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, 2021 to December 31, 2022 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, 2022, filed with the SEC on March 16, 2023, 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 $3.6 billion at December 31, 2023 and $3.2 billion at December 31, 2022. Total deposits were $3.0 billion at December 31, 2023 and $2.7 billion at December 31, 2022. Total loans were $2.7 billion at December 31, 2023, an increase of $229.6 million, or 9.1%, compared with $2.5 billion at December 31, 2022. Total shareholders' equity was $249.6 million and $235.0 million at December 31, 2023 and December 31, 2022, respectively. Net income was $9.2 million and $28.9 million for the years ended December 31, 2023 and 2022, 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. The decrease in net income was caused principally by a decrease in net interest income of $15.3 million and an increase in noninterest expense of $8.7 million, partially offset by a decrease in income tax expense of $4.8 million. 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. 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. As the economy transitioned from an extended period of historically low interest rates to a period of higher interest rates in 2022-2023, 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. -39- Financial highlights for 2023 and 2022: • Total assets increased $401.4 million, or 12.7%, to $3.6 billion at December 31, 2023 when compared with December 31, 2022. Total loans at December 31, 2023 were $2.7 billion, an increase of $229.6 million, or 9.1%, compared with December 31, 2022. Total deposits were $3.0 billion at December 31, 2023, an increase of $285.3 million, or 10.5% compared with December 31, 2022. Retained earnings were $68.0 million at December 31, 2023, a decrease of $8.4 million compared to $76.4 million at December 31, 2022. Shareholders' equity was $249.6 million and $235.0 million at December 31, 2023 and December 31, 2022, respectively. • Net income for each of the years ended December 31, 2023 and 2022 was $9.2 million and $28.9 million, respectively. • Earnings per common share were $0.62 for the year ended December 31, 2023 and $2.48 for the year ended December 31, 2022. Total weighted average common shares outstanding were 11,165,303 and 10,716,796 at December 31, 2023 and December 31, 2022, respectively. • 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, 2023, First Guaranty had remaining Round 1 PPP loans of $0.1 million and Round 2 PPP loans of $2.8 million. $16,000 in PPP fees were recognized during 2023 compared to $1.3 million in PPP fees recognized in 2022. • The allowance for credit losses was 1.13% of total loans at December 31, 2023 compared to 0.93% at December 31, 2022. The adoption of the CECL model under ASC 326 was the main component of the increase. • The provision for credit losses totaled $3.7 million for 2023 and 2022. • Net interest income for 2023 was $84.7 million compared to $100.0 million for 2022. • Noninterest income for 2023 was $10.6 million compared to $11.0 million for 2022. • The net interest margin was 2.69% for 2023 and 3.47% for 2022. First Guaranty attributed the decrease in the net interest margin to the increase in market interest rates that began in 2022 and continued through the third quarter of 2023 that increased the cost of liabilities. Loans as a percentage of average interest earning assets increased to 82.8% at December 31, 2023 compared to 79.8% at December 31, 2022. • Investment securities totaled $404.1 million at December 31, 2023, a decrease of $47.4 million when compared to $451.5 million at December 31, 2022. Losses on the sale of securities were $0 for 2023 as compared to $17,000 for 2022. At December 31, 2023, available for sale securities, at fair value, totaled $83.5 million, a decrease of $48.0 million when compared to $131.5 million at December 31, 2022. At December 31, 2023, held to maturity securities, at amortized cost and net of the allowance for credit losses, totaled $320.6 million as compared to $320.1 million at December 31, 2022. A provision for credit losses on HTM securities of $0.1 million was recorded in the third quarter of 2023, and the allowance for credit losses for HTM securities was $0.1 million at December 31, 2023. • Total loans net of unearned income were $2.7 billion at December 31, 2023 compared to $2.5 billion at December 31, 2022. Total loans net of unearned income are reduced by the allowance for credit losses which totaled $30.9 million at December 31, 2023 and $23.5 million at December 31, 2022. First Guaranty adopted ASC 326 effective January 1, 2023 and recorded a cumulative adoption adjustment to the allowance of $7.1 million. • Nonaccrual loans increased $11.6 million to $25.2 million at December 31, 2023 compared to $13.6 million at December 31, 2022. • First Guaranty adopted ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments." (CECL) effective January 1, 2023. The total adjustment for CECL was $10.0 million which includes $7.0 million for the ACL, $0.1 million for HTM securities, and $2.9 million for unfunded loan commitments. The $2.9 million for unfunded loan commitments is recorded in other liabilities. • Return on average assets was 0.28% and 0.97% for the years ended December 31, 2023 and 2022, respectively. Return on average common equity was 3.36% and 13.64% for 2023 and 2022, respectively. Return on average assets is calculated by dividing net income by average assets. Return on average common equity is calculated by dividing net income by average common equity. • Book value per common share was $17.36 as of December 31, 2023 compared to $18.84 as of December 31, 2022. Tangible book value per common share was $16.03 as of December 31, 2023 compared to $17.23 as of December 31, 2022. The decrease was due primarily to a decrease in retained earnings associated with the adoption of CECL, the recent issuances of new shares, and 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. • First Guaranty's Board of Directors declared cash dividends of $0.64 per common share in 2023 and 2022. First Guaranty has paid 122 consecutive quarterly dividends on its common stock as of December 31, 2023. • First Guaranty paid preferred cash dividends of $2.3 million during 2023 and 2022. • First Guaranty issued $20.0 million of common stock through two separate private placements during 2023. -40- • 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. • 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. On July 10, 2023, First Guaranty, First Guaranty Bank, and Lone Star entered into a Mutual Termination Agreement and Release pursuant to which the parties mutually agreed to terminate the Merger Agreement. First Guaranty estimates that total costs associated with the Lone Star acquisition was approximately $0.5 million through December 31, 2023. • On October 5, 2023, we entered into a Loan Agreement (the “Loan Agreement”) with Summit Community Bank, Inc. (“Lender”) pursuant to which Lender made (i) a term loan in the principal amount of $40.3 million (the “Term Loan”), and (ii) a revolving line of credit in the maximum principal amount of up to $20.0 million (the “Line of Credit,” and, together with the Term Loan, the “Loans”). The principal sum outstanding under the Term Loan will bear interest at a rate equal to the Prime Index Rate as published by the Wall Street Journal, reset quarterly, minus 0.50% per annum, with a floor of 4.49% per annum. The principal sum outstanding under the Line of Credit will bear interest at a rate equal to the Prime Index Rate as published by the Wall Street Journal, reset monthly, with a floor of 4.49% per annum. The principal amount due and payable under the Term Loan will be amortized over a period of forty (40) quarters and will be in quarterly installments of principal, plus accrued interest, with the final payment equal to the then-outstanding principal balance and all accrued and unpaid interest, penalties and fees due thereon due at maturity of October 5, 2033. Any outstanding amounts under the Line of Credit will be repaid with monthly installments of interest only, followed by a final payment equal to the then-outstanding principal balance and all accrued and unpaid interest, penalties and fees due thereon at maturity on October 5, 2024, unless renewed. The proceeds of the Term Loan were used to repay in full all outstanding amounts under the existing indebtedness from First Horizon Bank (formerly known as First Tennessee Bank National Association). -41- 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 Credit Losses. The allowance for credit losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. The allowance is based on management’s evaluation of expected credit losses over the life of the loans in the portfolio, in accordance with ASC 326. The loan portfolio is divided into segments to evaluate expected losses. Loans that do not share risk characteristics with a segment are evaluated individually. Management estimates the allowance balance using available information such as past events, current conditions and reasonable forecasts. Adjustments to historical information are made using qualitative and qualitative factors developed by management. 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. The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, and individually evaluated for impairment. For such loans that are also classified as individually evaluated for impairment, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the loan is lower than the carrying value of that loan. 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, 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 credit losses on unfunded commitments represents expected credit losses over the contractual period for which First Guaranty is exposed to credit risk from a contractual obligation to extend credit. No allowance is recorded if there is an unconditional right to cancel the obligation. The allowance is reported as a component of Other Liabilities on the Consolidated Balance Sheets. Adjustments to the allowance for unfunded commitments are included in the provision for credit losses on the Consolidated Statements of Income. -42- Financial Condition Assets Our total assets were $3.6 billion at December 31, 2023, an increase of $401.4 million, or 12.7%, from total assets of $3.2 billion at December 31, 2022. Assets increased primarily due to increases in net loans of $222.2 million and cash and cash equivalents of $203.2 million, partially offset by a decrease in investment securities of $47.4 million at December 31, 2023 compared to December 31, 2022. Loans Net loans increased $222.2 million, or 8.9%, to $2.7 billion at December 31, 2023 from $2.5 billion at December 31, 2022. Construction and land development loans increased $166.3 million principally due to advances on existing construction lines and new originations that was partially offset by the conversion of loans to permanent financing. Non-farm non-residential loan balances increased $52.9 million primarily due to new originations. One-to four-family loans increased $78.5 million primarily due to new originations. Farmland loans increased $7.7 million due to increases on agricultural loan commitments. Consumer and other loans increased $6.6 million primarily due to new originations. Agricultural loans increased $2.0 million primarily due to seasonal activity. Multifamily loans decreased $0.9 million primarily due to pay downs on the existing multifamily loan portfolio. Commercial lease loan balances decreased $32.2 million primarily due to pay downs on the existing lease portfolio. First Guaranty's commercial lease portfolio generally has higher yields than commercial real estate loans but shorter average lives. Commercial and industrial loans decreased $50.3 million primarily due to payoffs. SBA PPP loans totaled $2.8 million at December 31, 2023 compared to $5.9 million at December 31, 2022. These totals are included in commercial and industrial loans. Round 1 SBA PPP loans decreased from $2.0 million at December 31, 2022 to $0.1 million at December 31, 2023 due to SBA loan forgiveness and payments received. Round 2 SBA PPP loans decreased from $3.9 million at December 31, 2022 to $2.8 million at December 31, 2023 due to SBA loan forgiveness and payments received. First Guaranty had approximately 2.8% of funded and 2.0% of unfunded commitments in our loan portfolio to businesses engaged in support or service activities for oil and gas operations. First Guaranty's hotel and hospitality portfolio totaled $182.3 million at December 31, 2023. 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 $375.7 million in loans related to our Texas markets at December 31, 2023 which was an increase of $41.8 million or 12.5% from $333.8 million at December 31, 2022. First Guaranty anticipates additional growth opportunities in Texas. First Guaranty had $278.1 million in loans related to our new Mideast markets in Kentucky and West Virginia at December 31, 2023 which was an increase of $67.2 million or 31.8% from $210.9 million at December 31, 2022. Syndicated loans at December 31, 2023 were $76.7 million, of which $23.9 million were shared national credits. Syndicated loans decreased $11.6 million from $88.3 million at December 31, 2022. As of December 31, 2023, 74.0% of our loan portfolio was secured by real estate. The largest portion of our loan portfolio, at 37.9% as of December 31, 2023, was non-farm non-residential loans secured by real estate. As of December 31, 2023, approximately 45.8% of the loan portfolio was based on a floating rate tied to the prime rate, the Secured Overnight Financing Rate ("SOFR") or Treasury rates. 54.5% of the loan portfolio is scheduled to mature within five years from December 31, 2023. First Guaranty initiated a process to transfer any LIBOR indexed loans to alternative reference rates such as the prime rate or SOFR as LIBOR was discontinued for repricings after June 30, 2023. Commercial real estate (“CRE”) has received increased regulatory scrutiny in recent quarters due to valuation concerns associated with the increase in market interest rates and the impact of the COVID-19 pandemic. First Guaranty has utilized enhanced risk management practices for CRE concentration analysis for several years. First Guaranty Bank’s credit department conducts an annual stress test for CRE related loans that is presented to the Bank’s board of directors. The stress test analyses the impact of changes in interest rates and cash flow on loan customers with credit exposures of $2.5 million or greater. First Guaranty generally requires personal guarantees on CRE loans. First Guaranty generally approves CRE loans with loan-to-values of 80% or less. First Guaranty also generally requires for construction related CRE loans that the borrower provides their equity contribution upfront before loan funds are advanced. First Guaranty has diversified its CRE portfolio across both industries and geographic location. The following is a summary of the largest CRE related loans associated with hotel and motels, office properties, apartment complexes, healthcare related properties, and properties under construction as of December 31, 2023. The largest CRE loan secured by a hotel or motel totaled $21.1 million. The property is a flagged hotel located in Texas. The largest CRE loan secured by an office related property totaled $21.7 million and is located in West Virginia. The largest CRE loan secured by an apartment complex totaled $25.9 million and is located in Texas. The largest healthcare related loan is a $17.7 million property secured by an assisted living center located in Louisiana. The largest CRE loan under construction totaled $37.9 million for an apartment complex and is secured by a property located in Louisiana. -43- Loan Portfolio Maturities . The following tables summarize the scheduled repayments of our loan portfolio at December 31, 2023. 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, 2023 (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 $ 63,230 $ 134,139 $ 110,357 $ 91,709 $ 399,435 Farmland 2,467 7,639 2,689 19,735 32,530 1- 4 family 24,666 39,977 44,447 335,760 444,850 Multifamily 4,596 28,257 23,927 62,141 118,921 Non-farm non-residential 117,559 428,913 145,871 353,522 1,045,865 Total Real Estate 212,518 638,925 327,291 862,867 2,041,601 Non-Real Estate: Agricultural 14,739 6,554 8,738 10,977 41,008 Commercial and industrial 59,614 254,436 14,665 6,257 334,972 Commercial leases 71,908 207,205 6,302 — 285,415 Consumer and other 10,940 37,113 6,077 355 54,485 Total Non-Real Estate 157,201 505,308 35,782 17,589 715,880 Total Loans Before Unearned Income $ 369,719 $ 1,144,233 $ 363,073 $ 880,456 $ 2,757,481 Less: Unearned income (8,773) Total Loans Net of Unearned Income $ 2,748,708 The following table sets forth the scheduled repayments of fixed and adjustable-rate loans at December 31, 2023 that are contractually due after December 31, 2023. Due After December 31, 2023 (in thousands) Fixed Floating Total One year or less $ 268,864 88,884 357,748 One to five years 782,754 357,981 1,140,735 Over five to 15 years 88,490 269,918 358,408 Over 15 years 334,337 541,066 875,403 Subtotal $ 1,474,445 $ 1,257,849 $ 2,732,294 Nonaccrual loans 25,187 Total $ 2,757,481 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. -44- 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, 2023 and 2022. -45- December 31, (in thousands) 2023 2022 Nonaccrual loans: Real Estate: Construction and land development $ 530 $ 225 Farmland 836 290 1- 4 family 6,985 3,826 Multifamily 537 — Non-farm non-residential 9,740 3,746 Total Real Estate 18,628 8,087 Non-Real Estate: Agricultural 1,369 1,622 Commercial and industrial 1,581 819 Commercial leases 1,799 1,799 Consumer and other 1,810 1,239 Total Non-Real Estate 6,559 5,479 Total nonaccrual loans 25,187 13,566 Loans 90 days and greater delinquent & still accruing: Real Estate: Construction and land development — 427 Farmland — — 1- 4 family 124 332 Multifamily — 157 Non-farm non-residential 14,711 103 Total Real Estate 14,835 1,019 Non-Real Estate: Agricultural 57 — Commercial and industrial 395 123 Commercial leases — — Consumer and other — — Total Non-Real Estate 452 123 Total loans 90 days and greater delinquent & still accruing 15,287 1,142 Total non-performing loans $ 40,474 $ 14,708 Other real estate owned and foreclosed assets: Real Estate: Construction and land development 251 — Farmland — — 1- 4 family 309 113 Multifamily — — Non-farm non-residential 690 — Total Real Estate 1,250 113 Non-Real Estate: Agricultural — — Commercial and industrial — — Commercial leases — — Consumer and other — — Total Non-Real estate — — Total other real estate owned and foreclosed assets 1,250 113 Total non-performing assets $ 41,724 $ 14,821 Non-performing assets to total loans 1.52 % 0.59 % Non-performing assets to total assets 1.17 % 0.47 % Non-performing loans to total loans 1.47 % 0.58 % Nonaccrual loans to total loans 0.92 % 0.54 % Allowance for loan and lease losses to nonaccrual loans 122.79 % 173.36 % -46- For the years ended December 31, 2023 and 2022, gross interest income which would have been recorded had the non-performing loans been current in accordance with their original terms amounted to $1.2 million and $0.5 million, respectively. We recognized $0.3 million and $0.2 million of interest income on such loans during the years ended December 31, 2023 and 2022, respectively. For the years ended December 31, 2023 and 2022, 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 $0.1 million, respectively. We recognized $0.1 million and $0.1 million of interest income on such loans during the years ended December 31, 2023 and 2022, respectively. Non-performing assets were $41.7 million, or 1.17%, of total assets at December 31, 2023, compared to $14.8 million, or 0.47%, of total assets at December 31, 2022, which represented an increase in non-performing assets of $26.9 million. The increase in non-performing assets occurred primarily due to an increase in nonaccrual loans, 90 days or greater delinquent and still accruing, and other real estate owned. Nonperforming loans included loans previously classified as purchase credit deteriorated following the adoption of CECL. Nonaccrual loans increased from $13.6 million at December 31, 2022 to $25.2 million at December 31, 2023. The increase in nonaccrual loans was concentrated primarily in non-farm non-residential, one- to four-family, commercial and industrial, and consumer and other loans. Non-performing assets included $1.9 million in loans with a government guarantee, or 4.45% of non-performing assets. These are structured as net loss guarantees in which up to 90% of loss exposure is covered. At December 31, 2023 loans 90 days and greater delinquent and still accruing totaled $15.3 million, an increase of $14.1 million or 1238.6% from $1.1 million at December 31, 2022. The increase in loans 90 days or greater delinquent and still accruing was concentrated primarily in non-farm non-residential, commercial and industrial, and agricultural loans. Other real estate owned at December 31, 2023 totaled $1.3 million, an increase of $1.1 million from $0.1 million at December 31, 2022. The increase was primarily due to the addition of a $0.8 million non-farm non-residential property during the first quarter of 2023. This property was related to a loan that was on nonaccrual status at December 31, 2022. At December 31, 2023, our largest non-performing assets were comprised of the following nonaccrual loans and 90 days or greater delinquent and still accruing loans: (1) a non-farm non-residential loan that totaled $13.6 million; (2) a non-farm non-residential loan that totaled $4.7 million; (3) a $2.1 million loan relationship that is classified as purchased credit deteriorated; (4) a commercial lease loan that totaled $1.8 million; (5) a non-farm non-residential loan secured by a mobile home facility that totaled $1.3 million. -47- 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 increase in classified assets at December 31, 2023 as compared to December 31, 2022 was due to a $45.6 million increase in substandard loans and a $1.6 million increase in doubtful loans. The increase in substandard loans was primarily the result of the downgrade of one real estate secured loan relationship in the second quarter of 2023 with an aggregate principal balance of $36.5 million as of December 31, 2023. The loans are secured by shopping centers. While the loans are over collateralized based upon recent appraisals totaling $47.4 million, there is no certainty that the Bank will receive full repayment upon liquidation should that become necessary. The increase in doubtful loans was primarily the result of the downgrade of several loan relationships from substandard to doubtful. Special mention loans increased by $28.4 million in 2023. The increase in special mention loans was primarily the result of the downgrade of one commercial real estate loan from pass status to special mention totaling $15.0 million and the downgrade of one commercial lease loan relationship from pass status to special mention totaling $13.0 million. -48- Allowance for Credit Losses First Guaranty adopted FASB ASC Topic 326 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments” Update No. 2016-13 (“ASU 2016-13”). ASU 2016-13 on January 1, 2023. ASU 2016-13, referred to as the Current Expected Credit Loss (“CECL”) standard, requires financial assets measured on an amortized cost basis, including loans and held-to-maturity debt securities, to be presented at an amount net of an allowance for credit losses, which reflects expected losses for the full life of the financial asset. Unfunded lending commitments are also within the scope of this topic. Under prior GAAP losses were not recognized until the occurrence of the loss was probable. See Recent Accounting Pronouncements for more information on the adoption of ASC 326. The allowance for credit losses on loans is maintained to absorb expected losses over the life of the loans 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 expected 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; • 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, or collateral dependent. For such loans that are also classified as collateral dependent, an allowance is established when the collateral value is lower than the carrying value of that loan. 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 balance in the allowance for credit losses is principally influenced by the provision for loan losses, recoveries, and by net loan loss experience. Additions to the allowance are charged to the provision for credit 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 allowance for credit losses was $30.9 million at December 31, 2023 compared to $23.5 million at December 31, 2022. -49- The balance in the allowance for credit 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 credit 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 credit losses for the years indicated. As previously disclosed, the adoption of the CECL model in ASC 326 was the cause of most of the increase in the allowance. At or For the Years Ended December 31, (dollars in thousands) 2023 2022 Balance at beginning of year $ 23,518 $ 24,029 ASC 326 Adoption Day 1 Adjustment 8,120 — Charge-offs: Real Estate: Construction and land development — (65) Farmland — — 1- 4 family (964) (94) Multifamily — — Non-farm non-residential (138) (603) Total Real Estate (1,102) (762) Non-Real Estate: Agricultural — (460) Commercial and industrial loans (1,694) (563) Commercial leases — (150) Consumer and other (2,975) (4,151) Total Non-Real Estate (4,669) (5,324) Total charge-offs (5,771) (6,086) Recoveries: Real Estate: Construction and land development 7 340 Farmland — — 1- 4 family 93 76 Multifamily — 452 Non-farm non-residential 230 349 Total Real Estate 330 1,217 Non-Real Estate: Agricultural 414 133 Commercial and industrial loans 205 91 Commercial leases — 5 Consumer and other 426 473 Total Non-Real Estate 1,045 702 Total recoveries 1,375 1,919 Net (charge-offs) recoveries (4,396) (4,167) Provision for loan losses 3,684 3,656 Balance at end of year $ 30,926 $ 23,518 Ratios: Net loan charge-offs to average loans 0.17 % 0.18 % Net loan charge-offs to loans at end of year 0.16 % 0.17 % Allowance for loan and lease losses to loans at end of year 1.13 % 0.93 % Net loan charge-offs to allowance for loan and lease losses 14.21 % 17.72 % Net loan charge-offs to provision charged to expense 119.33 % 113.98 % -50- A provision for credit losses of $3.7 million was made during each of the years ended December 31, 2023 and 2022. The provisions made in 2023 included a $0.1 million negative provision for credit losses related to unfunded commitments and a $0.1 million provision for credit losses on HTM securities. The provisions made were taken to provide for current credit losses and to maintain the allowance proportionate to risks inherent in the loan portfolio. The loan portfolio factors in 2023 that primarily affected the allocation of the allowance included the following: • The adoption of the CECL methodology under ASU 2016-13 was the largest contributor to changes in both the size and allocation of the allowance for credit losses. First Guaranty also made adjustments of certain qualitative factors to take into account the current estimated impact of COVID-19, 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 individually evaluated for impairment loans within their respective categories. • Construction and land development loans increased during 2023 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, 2023. The allowance increase related to this portfolio was due to growth in the portfolio along with changes in the qualitative analysis of the portfolio and the adoption of CECL. • One-to-four family residential loans increased during 2023. The allowance increase related to this portfolio was due to changes in the qualitative analysis of the portfolio, portfolio growth, and also the adoption of CECL. • Multifamily loans decreased during 2023. The allowance related to this portfolio increased due primarily to the adoption of CECL. • Non-farm non-residential loans increased during 2023. The allowance increase related to this portfolio was due primarily to growth in the portfolio and also to the adoption of CECL. • Commercial and industrial loans decreased during 2023. The allowance increase related to this portfolio was due to the adoption of the CECL methodology. • Commercial leases decreased during 2023. The allowance decrease related to this portfolio was due to the reduction in this portfolio and due to changes in the qualitative analysis of the portfolio. Commercial leases declined during 2023 from $317.6 million at December 31, 2022 to $285.4 million at December 31, 2023. • Consumer and other loans increased during 2023. The decrease in the related loan loss allowance balance was due primarily to qualitative analysis, charge-offs on consumer loans and the adoption of the CECL methodology. First Guaranty charged off $5.8 million in loan balances during the year ended December 31, 2023 as compared to $6.1 million for 2022. Recoveries totaled $1.4 million for the year ended December 31, 2023 and $1.9 million during 2022. The details of the $5.8 million in charged-off loans were as follows: 1. First Guaranty charged off $0.3 million in consumer loans related to Hurricane Ida relief loans during 2023. 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 $0.8 million on a real estate secured loan in the fourth quarter of 2023. This loan had no remaining principal balance at December 31, 2023. This loan was previously acquired in the 2019 Union Bancshares acquisition. 3. First Guaranty charged off $0.3 million on a commercial and industrial loan during the fourth quarter of 2023. This loan had no remaining principal balance at December 31, 2023. 4. Smaller loans and overdrawn deposit accounts comprised the remaining $4.4 million of charge-offs for 2023. These charge offs were concentrated in equipment, vehicle, and unsecured loans. -51- 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, 2023 2022 (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 $ 5,845 18.9 % 14.5 % $ 1,232 5.2 % 9.2 % Farmland 36 0.1 % 1.2 % 83 0.4 % 1.0 % 1- 4 family 6,653 21.5 % 16.1 % 1,761 7.5 % 14.5 % Multifamily 1,614 5.2 % 4.3 % 746 3.2 % 4.7 % Non-farm non-residential 10,596 34.3 % 37.9 % 9,280 39.5 % 39.3 % Non-Real Estate: Agricultural 97 0.3 % 1.5 % 240 1.0 % 1.5 % Commercial and industrial 2,711 8.8 % 12.1 % 2,194 9.3 % 15.3 % Commercial leases 1,948 6.3 % 10.4 % 4,879 20.7 % 12.6 % Consumer and other 1,426 4.6 % 2.0 % 2,506 10.7 % 1.9 % Unallocated — — % — 597 2.5 % — Total Allowance $ 30,926 100.0 % 100.0 % $ 23,518 100.0 % 100.0 % The following table presents net charge-offs during the period to average loans outstanding: December 31, 2023 December 31, 2022 (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 $ 7 $ 333,107 — % $ 275 $ 203,364 0.1 % Farmland — 29,089 — % — 27,343 — % 1- 4 Family (871) 414,007 (0.2) % (18) 330,752 — % Multifamily — 120,522 — % 452 103,194 0.4 % Non-farm non-residential 92 1,037,722 — % (254) 957,858 — % Non-Real Estate: Agricultural 414 44,308 0.9 % (327) 38,175 (0.9) % Commercial and industrial (1,489) 343,041 (0.4) % (472) 390,183 (0.1) % Commercial leases — 290,559 — % (145) 273,367 (0.1) % Consumer and other (2,549) 49,370 (5.2) % (3,678) 48,301 (7.6) % 1 Average loans outstanding was calculated using the trailing four quarters total for loans. -52- Investment Securities Investment securities at December 31, 2023 totaled $404.1 million, a decrease of $47.4 million, or 10.5%, compared to $451.5 million at December 31, 2022. The portfolio consists of both available for sale (AFS) and held to maturity securities (HTM). The securities designated as held to maturity are agency and corporate debt securities that are part of First Guaranty’s investment strategy and public funds collateralization program. 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, 2023, the U.S. Government and Government agency securities and municipal bonds qualified as securities available to collateralize public funds. Securities pledged as collateral totaled $192.2 million at December 31, 2023 and $260.8 million at December 31, 2022. 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 $83.5 million at December 31, 2023, a decrease of $48.0 million, or 36.5%, compared to $131.5 million at December 31, 2022. The decrease was primarily due to the maturity of U.S. Treasury securities. Our held to maturity securities portfolio had an amortized cost of $320.6 million, net of allowance at December 31, 2023, compared to $320.1 million at December 31, 2022. There were no credit related impairment of available for sale securities during 2023. An allowance for credit losses of $0.1 million for held to maturity securities was recorded upon the adoption of ASC 326. There was one charge-off, net of recovery of $0.1 million recognized on a corporate security classed as held to maturity during 2023. There was a provision of $0.1 million was recorded in the third quarter of 2023. The allowance for credit losses for held to maturity securities was $0.1 million at December 31, 2023. The following tables set forth the stated maturities and weighted average yields of our investment securities at December 31, 2023. At December 31, 2023 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 $ 49,830 1.0 % $ — — % $ — — % $ — — % U.S. Government Agencies — — % — — % — — % — 2.3 — % Corporate debt securities — — % — — % 15,474 5.4 % — — % Municipal bonds 807 3.4 % 2,763 3.6 % 3,290 4.3 % 6,321 3.5 % Mortgage-backed securities — — % 1 3.4 % 4 5.4 % 4,995 5.0 % Total available for sale securities $ 50,637 1.0 % $ 2,764 3.6 % $ 18,768 5.2 % $ 11,316 4.2 % Held to maturity: U.S. Government Agencies $ — — % $ — — % $ 62,756 2.3 % $ 203,140 2.5 % Corporate debt securities $ — — % $ 2,004 3.1 % $ 52,818 3.2 % $ — — % Total held to maturity securities $ — — % $ 2,004 3.1 % $ 115,574 2.7 % $ 203,140 2.5 % At December 31, 2023, $50.6 million, or 12.5%, 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 $209.5 million, or 51.8%, of the total portfolio at December 31, 2023. 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. -53- 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, 2022 to December 31, 2023, total deposits increased $285.3 million, or 10.5%, to $3.0 billion. Noninterest-bearing demand deposits decreased $81.7 million, or 15.6% to $442.8 million at December 31, 2023. The decrease in noninterest-bearing demand deposits was primarily due to increased competition in the marketplace for interest bearing deposits. Interest-bearing demand deposits increased $66.4 million, or 4.5%, to $1.5 billion at December 31, 2023. The increase in interest-bearing demand deposits was primarily concentrated in public funds interest-bearing demand deposits. Savings deposits increased $13.2 million, or 6.4%, to $219.0 million at December 31, 2023, primarily related to increases in business and individual savings deposits. Time deposits increased $287.4 million, or 53.9%, to $820.7 million at December 31, 2023, primarily due to increases in consumer and business time deposits along with increased brokered time deposits of approximately $175.6 million. These new brokered time deposits had maturities of two and three years. The proceeds from the new deposits were used to reduce short-term FHLB borrowings. 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. At December 31, 2023, public funds deposits totaled $1.2 billion compared to $1.1 billion at December 31, 2022. Public funds time deposits totaled $50.9 million at December 31, 2023 compared to $32.4 million at December 31, 2022. 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 $591.7 million at December 31, 2023 compared to $576.3 million at December 31, 2022. The following table sets forth public funds as a percent of total deposits. At December 31, (in thousands except for %) 2023 2022 Public Funds: Noninterest-bearing Demand $ 6,471 $ 11,730 Interest-bearing Demand 1,090,527 1,022,760 Savings 46,606 46,354 Time 50,934 32,427 Total Public Funds $ 1,194,538 $ 1,113,271 Total Deposits $ 3,009,094 $ 2,723,792 Total Public Funds as a percent of Total Deposits 39.7 % 40.9 % At December 31, 2023, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $250,000 was approximately $196.9 million. At December 31, 2023, approximately $34.6 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 $302.6 million at December 31, 2023. This total excludes public funds deposits that are collateralized by securities or FHLB letters of credit. The amount of uninsured deposits including collateralized public funds deposits was estimated at $880.6 million at December 31, 2023. -54- The following table sets forth the maturity of certificates of deposits greater than $250,000 at December 31, 2023. (in thousands) December 31, 2023 Three months or less $ 76,884 Three to six months 27,222 Six months to one year 39,559 One to three years 19,612 More than three years 4,105 Total certificates of deposit greater than $250,000 $ 167,382 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 $66.3 million in short-term borrowings outstanding at December 31, 2023 compared to $146.4 million outstanding at December 31, 2022. The short-term borrowings at December 31, 2023 were comprised of short-term Federal Home Loan Bank advances of $50.0 million, a line of credit of $20.0 million with an outstanding balance of $10.0 million and repurchase agreements of $6.3 million. The short-term borrowings outstanding at December 31, 2022 were comprised of $120.0 million 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. First Guaranty had available lines of credit of $20.0 million, with $10.0 million outstanding at December 31, 2023. A net availability of $10.0 million remained. First Guaranty had long-term borrowings from the FHLB that totaled $155.0 million at December 31, 2023. First Guaranty converted previous short-term floating rate borrowings from the FHLB into long-term lower fixed rate borrowings in order to reduce interest expense. First Guaranty has a $20.0 million FHLB advance that matures in the first quarter of 2025, a $100.0 million FHLB advance that matures in the second quarter of 2027, and $35.0 million FHLB advance that matures in the third quarter of 2027. At December 31, 2023, we had $513.3 million in FHLB letters of credit outstanding obtained primarily for collateralizing public deposits compared to $388.6 million at December 31, 2022. First Guaranty had senior long-term debt totaling $39.1 million at December 31, 2023 and $21.9 million at December 31, 2022. The change in senior long-term debt occurred when First Guaranty refinanced its outstanding balance on a revolving line of credit into a long term credit facility in October 2023. First Guaranty also had subordinated debt totaling $15.0 million at December 31, 2023 and $15.0 million at December 31, 2022. Shareholders' Equity Total shareholders' equity increased to $249.6 million at December 31, 2023 from $235.0 million at December 31, 2022. The increase in shareholders' equity was principally the result of an increase of $19.0 million in surplus and a $2.3 million decrease in accumulated other comprehensive loss, partially offset by a decrease of $8.4 million in retained earnings. The $19.0 million increase in surplus was due to common stock issued in private placements and common stock issued under the Equity Bonus Plan during 2023. The decrease in accumulated other comprehensive loss was primarily attributed to the decrease in unrealized losses on available for sale securities during the year ended December 31, 2023. The $8.4 million decrease in retained earnings was primarily due to the adoption of CECL which had a $7.9 million after tax reduction to retained earnings, $7.4 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, partially offset by net income of $9.2 million during the year ended December 31, 2023. -55- Results of Operations A discussion regarding significant changes in our financial condition from December 31, 2021 to December 31, 2022 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, 2022, filed with the SEC on March 16, 2023, 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, 2023 compared with year ended December 31, 2022. Net income for the year ended December 31, 2023 was $9.2 million, a decrease of $19.7 million, or 68.1%, as compared to $28.9 million for the year ended December 31, 2022. The decrease in net income of $19.7 million for the year ended December 31, 2023 was the result of several factors. First Guaranty experienced an increase in interest income. This increased income was offset by an increase in interest expense, an increase in the provision for credit losses, a decrease in noninterest income, and an increase in noninterest expense. Loan interest income increased due to the growth in First Guaranty's loan portfolio and repricing of existing loans to higher market rates, including loan fees recognized as an adjustment to yield. Securities interest income increased due to an increase in the average yield of the investment portfolio. Factors that 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 changes within the portfolio. Noninterest income decreased primarily due a decrease on the sale of loans. Noninterest expense increased primarily due to increased personnel expenses, legal and professional fees, software expense, regulatory assessment, and data processing expenses. Earnings per common share for the years ended December 31, 2023 was $0.62 per common share, a decrease of 75.0% or $1.86 per common share from $2.48 per common share for the year ended December 31, 2022. 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, SOFR 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 and 2023 due to the impact of inflation and the Federal Reserve's 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, 2023 compared with year ended December 31, 2022 . Net interest income for the years ended December 31, 2023 and 2022 was $84.7 million and $100.0 million, respectively. The decrease in net interest income for the year ended December 31, 2023 as compared to the prior year was primarily due to 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, partially offset by 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. For the year ended December 31, 2023, the average balance of our total interest-bearing liabilities increased by $320.8 million to $2.5 billion due to growth in interest-bearing deposits and borrowings. The average rate of our total interest-bearing liabilities increased by 224 basis points to 3.90% from 1.66% for the year ended 2022. The rise in market interest rates, particularly associated with Treasury rates, contributed to the increase in our liabilities cost. The primary source of the increase in liabilities cost was associated with interest bearing demand deposits for public funds that are primarily indexed to Treasury rates. For the year ended December 31, 2023, the average balance of our total interest-earning assets increased by $267.2 million to $3.1 billion due to an improved mix of higher yielding assets. The average yield of our interest-earning assets increased by 107 basis points to 5.81% from 4.74% for the year ended December 31, 2022 due to an improved mix of higher yielding assets. As a result, our net interest rate spread decreased 117 basis points to 1.91% for the year ended December 31, 2023 from 3.08% for the year ended December 31, 2022. Our net interest margin decreased 78 basis points to 2.69% for the year ended December 31, 2023 from 3.47% for the year ended December 31, 2022. -56- Interest Income Year ended December 31, 2023 compared with year ended December 31, 2022 . Interest income increased $46.4 million, or 34.0%, to $183.0 million for the year ended December 31, 2023 as compared to the prior year. First Guaranty's loan portfolio expanded during 2023 due to growth associated with our loan originations and existing loans repriced to higher market rates. 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 $267.2 million to $3.1 billion for the year ended December 31, 2023 as compared to the prior year. The average yield of interest-earning assets increased by 107 basis points to 5.81% for the year ended December 31, 2023 compared to 4.74% for the year ended December 31, 2022. Interest income on securities increased $0.4 million to $9.6 million for the year ended December 31, 2023 as compared to the prior year primarily as a result of an increase in average yield of securities. The average yield on securities increased by 26 basis points to 2.31% for the year ended December 31, 2023 from 2.05% for the year ended December 31, 2022 due to the decrease in lower yielding Treasury securities that matured in 2023. The average balance of securities decreased $36.7 million to $415.5 million for the year ended December 31, 2023 from $452.2 million for the year ended December 31, 2022 primarily due to a decrease in the average balance of our U.S. Treasuries securities portfolio compared to the prior year. Interest income on loans increased $41.1 million, or 32.6%, to $167.1 million for the year ended December 31, 2023 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 $308.8 million to $2.6 billion for the year ended December 31, 2023 from $2.3 billion for the year ended December 31, 2022 as a result of new loan originations. The average yield on loans (excluding loans held for sale) increased by 93 basis points to 6.41% for the year ended December 31, 2023 from 5.48% for the year ended December 31, 2022 due to the improved mix of loans along with an increase in market interest rates. Interest Expense Year ended December 31, 2023 compared with year ended December 31, 2022 . Interest expense increased $61.8 million, or 169.1%, to $98.3 million for the year ended December 31, 2023 from $36.5 million for the year ended December 31, 2022 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 259 basis points during the year ended December 31, 2023 to 4.16% as compared to 1.57% 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. The largest concentration of interest-bearing demand deposits is associated with public funds deposits that are primarily indexed to Treasury rates. Treasury rates increased as the Federal Reserve increased rates to address increased inflation in the U.S. economy. The average rate of time deposits increased 163 basis points during the year ended December 31, 2023 to 3.58% as compared to 1.95% for the prior year. The increase in the average rate of time deposits was due to changes in market rates. The average balance of interest-bearing liabilities increased by $320.8 million during the year ended December 31, 2023 to $2.5 billion. This increase was a result of a $86.2 million increase in the average balance of interest-bearing demand deposits, a $0.7 million increase in the average balance of savings deposits, a $122.9 million increase in the average balance of time deposits, and a $111.1 million increase 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. -57- December 31, 2023 December 31, 2022 (in thousands except for %) Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate Assets Interest-earning assets: Interest-earning deposits with banks(1) $ 125,417 $ 6,268 5.00 % $ 130,406 $ 1,324 1.02 % Securities (including FHLB stock) 415,504 9,601 2.31 % 452,213 9,250 2.05 % Federal funds sold 374 — — % 256 — — % Loans held for sale — — % — — — % Loans, net of unearned income (6) 2,607,074 167,140 6.41 % 2,298,273 126,002 5.48 % Total interest-earning assets 3,148,369 183,009 5.81 % 2,881,148 136,576 4.74 % Noninterest-earning assets: Cash and due from banks 18,729 18,833 Premises and equipment, net 61,733 58,197 Other assets 27,514 29,509 Total Assets $ 3,256,345 $ 2,987,687 Liabilities and Shareholders' Equity Interest-bearing liabilities: Demand deposits $ 1,448,597 60,243 4.16 % $ 1,362,396 21,419 1.57 % Savings deposits 213,025 3,554 1.67 % 212,329 915 0.43 % Time deposits 669,661 23,967 3.58 % 546,776 10,682 1.95 % Borrowings 187,019 10,540 5.64 % 75,962 3,518 4.63 % Total interest-bearing liabilities 2,518,302 98,304 3.90 % 2,197,463 36,534 1.66 % Noninterest-bearing liabilities: Demand deposits 481,456 552,786 Other 18,672 9,669 Total Liabilities 3,018,430 2,759,918 Shareholders' Equity 237,915 227,769 Total Liabilities and Shareholders' Equity $ 3,256,345 $ 2,987,687 Net interest income $ 84,705 $ 100,042 Net interest rate spread(2) 1.91 % 3.08 % Net interest-earning assets(3) $ 630,067 $ 683,685 Net interest margin(4)(5) 2.69 % 3.47 % Average interest-earning assets to interest-bearing liabilities 125.02 % 131.11 % (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 2.69% and 3.48% for the years ended December 31, 2023 and 2022. A 21% tax rate was used to calculate the effect on securities income from tax exempt securities for the years ended December 31, 2023 and 2022. (6) Includes loan fees of $6.0 million and $7.8 million for the years ended December 31, 2023 and 2022. PPP loan fee income of $16,000 and $1.3 million was recognized for the years ended December 31, 2023 and 2022, respectively. -58- 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, 2023 vs. 2022 Increase (Decrease) Due To (in thousands except for %) Volume Rate Increase/ Decrease Interest earned on: Interest-earning deposits with banks $ (52) $ 4,996 $ 4,944 Securities (including FHLB stock) (788) 1,139 351 Federal funds sold — — — Loans held for sale — — — Loans, net of unearned income 18,198 22,940 41,138 Total interest income 17,358 29,075 46,433 Interest paid on: Demand deposits 1,437 37,387 38,824 Savings deposits 3 2,636 2,639 Time deposits 2,825 10,460 13,285 Borrowings 6,115 907 7,022 Total interest expense 10,380 51,390 61,770 Change in net interest income $ 6,978 $ (22,315) $ (15,337) Provision for Credit and Loan Losses A provision for credit and loan losses is a charge to income in an amount that management believes is necessary to maintain an adequate allowance for credit losses. The allowance for credit losses is calculated under ASC 326 and is management's evaluation of expected credit losses over the life of the loans in the portfolio. 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. Past events, current conditions, and reasonable forecasts, along with quantitative and qualitative adjustments, are used in calculating the allowance for credit 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 credit losses for the year ended December 31, 2023 compared to $3.7 million for 2022. The $3.7 million provision included a $0.1 million negative provision for credit losses related to unfunded commitments and a $0.1 million provision for credit losses on HTM securities. Total charge-offs were $5.8 million for year ended December 31, 2023 and $6.1 million for 2022. Charge-offs for 2023 were concentrated in consumer relief loans associated with Hurricane Ida, a non-farm non-residential loan, and a commercial and industrial loan. Hurricane Ida consumer relief loans charge-offs totaled $0.3 million during 2023. Partially offsetting these charge-offs were recoveries that totaled $1.4 million for the year ended December 31, 2023 and $1.9 million for the same period in 2022. We believe that the allowance is adequate to cover expected losses in the loan portfolio. Economic uncertainty may result in additional increases to the allowance for credit losses in future periods. -59- Noninterest Income Our primary sources of recurring noninterest income are customer service fees, ATM and debit card fees, loan fees, gains on the sales of loans and available for sale securities and other service fees. Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method. Noninterest income totaled $10.6 million for the year ended December 31, 2023, a decrease of $0.4 million from $11.0 million for the year ended December 31, 2022. The decrease was primarily due to reduced gains on the sale of loans. Net securities losses were $0 for the year ended December 31, 2023 as compared to net securities losses of $17,000 for 2022. Service charges, commissions and fees totaled $3.4 million for the year ended December 31, 2023 as compared to $3.2 million for 2022. ATM and debit card fees totaled $3.2 million for the year ended December 31, 2023 and $3.4 million for 2022. Net gains on the sale of loans were $12,000 for the year ended December 31, 2023 and $1.8 million for 2022. Other noninterest income totaled $3.9 million and $2.7 million for the years ended December 31, 2023 and 2022, respectively. Noninterest Expense Noninterest expense includes salaries and employee benefits, occupancy and equipment expense and other types of expenses. Noninterest expense totaled $79.7 million for the year ended December 31, 2023 and $71.0 million for the year ended December 31, 2022. Salaries and benefits expense totaled $40.4 million for the year ended December 31, 2023 and $36.7 million for the year ended December 31, 2022. The increase was primarily due to the increase in personnel expense from new hires. Occupancy and equipment expense totaled $9.0 million for the year ended December 31, 2023 and $8.9 million for the year ended December 31, 2022. Other noninterest expense totaled $30.2 million for the year ended December 31, 2023 and $25.4 million for 2022. The largest increase in other noninterest expense was a $1.5 million increase in legal fees, which incluced a $0.6 million settlement payment to the SEC and legal fees related to the propesed merger with Lone Star Bank. Regulatory assessments increased $1.1 million to $3.1 million in 2023, compared to $2.0 million in 2022. The following table presents, for the years indicated, the major categories of other noninterest expense: (in thousands) December 31, 2023 December 31, 2022 Other noninterest expense: Legal and professional fees $ 5,709 $ 4,159 Data processing 2,100 1,596 ATM fees 1,804 1,750 Marketing and public relations 1,927 1,747 Taxes - sales, capital, and franchise 2,263 1,949 Operating supplies 778 728 Software expense and amortization 5,282 4,191 Travel and lodging 1,362 1,236 Telephone 382 406 Amortization of core deposits 696 696 Donations 595 638 Net costs from other real estate and repossessions 157 393 Regulatory assessment 3,136 1,997 Other 4,032 3,888 Total other expense $ 30,223 $ 25,374 -60- 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 and the statutory tax rate. The provision for income taxes for the years ended December 31, 2023 and 2022 was $2.7 million and $7.5 million, respectively. The provision for income taxes in 2023 decreased as compared to 2022 due to the decrease in income before income taxes. First Guaranty's statutory tax rate was 21.0% for the years ended December 31, 2023 and 2022. 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 and 2023 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 %) 2023 2022 2021 2020 2019 Year End Balance Sheet Data: Investment securities $ 404,123 $ 451,526 $ 364,156 $ 238,548 $ 426,516 Federal funds sold $ 341 $ 423 $ 183 $ 702 $ 914 Loans, net of unearned income $ 2,748,708 $ 2,519,077 $ 2,159,359 $ 1,844,135 $ 1,525,490 Allowance for loan and lease losses $ 30,926 $ 23,518 $ 24,029 $ 24,518 $ 10,929 Total assets $ 3,552,772 $ 3,151,347 $ 2,878,120 $ 2,473,078 $ 2,117,216 Total deposits $ 3,009,094 $ 2,723,792 $ 2,596,492 $ 2,166,318 $ 1,853,013 Borrowings $ 275,396 $ 183,369 $ 49,635 $ 116,630 $ 86,747 Shareholders' equity $ 249,631 $ 234,991 $ 223,889 $ 178,591 $ 166,035 Common shareholders' equity $ 216,573 $ 201,933 $ 190,831 $ 178,591 $ 166,035 Performance Ratios and Other Data: Return on average assets 0.28 % 0.97 % 1.01 % 0.87 % 0.76 % Return on average common equity 3.36 % 13.64 % 14.06 % 11.36 % 8.99 % Return on average tangible assets (1) 0.30 % 0.99 % 1.04 % 0.90 % 0.78 % Return on average tangible common equity (1) 3.98 % 15.31 % 15.98 % 13.08 % 9.68 % Net interest margin 2.69 % 3.47 % 3.44 % 3.35 % 3.41 % Average loans to average deposits 92.69 % 85.94 % 83.65 % 81.25 % 78.59 % Efficiency ratio (2) 83.62 % 63.94 % 63.63 % 58.95 % 67.48 % Efficiency ratio (excluding amortization of intangibles and securities transactions) (2) 82.89 % 63.30 % 63.32 % 68.44 % 66.77 % Full time equivalent employees (year end) 491 472 470 429 431 (Footnotes follow on next page) -61- At or For the Years Ended December 31, (in thousands except for % and share data) 2023 2022 2021 2020 2019 Capital Ratios: Average shareholders' equity to average assets 7.31 % 7.62 % 7.65 % 7.62 % 8.42 % Average tangible equity to average tangible assets (3) 6.82 % 7.08 % 7.02 % 6.86 % 8.02 % Common shareholders' equity to total assets 6.10 % 6.41 % 6.63 % 7.22 % 7.84 % Tangible common equity to tangible assets (3) 5.65 % 5.89 % 6.04 % 6.51 % 6.99 % Income Data: Interest income $ 183,009 $ 136,576 $ 111,917 $ 100,684 $ 91,643 Interest expense $ 98,304 $ 36,534 $ 22,299 $ 26,017 $ 29,966 Net interest income $ 84,705 $ 100,042 $ 89,618 $ 74,667 $ 61,677 Provision for loan losses $ 3,714 $ 3,656 $ 2,055 $ 14,877 $ 4,860 Noninterest income (excluding securities transactions) $ 10,577 $ 11,026 $ 10,046 $ 8,989 $ 8,456 Securities (losses) gains $ — $ (17) $ 714 $ 14,791 $ (157) Noninterest expense $ 79,672 $ 71,005 $ 63,868 $ 58,033 $ 47,219 Earnings before income taxes $ 11,896 $ 36,390 $ 34,455 $ 25,537 $ 17,897 Net income $ 9,219 $ 28,884 $ 27,297 $ 20,318 $ 14,241 Net income available to common shareholders $ 6,890 $ 26,556 $ 25,913 $ 20,318 $ 14,241 Per Common Share Data: Net earnings $ 0.62 $ 2.48 $ 2.42 $ 1.90 $ 1.34 Cash dividends paid $ 0.64 $ 0.64 $ 0.60 $ 0.58 $ 0.54 Book value $ 17.36 $ 18.84 $ 17.81 $ 16.66 $ 15.49 Tangible book value (4) $ 16.03 $ 17.23 $ 16.13 $ 14.92 $ 13.68 Dividend payout ratio for Common and Preferred 105.20 % 31.81 % 28.49 % 30.68 % 40.74 % Weighted average number of shares outstanding 11,165,303 10,716,796 10,716,796 10,716,796 10,666,055 Number of shares outstanding 12,475,424 10,716,796 10,716,796 10,716,796 10,716,796 Asset Quality Ratios: Non-performing assets to total assets 1.17 % 0.47 % 0.70 % 1.25 % 1.04 % Non-performing assets to total loans 1.52 % 0.59 % 0.93 % 1.68 % 1.44 % Non-performing loans to total loans 1.47 % 0.58 % 0.83 % 1.55 % 1.12 % Loan loss reserve to non-performing assets 74.12 % 158.68 % 119.95 % 79.33 % 49.86 % Net charge-offs to average loans 0.17 % 0.18 % 0.13 % 0.08 % 0.36 % Provision for loan and lease loss to average loans 0.14 % 0.16 % 0.10 % 0.89 % 0.37 % Allowance for loan and lease loss to total loans 1.13 % 0.93 % 1.11 % 1.33 % 0.72 % (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." -62- 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 %) 2023 2022 2021 2020 2019 Tangible Common Equity Total shareholders' equity $ 249,631 $ 234,991 $ 223,889 $ 178,591 $ 166,035 Adjustments: Preferred Stock 33,058 33,058 33,058 — — Goodwill 12,900 12,900 12,900 12,900 12,942 Acquisition intangibles 3,658 4,355 5,051 5,815 6,527 Other intangibles 100 — — — — Tangible common equity $ 199,915 $ 184,678 $ 172,880 $ 159,876 $ 146,566 Common shares outstanding 12,475,424 10,716,796 10,716,796 10,716,796 10,716,796 Book value per common share $ 17.36 $ 18.84 $ 17.81 $ 16.66 $ 15.49 Tangible book value per common share $ 16.03 $ 17.23 $ 16.13 $ 14.92 $ 13.68 Tangible Assets Total Assets $ 3,552,772 $ 3,151,347 $ 2,878,120 $ 2,473,078 $ 2,117,216 Adjustments: Goodwill 12,900 12,900 12,900 12,900 12,942 Acquisition intangibles 3,658 4,355 5,051 5,815 6,527 Other intangibles 100 — — — — Tangible Assets $ 3,536,114 $ 3,134,092 $ 2,860,169 $ 2,454,363 $ 2,097,747 Tangible common equity to tangible assets 5.65 % 5.89 % 6.04 % 6.51 % 6.99 % 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 %) 2023 2022 2021 2020 2019 GAAP-based efficiency ratio 83.62 % 63.94 % 63.63 % 58.95 % 67.48 % Noninterest expense $ 79,672 $ 71,005 $ 63,868 $ 58,033 $ 47,219 Amortization of intangibles 696 696 764 711 390 Noninterest expense, excluding amortization 78,976 70,309 63,104 57,322 46,829 Net interest income 84,705 100,042 89,618 74,667 61,677 Noninterest income 10,577 11,009 10,760 23,780 8,299 Adjustments: Securities transactions — (17) 714 14,691 (157) Noninterest income, excluding securities transactions $ 10,577 $ 11,026 $ 10,046 $ 9,089 $ 8,456 Efficiency ratio 82.89 % 63.30 % 63.32 % 68.44 % 66.77 % -63- 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 $286.5 million at December 31, 2023 compared to $83.2 million at December 31, 2022. Loans maturing within one year or less at December 31, 2023 totaled $357.7 million compared to $372.1 million at December 31, 2022. At December 31, 2023, time deposits maturing within one year or less totaled $503.7 million compared to $312.9 million at December 31, 2022. Time deposits maturing after one year through three years totaled $214.0 million at December 31, 2023 compared to $183.0 million at December 31, 2022. Time deposits maturing after three years totaled $103.0 million at December 31, 2023 compared to $37.4 million at December 31, 2022. First Guaranty's held to maturity ("HTM") investment securities portfolio at December 31, 2023 was $320.6 million or 79.3% of the investment portfolio compared to $320.1 million at December 31, 2022. First Guaranty's available for sale ("AFS") portfolio was $83.5 million, or 20.7% of the investment portfolio at December 31, 2023 compared to $131.5 million, or 29.1% at December 31, 2022. 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 $259.6 million and $369.5 million at December 31, 2023 and December 31, 2022, respectively with $205.0 million and $120.0 million in FHLB advances outstanding at December 31, 2023 and December 31, 2022, respectively. The advances outstanding at December 31, 2023 were comprised of three long term advances totaling $155.0 million and two short-term advances that totaled $50.0 million. 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, 2023, we had outstanding letters of credit from the FHLB in the amount of $513.3 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 one revolving line of credit totaling $20.0 million secured by a pledge of the Bank's common stock, with a $10.0 million outstanding balance at December 31, 2023. We also have a discount window line with the Federal Reserve Bank that totaled $219.1 million at December 31, 2023. 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 $249.6 million at December 31, 2023 from $235.0 million at December 31, 2022. The increase in shareholders' equity was principally the result of an increase of $19.0 million in surplus and a $2.3 million decrease in accumulated other comprehensive loss, partially offset by a decrease of $8.4 million in retained earnings. The $19.0 million increase in surplus was due to common stock issued in private placements and common stock issued under the Equity Bonus Plan during 2023. The decrease in accumulated other comprehensive loss was primarily attributed to the decrease in unrealized losses on available for sale securities during the year ended December 31, 2023. The $8.4 million decrease in retained earnings was primarily due to the adoption of CECL which had a $7.9 million after tax reduction to retained earnings, $7.4 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, partially offset by net income of $9.2 million during the year ended December 31, 2023. -64- 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, 2023, First Guaranty Bank was classified as well-capitalized. First Guaranty Bank's capital conservation buffer was 3.20% at December 31, 2023. The following table presents First Guaranty Bank's capital ratios as of the indicated dates. "Well Capitalized Minimums" At December 31, 2023 "Well Capitalized Minimums" At December 31, 2022 Tier 1 Leverage Ratio 5.00 % 8.94 % 5.00 % 9.35 % Tier 1 Risk-based Capital Ratio 8.00 % 10.31 % 8.00 % 10.31 % Total Risk-based Capital Ratio 10.00 % 11.20 % 10.00 % 11.16 % Common Equity Tier One Capital 6.50 % 10.31 % 6.50 % 10.31 % 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, 2023 and 2022 are as follows: Contract Amount (in thousands) December 31, 2023 December 31, 2022 Commitments to Extend Credit $ 304,218 $ 246,968 Unfunded Commitments under lines of credit $ 214,546 $ 253,906 Commercial and Standby letters of credit $ 13,971 $ 14,222 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, 2023, 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, 2023 and 2022. The reserve for credit losses on unfunded commitments was $2.8 million at December 31, 2023. -65-