 $ 29,966 $ 21,366 Net interest income $ 100,042 $ 89,618 $ 74,667 $ 61,677 $ 57,024 Provision for loan losses $ 3,656 $ 2,055 $ 14,877 $ 4,860 $ 1,354 Noninterest income (excluding securities transactions) $ 11,026 $ 10,046 $ 8,989 $ 8,456 $ 7,110 Securities (losses) gains $ (17) $ 714 $ 14,791 $ (157) $ (1,830) Noninterest expense $ 71,005 $ 63,868 $ 58,033 $ 47,219 $ 43,275 Earnings before income taxes $ 36,390 $ 34,455 $ 25,537 $ 17,897 $ 17,675 Net income $ 28,884 $ 27,297 $ 20,318 $ 14,241 $ 14,213 Net income available to common shareholders $ 26,556 $ 25,913 $ 20,318 $ 14,241 $ 14,213 Per Common Share Data: Net earnings $ 2.48 $ 2.42 $ 1.90 $ 1.34 $ 1.33 Cash dividends paid $ 0.64 $ 0.60 $ 0.58 $ 0.54 $ 0.53 Book value $ 18.84 $ 17.81 $ 16.66 $ 15.49 $ 13.82 Tangible book value (4) $ 17.23 $ 16.13 $ 14.92 $ 13.68 $ 13.24 Dividend payout ratio for Common and Preferred 31.81 % 28.49 % 30.68 % 40.74 % 39.65 % Weighted average number of shares outstanding 10,716,796 10,716,796 10,716,796 10,666,055 10,657,245 Number of shares outstanding 10,716,796 10,716,796 10,716,796 10,716,796 10,657,245 Asset Quality Ratios: Non-performing assets to total assets 0.47 % 0.70 % 1.25 % 1.04 % 0.55 % Non-performing assets to total loans 0.59 % 0.93 % 1.68 % 1.44 % 0.82 % Non-performing loans to total loans 0.58 % 0.83 % 1.55 % 1.12 % 0.73 % Loan loss reserve to non-performing assets 158.68 % 119.95 % 79.33 % 49.86 % 107.48 % Net charge-offs to average loans 0.18 % 0.13 % 0.08 % 0.36 % (0.02) % Provision for loan and lease loss to average loans 0.16 % 0.10 % 0.89 % 0.37 % 0.12 % Allowance for loan and lease loss to total loans 0.93 % 1.11 % 1.33 % 0.72 % 0.88 % (1) Tangible calculation eliminates goodwill and acquisition intangibles, principally core deposit intangibles, net of accumulated amortization, net of tax. See below for our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption "Selected Historical Consolidated Financial and Other Data— Non-GAAP Financial Measures." (2) Efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income. We calculate both a GAAP and a non-GAAP efficiency ratio. The GAAP-based efficiency ratio is noninterest expenses divided by net interest income plus noninterest income. See below for our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption "Selected Financial Data— Non-GAAP Financial Measures. (3) We calculate tangible common equity as total shareholders' equity less preferred stock, goodwill and acquisition intangibles, principally core deposit intangibles, net of accumulated amortization, and we calculate tangible assets as total assets less goodwill and core deposit intangibles. Tangible common equity to tangible assets is a non-GAAP financial measure, and, as we calculate tangible common equity to tangible assets, the most directly comparable GAAP financial measure is total shareholders' equity to total assets. See below for our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption "Selected Historical Consolidated Financial and Other Data— Non-GAAP Financial Measures." (4) We calculate tangible book value per common share as total shareholders' equity less preferred stock, goodwill and acquisition intangibles, principally core deposit intangibles, net of accumulated amortization at the end of the relevant period, divided by the outstanding number of shares of our common stock at the end of the relevant period. Tangible book value per common share is a non-GAAP financial measure, and, as we calculate tangible book value per common share, the most directly comparable GAAP financial measure is book value per common share. See below for our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption "Selected Financial Data— Non-GAAP Financial Measures." -65- Non-GAAP Financial Measures Our accounting and reporting policies conform to accounting principles generally accepted in the United States, or GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional metrics. Tangible book value per share and the ratio of tangible equity to tangible assets are not financial measures recognized under GAAP and, therefore, are considered non-GAAP financial measures. Our management, banking regulators, many financial analysts and other investors use these non-GAAP financial measures to compare the capital adequacy of banking organizations with significant amounts of preferred equity and/or goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible equity, tangible assets, tangible book value per share or related measures should not be considered in isolation or as a substitute for total shareholders' equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table reconciles, as of the dates set forth below, shareholders' equity (on a GAAP basis) to tangible equity and total assets (on a GAAP basis) to tangible assets and calculates our tangible book value per share. At December 31, (in thousands except for share data and %) 2022 2021 2020 2019 2018 Tangible Common Equity Total shareholders' equity $ 234,991 $ 223,889 $ 178,591 $ 166,035 $ 147,284 Adjustments: Preferred Stock 33,058 33,058 — — — Goodwill 12,900 12,900 12,900 12,942 3,472 Acquisition intangibles 4,355 5,051 5,815 6,527 2,704 Tangible common equity $ 184,678 $ 172,880 $ 159,876 $ 146,566 $ 141,108 Common shares outstanding 10,716,796 10,716,796 10,716,796 10,716,796 10,657,245 Book value per common share $ 18.84 $ 17.81 $ 16.66 $ 15.49 $ 13.82 Tangible book value per common share $ 17.23 $ 16.13 $ 14.92 $ 13.68 $ 13.24 Tangible Assets Total Assets $ 3,151,347 $ 2,878,120 $ 2,473,078 $ 2,117,216 $ 1,817,211 Adjustments: Goodwill 12,900 12,900 12,900 12,942 3,472 Acquisition intangibles 4,355 5,051 5,815 6,527 2,704 Tangible Assets $ 3,134,092 $ 2,860,169 $ 2,454,363 $ 2,097,747 $ 1,811,035 Tangible common equity to tangible assets 5.89 % 6.04 % 6.51 % 6.99 % 7.79 % The efficiency ratio is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income, excluding amortizations of intangibles and securities transactions. The GAAP-based efficiency ratio is noninterest expenses divided by net interest income plus noninterest income. The following table reconciles, as of the dates set forth below, our efficiency ratio to the GAAP-based efficiency ratio: For the Year Ended December 31, (in thousands except for share data and %) 2022 2021 2020 2019 2018 GAAP-based efficiency ratio 63.94 % 63.63 % 58.95 % 67.48 % 69.46 % Noninterest expense $ 71,005 $ 63,868 $ 58,033 $ 47,219 $ 43,275 Amortization of intangibles 696 764 711 390 545 Noninterest expense, excluding amortization 70,309 63,104 57,322 46,829 42,730 Net interest income 100,042 89,618 74,667 61,677 57,024 Noninterest income 11,009 10,760 23,780 8,299 5,280 Adjustments: Securities transactions (17) 714 14,691 (157) (1,830) Noninterest income, excluding securities transactions $ 11,026 $ 10,046 $ 9,089 $ 8,456 $ 7,110 Efficiency ratio 63.30 % 63.32 % 68.44 % 66.77 % 66.63 % -66- 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 $83.2 million at December 31, 2022 compared to $261.9 million at December 31, 2021. Loans maturing within one year or less at December 31, 2022 totaled $372.1 million compared to $357.1 million at December 31, 2021. At December 31, 2022, time deposits maturing within one year or less totaled $312.9 million compared to $267.0 million at December 31, 2021. Time deposits maturing after one year through three years totaled $183.0 million at December 31, 2022 compared to $269.7 million at December 31, 2021. Time deposits maturing after three years totaled $37.4 million at December 31, 2022 compared to $50.0 million at December 31, 2021. First Guaranty's held to maturity ("HTM") investment securities portfolio at December 31, 2022 was $320.1 million or 70.9% of the investment portfolio compared to $153.5 million at December 31, 2021. First Guaranty's available for sale ("AFS") portfolio was $131.5 million, or 29.1% of the investment portfolio at December 31, 2022 compared to $210.6 million, or 57.8% at December 31, 2021. 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 $369.5 million and $456.3 million at December 31, 2022 and December 31, 2021, respectively with $120.0 million and $3.2 million in FHLB advances outstanding at December 31, 2022 and December 31, 2021, respectively. The advances outstanding at December 31, 2022 were comprised of three short-term advances that were paid off in January 2023. The advance outstanding at December 31, 2021 was comprised of a long-term advance that totaled $3.2 million. First Guaranty paid off the $3.2 million long-term advance acquired from the Union acquisition in the first quarter of 2022. 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, 2022, we had outstanding letters of credit from the FHLB in the amount of $388.6 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 $20.0 million outstanding balance at December 31, 2022. We also have a discount window line with the Federal Reserve Bank that totaled $29.0 million at December 31, 2022. 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 $235.0 million at December 31, 2022 from $223.9 million at December 31, 2021. The increase in shareholders' equity was principally the result of an increase of $19.7 million in retained earnings, partially offset by a decrease of $8.6 million in accumulated other comprehensive income. The $19.7 million increase in retained earnings was due to net income of $28.9 million during the year ended December 31, 2022, partially offset by $6.9 million in cash dividends paid on our common stock and $2.3 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, 2022. -67- 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, 2022, First Guaranty Bank was classified as well-capitalized. First Guaranty Bank's capital conservation buffer was 3.16% at December 31, 2022. The following table presents First Guaranty Bank's capital ratios as of the indicated dates. "Well Capitalized Minimums" At December 31, 2022 "Well Capitalized Minimums" At December 31, 2021 Tier 1 Leverage Ratio 5.00 % 9.35 % 5.00 % 8.71 % Tier 1 Risk-based Capital Ratio 8.00 % 10.31 % 8.00 % 10.22 % Total Risk-based Capital Ratio 10.00 % 11.16 % 10.00 % 11.22 % Common Equity Tier One Capital 6.50 % 10.31 % 6.50 % 10.22 % 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, 2022 and 2021 are as follows: Contract Amount (in thousands) December 31, 2022 December 31, 2021 Commitments to Extend Credit $ 246,968 $ 198,444 Unfunded Commitments under lines of credit $ 253,906 $ 250,231 Commercial and Standby letters of credit $ 14,222 $ 13,787 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, 2022, 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, 2022 and 2021. -68-