10-K 1 fgbform123117form10k.htm FORM 10-K  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2017
 
or
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
 
Commission file number: 001-37621

  

FIRST GUARANTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
 
Louisiana
 
26-0513559
(State or other jurisdiction incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
400 East Thomas Street
 
 
Hammond, Louisiana
 
70401
(Address of principal executive offices)
 
(Zip Code)
 
(985) 345-7685
(Registrant's telephone number, including area code)
 
Not Applicable
(Former name or former address, if changed since last report)
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
Common Stock, $1.00 par value
 
 The NASDAQ Stock Market, LLC
 (Title of each class)
 
 (Name of each exchange on which registered)
 
 
  Securities Registered Pursuant to Section 12(g) of the Act: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES          NO
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES          NO
  
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES         NO
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
YES         NO
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.T
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filerAccelerated filer Non-accelerated filerSmaller reporting company
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES         NO
 
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2017 was $111,683,537 based upon the price from the last trade of $27.24.
 
As of March 15, 2018, there were issued and outstanding 8,807,175 shares of the Registrant's Common Stock.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
(1) 
Proxy Statement for the 2018 Annual Meeting of Shareholders of the Registrant (Part III).
 

TABLE OF CONTENTS
 
 
 
Page
Part I.
 
 
Item 1
4
Item 1A
20
Item 1B
30
Item 2
31
Item 3
32
Item 4
32
 
 
 
Part II.
 
 
Item 5
33
Item 6
34
Item 7
37
Item 7A
70
Item 8
72
 
78
Item 9
115
Item 9A
115
Item 9B
115
 
 
 
Part III.
 
 
Item 10
116
Item 11
116
Item 12
116
Item 13
116
Item 14
116
 
 
 
Part IV.
 
 
Item 15
117
Item 16
 
117
 

PART I
 
Item 1 – Business
 
Our Company
 
First Guaranty Bancshares, Inc. ("First Guaranty") is a Louisiana-chartered bank holding company headquartered in Hammond, Louisiana. Our wholly owned subsidiary, First Guaranty Bank (the "Bank"), a Louisiana-chartered commercial bank, provides personalized commercial banking services mainly to Louisiana and Texas customers through 27 banking facilities primarily located in the Market Services Areas ("MSAs"), of Hammond, Baton Rouge, Lafayette, Shreveport-Bossier City, Dallas-Fort Worth-Arlington, and Waco MSAs. Our principal business consists of attracting deposits from the general public and local municipalities in our market areas and investing those deposits, together with funds generated from operations and borrowings in lending and in securities activities to serve the credit needs of our customer base, including commercial real estate loans, commercial and industrial loans, one- to four-family residential real estate loans, construction and land development loans, agricultural and farmland loans, and to a lesser extent, consumer and multi-family loans. We also participate in certain syndicated loans, including shared national credits, with other financial institutions. We offer a variety of deposit accounts to consumers and small businesses, including personal and business checking and savings accounts, time deposits, money market accounts and demand accounts. We invest a portion of our assets in securities issued by the United States Government and its agencies, state and municipal obligations, corporate debt securities, mutual funds, and equity securities. We also invest in mortgage-backed securities primarily issued or guaranteed by United States Government agencies or enterprises. In addition, we offer a broad range of consumer services, including personal and commercial credit cards, remote deposit capture, safe deposit boxes, official checks, online and mobile banking, automated teller machines, and online bill pay. For our business customers we are pleased to offer additional solutions such as merchant services, remote deposit capture, and lockbox services.
 
At December 31, 2017, we had consolidated total assets of $1.8 billion, total deposits of $1.5 billion and total shareholders' equity of $144.0 million.
 
Recent Events

First Guaranty completed its merger with Premier and its wholly owned subsidiary, Synergy Bank, on June 16, 2017. First Guaranty acquired a total of $158.3 million in assets and assumed an $137.4 million in liabilities.
 
First Guaranty acquired a fifty percent ownership in an insurance brokerage in November 2017. The company is called Centurion Insurance Services, Inc. and provides First Guaranty with an ability to increase non-interest income by selling insurance products.
 
In November 2017, First Guaranty announced the launch of an At-The-Market Equity Offering program ("ATM Offering").  First Guaranty may sell up to $25.0 million of common stock under the ATM Offering. First Guaranty expects to use the net proceeds of the ATM Offering for general corporate purposes, including support for organic growth and financing possible acquisitions of other financial institutions. First Guaranty did not sell any shares of common stock under the ATM Offering during the quarter ended December 31, 2017. 

First Guaranty Bank received approval to open a loan production office in Lake Charles, Louisiana. We anticipate opening this office in the second or third quarter of 2018. The Lake Charles MSA is projected to be one of the fastest growing regions in Louisiana. It is adjacent to First Guaranty's existing markets in the Lafayette, MSA.
 
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Our History and Growth
 
First Guaranty Bank was founded in Amite, Louisiana on March 12, 1934. While the origins of First Guaranty Bank go back over 80 years, we began our modern history in 1993 when an investor group, led by Marshall T. Reynolds, our Chairman, invested $3.6 million in First Guaranty Bank as part of a recapitalization plan with the objective of building a community-focused commercial bank in our Louisiana markets. Since the implementation of that recapitalization plan, we have grown from six branches and $159 million in assets at the end of 1993 to 27 branches and $1.8 billion in assets at December 31, 2017. We have also paid a quarterly dividend for 98 consecutive quarters as of December 31, 2017. On July 27, 2007, we formed First Guaranty Bancshares and completed a one-for-one share exchange that resulted in First Guaranty Bank becoming the wholly-owned subsidiary of First Guaranty Bancshares (the "Share Exchange") and First Guaranty Bancshares becoming an SEC reporting public company.
 
Since our Share Exchange, we have supplemented our organic growth with three acquisitions, which added stable deposits that provided funding for our lending business and extended our geographic footprint in the Baton Rouge, Hammond, Dallas-Fort Worth-Arlington, and Waco MSAs.
 
The following table summarizes the three acquisitions:

Acquired Institution/Market
Date of Acquisition
 
Deal Value
(dollars in thousands)
   
Fair Value of
Total Assets Acquired
(dollars in thousands)
 
Premier Bancshares, Inc.
June 16, 2017
 
$
20,954
   
$
158,313
 
Dallas-Fort Worth-Arlington and Waco MSA
                 
                   
Greensburg Bancshares, Inc.
July 1, 2011
   
5,308
     
89,386
 
Baton Rouge MSA
 
               
 
 
               
Homestead Bancorp, Inc.
July 30, 2007
   
12,140
     
129,606
 
Hammond MSA
 
               
 
Our participation in the SBLF from 2011 to 2015 enabled us to leverage $39.4 million in capital received from the United States Department of the Treasury (the "U.S. Treasury") to grow our lending business. In November 2015, First Guaranty completed a public stock offering selling 626,560 shares and raising $9.3 million in net proceeds. In connection with the completion of the stock offering, First Guaranty's common shares began trading on the NASDAQ Global Market. In December 2015, we redeemed the $39.4 million in preferred stock issued to the U.S. Treasury.
 
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Our Markets
 
Our primary market areas include the Louisiana MSAs of Hammond, Baton Rouge, Lafayette, and Shreveport-Bossier City along with the Texas MSAs of  Dallas-Fort Worth-Arlington and Waco. Most of our branches are located along the major Louisiana interstates of I-12, I-55, I-10 and I-20. We have four branches in the Dallas-Fort Worth metropolitan area and one branch in Waco, Texas.
 
Hammond MSA. We are headquartered in Hammond, Louisiana and approximately 50% of our deposits are in the Hammond MSA, our largest deposit concentration market. We had a deposit market share of 37.3% (at June 30, 2017) in the Hammond MSA, placing us first overall. Hammond is the principal city of the Hammond MSA, which includes all of Tangipahoa Parish, and is located approximately 50 miles north of New Orleans and 30 miles east of Baton Rouge. The Hammond MSA has a population of approximately 125,000. Hammond is intersected by I-55 and I-12, which are two heavily traveled interstate highways. As a result of Hammond's close proximity to New Orleans and Baton Rouge, Hammond and Tangipahoa Parish are among the fastest growing cities and Parishes in Louisiana. There is an abundance of new development, both commercial and residential, as well as numerous hotels which absorb overflowing demand for rooms near major events in New Orleans. Hammond is also the home of the main campus of Southeastern Louisiana University, with an enrollment of approximately 15,000 students.
 
The Hammond Northshore Regional Airport is a backup landing site for the Louis Armstrong New Orleans International Airport. The Louisiana National Guard maintains a 56-acre campus at the airport, which is home to the 1/244th Air Assault Helicopter Battalion. Port Manchac, which provides egress via Lake Pontchartrain with the Gulf of Mexico, is located 15 miles south of Hammond. The Hammond Amtrak Station located in downtown Hammond is on Amtrak's City of New Orleans route, which runs from New Orleans to Chicago, Illinois. The combination of highway, air, sea and rail transportation has made Hammond a major transportation and commercial hub of Louisiana. Hammond hosts numerous warehouses and distribution centers, and is a major distribution point for Wal-Mart and Winn Dixie.
 
Baton Rouge MSA. Baton Rouge is the capital of Louisiana and the MSA has a population of approximately 824,000. As the capital city, Baton Rouge is the political hub for Louisiana. The state government is the largest employer in Baton Rouge. Baton Rouge is the farthest inland port on the Mississippi River that can accommodate ocean-going tankers and cargo carriers. As a result, Baton Rouge's largest industry is petrochemical production and manufacturing. The ExxonMobil facility in Baton Rouge is one of the largest oil refineries in the country. Baton Rouge also has a diverse economy comprised of healthcare, education, finance and motion pictures. The main campus of Louisiana State University, with an enrollment of approximately 30,000 students, and Southern University, with an enrollment of approximately 7,000 students, are located in Baton Rouge.
 
Our market areas in the Baton Rouge MSA also include the Livingston and St. Helena Parishes. Livingston Parish's growth is tied to Baton Rouge as it is a suburban community with many of its residents commuting to Baton Rouge for employment. The economy for St. Helena Parish is comprised primarily of forestry operations, construction, manufacturing, educational services, health care, and social assistance.
 
Lafayette MSA. Lafayette is Louisiana's third largest city and deposit market, and is located in the Lafayette-Acadiana region. The Lafayette MSA has a population of approximately 479,000. Its major industries include oil and gas, healthcare, construction, manufacturing and agriculture. With respect to agriculture, sugarcane and rice are the leaders among the plant producers within the area, with approximately 30,000 acres of sugarcane and 51,000 acres of rice plantings. Lafayette also has numerous beef producers and fisheries. We finance agricultural loans, predominately out of our Abbeville and Jennings branches, in Southwest Louisiana. Lafayette is home to the University of Louisiana at Lafayette, with an enrollment of approximately 17,000 students.
 
Shreveport-Bossier City MSA. Our primary market areas in northwest Louisiana are the Bossier and Caddo Parishes, which are a part of the Shreveport-Bossier City MSA. The Shreveport and Bossier City MSA has a population of approximately 451,000. Shreveport and Bossier City are located in northern Louisiana on I-20, approximately 15 miles from the Texas state border and 185 miles east of Dallas, Texas. Our primary market area has a diversified economy with employment in services, government and wholesale/retail trade constituting the basis of the local economy, with service jobs being the largest component. The majority of the services are health care related as Shreveport has become a regional hub for health care. The casino gaming industry, with its Las Vegas-style gaming, year-round festivals and local dining, also supports a significant number of service jobs. The energy sector has a prominent role in the regional economy, resulting from oil and gas exploration and drilling. Bossier Parish is also the home to the Barksdale Air Force Base, which has 12,000 employees.

Dallas-Fort Worth-Arlington MSA.

The Dallas-Fort Worth-Arlington MSA has a population of approximately 7.1 million people and is located in the heart of North Texas. The metroplex has a thriving economy that is well diversified. There are currently approximately 40 colleges and universities in the Dallas- Fort Worth-Arlington MSA. Also, DFW International Airport is perfect for international commerce with its size and central location. We currently are operating four branches located in Fort Worth (Tarrant County), Denton (Denton County), McKinney (Collin County), and Garland (Dallas County).

Waco MSA.
 
The Waco MSA is located between the Dallas Forth Worth MSA and Austin, Texas with a population of 135,000. The economy in the Waco MSA is also well diversified and has a small airport with regional service, although it is located around 100 miles from DFW International and Austin International Airports. Waco is the home of Baylor University with approximately 15,000 students.

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Our Strategy
 
Our mission is to increase shareholder value while providing services for and contributing to the growth and welfare of the communities that we serve. As home to "Fanatical Banking" our mission is to become the bank of choice for small business and consumer customers who are located in both metropolitan and rural markets. We desire to grow our market share along Louisiana's key interstate corridors of major interstates I-12, I-55, I-10 and I-20 along with our new Texas markets in Dallas Fort-Worth-Arlington and Waco both organically and through strategic acquisitions. This mission involves not only expanding our geographical footprint but also evolving as an institution and staying relevant while offering new ways of banking. To achieve all of this, we seek to implement the following strategies:
 
Continue to Increase Total Loans as a Percentage of Assets. We plan to continue to change our asset composition by growing our loan portfolio to increase our total loans as a percentage of our assets. Our loan to deposit ratio was 74.2% as of December 31, 2017. The growth in our loan portfolio has broadened our customer base, reduced our interest rate risk exposure to fixed rate investment securities, and helped us expand our net interest margin. We have invested in the internal development of our lending department along with the select addition of experienced lenders.
 
We intend to continue to grow our loan portfolio organically by targeting small and medium-sized businesses engaged in manufacturing, agriculture, petrochemicals, healthcare and other professional services. As a former participant in the SBLF, we developed and executed a sustained loan growth campaign focused on these target loan areas beginning in 2011 that far exceeded our original goals of the program. We are continuing this campaign even after we redeemed our SBLF preferred stock in December 2015.  Our gross loan portfolio has increased by $575.9 million, or 100.5%, to $1.1 billion at December 31, 2017 from $573.1 million at December 31, 2011.
 
Our commercial lending team is organized around our regional market areas of Louisiana and Texas. A senior experienced lender leads each market team and ensures that our lenders deliver timely service to customers, meet and exceed expectations of loan approval time, and broaden customer relationships through referrals.
 
We are expanding upon our successful small business lending program with a new emphasis on growing our SBA, USDA and commercial leasing lending programs. The acquisition of Synergy Bank brought expertise in SBA lending that we have leveraged through both our new Texas markets and our existing Louisiana markets. We have invested in training key personnel to focus on this market as we believe that SBA, USDA and commercial leasing loans can serve as new market opportunities for our Bank. We will continue to be a leading agricultural lender and grow our FSA lending.
 
Over the last ten years, we have pursued a focused program to participate in syndicated loans (loans made by a group of lenders, including us, who share or participate in a specific loan, which is typically secured by business assets or equipment, and also commercial real estate) with a larger regional financial institution as the lead lender. Our focus has been to finance middle market companies whose borrowing needs typically range from $25 million to $75 million. Syndicated loans diversify our loan portfolio, increase our yield and mitigate interest rate risk due to the variable rate pricing structure of the loans. We expect to continue our syndicated lending program but our local loan originations remain our funding priority.
 
We intend to grow our consumer loan portfolio principally through our residential mortgage program. We intend to leverage our existing branch network to expand our retail lending. We have expanded our technology to make it easier for both individual and business customers to bank with us through mobile and internet banking.
 
Expand Individual and Business Deposits and Maintain our Public Funds Program. Our deposit strategy is focused on continuing to expand our individual and business deposit bases while maintaining our public funds deposit program. Our deposit strategy leverages off the market share dominance that we have in several of our markets, such as the Hammond MSA where we had a 37.3% deposit market share at June 30, 2017, placing us first overall. Our commercial and consumer lending teams focus on building business and individual deposits concurrent with loans. Our public funds department is dedicated to maintaining strong relationships with our well diversified base of public entities. We provide a variety of services to our public funds clients. Our public funds deposit program has provided us with a stable and low cost source of funding. We will continue to concentrate on keeping many of these funds under contract as we are often the fiscal agent for these governmental agencies which helps maintain this funding.
 
Maintain Strong Asset Quality. We emphasize a disciplined credit culture based on intimate market knowledge, close ties to our customers, sound underwriting standards and experienced loan officers. While the challenging operating environment which began following the 2008-2009 recession of the United States contributed to an increase in problem assets, management's primary objective has been to expeditiously reduce the level of non-performing assets through diligent monitoring and aggressive resolution efforts. The results of this effort are reflected in our improved asset quality. At December 31, 2017, non-performing assets totaled $14.7 million, or 0.84% of total assets, and has declined by $3.6 million from $18.3 million, or 1.27% of total assets at December 31, 2013.
 
Pursue Strategic Acquisitions. Our strategy is to supplement our organic growth by executing a targeted and disciplined acquisition strategy of community banks and non-banking financial companies as opportunities arise. On June 16, 2017, First Guaranty completed its merger with Premier Bancshares, Inc. located in the Dallas / Fort Worth and Waco market areas in Texas. We have successfully integrated prior acquisitions as demonstrated by our acquisitions of Greensburg Bancshares, Inc. in 2011 and Homestead Bancorp, Inc. in 2007. Our board of directors' broad experiences across many industries assists us in expanding our business. Our Chairman, Marshall T. Reynolds, has more than 40 years of experience in managing the growth of commercial banks both organically and through acquisitions throughout the United States.
 
We believe our ability to execute an acquisition strategy has been enhanced by our internal investments in the areas of operations, compliance, finance, credit and information technology that provide us with a scalable platform for growth. Our focus will be on targets with quality loan portfolios and a long term deposit customer base, particularly those with high levels of consumer and retail checking accounts, low cost deposits and favorable market share. We intend to pursue opportunities that will be accretive to earnings, result in a tangible book value earn back of approximately three years, strengthen our franchise, and ultimately enhance shareholder value.  We also believe the listing of our shares on NASDAQ in November 2015 provides us with a more marketable and liquid stock currency that will be attractive to potential targets.

Seek Innovative Partnerships. We are committed to staying on top of the industry trends and continuing to educate ourselves in the way our customers want to do business. Creating partnerships with innovative companies will allow us to stay relevant and meet the needs of our current and new customers.
 
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Lending Activities
 
We offer a broad range of loan and lease products with a variety of rates and terms throughout our market areas, including business loans to primarily small to medium-sized businesses and professionals, as well as loans to individuals. Our lending operations consist of the following major segments: non-farm, non-residential loans secured by real estate, commercial and industrial loans, one- to four-family residential loans, construction and land development loans, agricultural loans, farmland loans, consumer and other loans, and multi-family loans. All loan decisions are locally made which can allow for a faster approval process than many of our larger regional and nationwide bank competitors.
 
Non-Farm Non-Residential Loans. Non-farm non-residential loans are an integral part of our operating strategy. We expect to continue to emphasize this business line in the future with a target loan size of $1.0 million to $10.0 million to small businesses and real estate projects in our market area. At December 31, 2017 loans secured by non-farm non-residential properties totaled $540.2 million, or 46.9% of our total loan portfolio. Our non-farm non-residential loans are secured by commercial real estate generally located in our market area, which may be owner-occupied or non-owner occupied. Our owner-occupied commercial real estate loans totaled $182.3 million, or 33.7% of total non-farm non-residential loans at December 31, 2017. Permanent loans on non-farm non-residential properties are generally originated in amounts up to 85% of the appraised value of the property for owner-occupied commercial real estate properties and up to 80% of the appraised value of the property for non- owner-occupied commercial real estate properties. We consider a number of factors in originating non-farm non-residential loans. We evaluate the qualifications and financial condition of the borrower (including credit history), profitability and expertise, as well as the value and condition of the mortgaged property securing the loan. We consider the financial resources of the borrower, the borrower's experience in owning or managing similar property and the borrower's payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the debt service coverage ratio (the ratio of net operating income to debt service) to ensure that the borrower's net operating income together with the borrower's other sources of income is at least 125% of the annual debt service and the ratio of the loan amount to the appraised value of the mortgaged property. We generally obtain personal guarantees from the borrower or a third party as a condition to originating commercial real estate loans. All non-farm non-residential loans are appraised by outside independent appraisers approved by the board of directors.
 
Our non-farm non-residential loans are diversified by borrower and industry group, and generally secured by improved property such as hotels, office buildings, retail stores, gaming facilities, warehouses, church buildings and other non-residential buildings. Non-farm non-residential loans are generally made at rates that adjust above the prime rate as reported in the Wall Street Journal, that mature in three to five years and with principal amortization for a period of up to 20 years. We will also originate fixed-rate, non-farm non-residential loans that mature in three to five years with principal amortization of up to 20 years. Our largest concentration of non-farm non-residential loans is secured by hotels, and such loans are generally made only to hotel operators known to management. We will finance the construction of the hotel project and upon completion the loan will convert to permanent financing with a balloon feature after three to five years.
 
Loans secured by non-farm non-residential real estate are generally larger and involve a greater degree of risk than residential real estate loans. The borrower's creditworthiness and the feasibility and cash flow potential of the project is of primary concern in non-farm non-residential real estate lending. Loans secured by income properties are generally larger and involve greater risks than residential mortgage loans, because payments on loans secured by income properties are often dependent on the successful operation or management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy.
 
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Commercial and Industrial Loans. Commercial and industrial loans totaled $220.7 million, or 19.2% of our total loan portfolio at December 31, 2017. Commercial and industrial loans (excluding syndicated loans) are generally made to small and mid-sized companies located within Louisiana and Texas. We also participate in government programs which guarantee portions of commercial and industrial loans such as the SBA and USDA. In most cases, we require collateral of equipment, accounts receivable, inventory, chattel or other assets before making a commercial business loan. We have a dedicated staff within our credit department that monitors asset based lending and regularly conducts reviews of borrowing based certificates, aging and inventory reports, and on-site audits. Our commercial term loans totaled $70.3 million at December 31, 2017, or 31.8% of total commercial and industrial loans. Our commercial and industrial maximum loan to value limit is 80%. Our commercial term loans are generally fixed interest rate loans, indexed to the prime rate, with terms of up to five years, depending on the needs of the borrower and the useful life of the underlying collateral. Our commercial lines of credit totaled $150.4 million at December 31, 2017, or 68.2% of total commercial and industrial loans. Typically, our commercial lines of credit are adjustable rate lines, indexed to the prime interest rate, which generally mature yearly. Our underwriting standards for commercial and industrial loans include a review of the applicant's tax returns, financial statements, credit history, the underlying collateral and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan based on cash flow generated by the applicant's business. We generally obtain personal guarantees from the borrower or a third party as a condition to originating commercial and industrial loans.
 
Over the last ten years, we pursued a focused program to participate in syndicated loans (loans made by a group of lenders, including us, who share or participate in a specific loan) with a larger regional financial institution as the lead lender. Syndicated loans are typically made to large businesses (which are referred to as shared national credits) or middle market companies (which do not meet the regulatory definition of shared national credits), both of which are secured by business assets or equipment, and also commercial real estate. The syndicate group for both types of loans usually consists of two to three other financial institutions. These loans are adjustable-rate loans generally tied to LIBOR. Our participation amounts typically range between $5.0 million and $15.0 million. Our focus has been to finance middle market companies whose borrowing needs typically range from $25.0 million to $75.0 million. Syndicated loans diversify our loan portfolio, increase our yield and mitigate interest rate risk due to the variable rate pricing structure of the loans. We have a defined set of credit guidelines that we use when evaluating these credits. Our credit department independently reviews all syndicate loans and our board of directors has created a special committee to oversee the underwriting and approval of these loans.  At December 31, 2017, syndicated loans secured by assets other than commercial real estate totaled $66.5 million, or 30.1% of the commercial and industrial loan portfolio. On December 21, 2017 the Federal Reserve, FDIC, and Office of Comptroller of the Currency issued a change to the definition of a Shared National Credit. Effective January 1, 2018, the aggregate loan commitment threshold for inclusion in the Shared National Credit (SNC) program increased from $20 million to $100 million.  First Guaranty's syndicated loans that meet the revised definition if it was in effect at December 31, 2017 was $22.6 million.
 
Commercial and industrial loans generally involve increased credit risk and, therefore, typically yield a higher return. The increased risk in commercial and industrial loans derives from the expectation that such loans generally are serviced principally from the operations of the business, and those operations may not be successful. Any interruption or discontinuance of operating cash flows from the business, which may be influenced by events not under the control of the borrower such as economic events and changes in governmental regulations, could materially affect the ability of the borrower to repay the loan. In addition, the collateral securing commercial and industrial loans generally includes movable property such as equipment and inventory, which may decline in value more rapidly than we anticipate exposing us to increased credit risk. As a result of the foregoing, commercial and industrial loans require extensive administration and servicing.
 
One- to Four-Family Residential Real Estate Loans. At December 31, 2017, our one- to four-family residential real estate loans totaled $158.7 million, or 13.8% of our total loan portfolio. We originate one- to four-family residential real estate loans that are secured primarily by residential property in Louisiana and Texas. We generally originate loans in amounts up to 95% of the lesser of the appraised value or purchase price of the mortgaged property. We currently offer one- to four-family residential real estate loans with terms up to 30 years that are generally underwritten according to Fannie Mae guidelines, and we refer to loans that conform to such guidelines as "conforming loans." We generally originate fixed-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which at December 31, 2017 was $424,100 for single-family homes in our market area. At December 31, 2017, we held $24.5 million in jumbo loans that are greater than the conforming loan limit. We generally hold our one- to four-family residential real estate loans in our portfolio. We also originate one- to four-family residential real estate loans secured by non-owner occupied properties, but less frequently. Our fixed-rate one- to four-family residential real estate loans include loans that generally amortize on a monthly basis over periods between 10 to 30 years with maturities that range from eight to 30 years. Fixed rate one- to four-family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans. We do not offer one- to four-family residential real estate loans specifically designed for borrowers with sub-prime credit scores, including interest-only, negative amortization or payment option adjustable-rate mortgage loans.
 
We have diversified our one- to four-family residential real estate loans with the select purchase of conforming mortgage loans that are located outside Louisiana. Our purchased loans are generally serviced by other financial institutions. At December 31, 2017, $26.2 million of our one- to four-family residential real estate loans, or 16.5% of our one- to four-family residential real estate loans, were purchased loans secured by property located outside our market area. The majority of our out of state purchased one- to four-family residential real estate loans are located in West Virginia, Virginia, Pennsylvania and the District of Columbia. Our purchased one- to four-family residential real estate loans must meet our internal underwriting criteria. At December 31, 2017, we had one purchased one- to four-family residential real estate loan with a balance of $62,000 that was classified as nonaccruing. While we intend to continue to purchase one- to four-family residential real estate loans from time-to-time, our strategic emphasis for future periods is to increase the volume of our internal originations of such loans.
 
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Our one- to four-family loans also include home equity lines of credit that have second mortgages. At December 31, 2017, we had $4.2 million in home equity lines of credit, which represented 2.7% of our one- to four-family residential real estate loans. Our home equity products are originated in amounts, that when combined with the existing first mortgage loan, do not generally exceed 80% of the loan-to-value ratio of the subject property.
 
All of our one- to four-family residential mortgages include "due on sale" clauses, which are provisions giving us the right to declare a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a third party.
 
Property appraisals on real estate securing our single-family residential loans are made by state certified and licensed independent appraisers approved by the board of directors. Appraisals are performed in accordance with applicable regulations and policies. At our discretion, we obtain either title insurance policies or attorneys' certificates of title, on all first mortgage real estate loans originated. We also require fire and casualty insurance on all properties securing our one- to four-family residential loans. We also require the borrower to obtain flood insurance where appropriate. In some instances, we charge a fee equal to a percentage of the loan amount, commonly referred to as points.
 
Construction and Land Development Loans. We offer loans to finance the construction of various types of commercial and residential property. At December 31, 2017, $112.6 million, or 9.8% of our total loan portfolio consisted of construction and land development loans. Construction loans to builders generally are offered with terms of up to 18 months and interest rates are tied to the prime lending rate. These loans generally are offered as fixed or adjustable-rate loans. We will originate residential construction loans for individual borrowers and builders, provided all necessary plans and permits have been obtained. Construction loan funds are disbursed as the project progresses.  We will originate construction loans up to 80% of the estimated completed value of the project and we will originate land development loans in amounts up to 75% of the value of the property as developed. We will originate owner occupied one-to-four family residential construction loans up to 90% of the estimated completed value of the property.
 
Construction and land development financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction and development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. Additionally, if the estimate of value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment.
 
Agricultural Loans. We are the leading lender for agricultural loans in our Southwest Louisiana market. Our agricultural lending includes loans to farmers for the purpose of cultivating rice, sugarcane, soybeans, timber, poultry and cattle. Agricultural loans are generally secured by crops, but may include additional collateral such as farm equipment or vehicles. Agricultural loans totaled $21.5 million, or 1.9% of our total loan portfolio at December 31, 2017. Such loans are generally offered with fixed rates at a margin above prime for a term of generally one year. We will originate agricultural loans in those instances where the borrower's financial strength and creditworthiness has been established. Agricultural loans generally bear higher interest rates than residential loans, but they also may involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower's business. Substantially all of our originated agricultural loans are guaranteed by the U.S. Farm Service Agency. We generally obtain personal guarantees from the borrower or a third party as a condition to originating agricultural loans.
 
The underwriting standards used for agricultural loans include a determination of the borrower's ability to meet existing obligations and payments on the proposed loan from normal cash flows generated in the borrower's business. The financial strength of each applicant also is assessed through review of financial statements and tax returns provided by the applicant. The creditworthiness of a borrower is derived from a review of credit reports as well as a search of public records. Once originated, agricultural loans are reviewed periodically. Financial statements are requested at least annually and are reviewed for substantial deviations or changes that might affect repayment of the loan. Loan officers also visit the premises of borrowers to observe the business premises, facilities, and personnel and to inspect the collateral. Underwriting standards for agricultural loans are different for each type of loan depending on the financial strength of the borrower and the value of collateral offered as security.
 
Farmland Loans. We originate first mortgage loans secured by farmland. At December 31, 2017, farmland loans totaled $25.7 million, or 2.2% of our total loan portfolio. Such loans are generally fixed-rate loans at a margin over the prime rate with terms up to five years and amortization schedules of up to 20 years (40 years if secured by a guarantee from the U. S. Farm Service Agency). Loans secured by farmland may be made in amounts up to 80% of the value of the farm. However, we will originate farmland loans in amounts up to 100% of the value of the farm if the borrower is able to secure a guarantee from the U.S. Farm Service Agency. Generally, we obtain personal guarantees of the borrower on all loans secured by farmland.
 
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Consumer and Other Loans. We make various types of secured consumer loans that are collateralized by deposits, boats and automobiles as well as unsecured consumer loans. Such loans totaled $55.2 million, or 4.8% of our total loan portfolio at December 31, 2017. Included in other loans were $0.2 million in purchased commercial leases that are serviced by the Bank as of December 31, 2017. Consumer loans generally have a fixed rate at a margin over the prime rate and have terms of three years to ten years. At December 31, 2017, $8.7 million of our consumer loans were unsecured. Our procedure for underwriting consumer loans includes an assessment of the applicant's credit history and ability to meet existing obligations and payments for the proposed loan, as well as an evaluation of the value of the collateral security, if any.
 
Consumer loans generally entail greater risk than other types of loans, particularly in the case of loans that are unsecured or are secured by assets that tend to depreciate in value, such as automobiles. As a result, consumer loan collections are primarily dependent on the borrower's continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. In these cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan, and the remaining value often does not warrant further substantial collection efforts against the borrower.
 
Multi-Family Loans. On occasion we will originate loans secured by multi-family real estate. At December 31, 2017, we had $16.8 million or 1.4% of our total loan portfolio in multi-family loans. Such loans may be either fixed- or adjustable-rate loans tied to the prime rate with terms to maturity up to five years and amortization schedules of up to 20 years. We will originate multi-family loans in amounts up to 80% of the value of the multi-family property. Nearly all of our multi-family loans are secured by properties in Louisiana and Texas. The underwriting of multi-family loans follows the general guidelines for our non-farm non-residential loans.
 
Loans secured by multi-family real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate typically depends upon the successful operation of the real estate property securing the loans. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired.
 
Loan Originations, Sales and Participations. Loan originations are derived from a number of sources such as referrals from our board of directors, existing customers, borrowers, builders, attorneys and walk-in customers. We generally retain the loans that we originate in our loan portfolio and only sell loans infrequently. We had $7.7 million at December 31, 2017 in purchased loan participations that were not syndicated loans. We had $0.2 million in purchased commercial leases that are serviced by the Bank as of December 31, 2017. At December 31, 2017, we had $70.4 million in syndicated loans, of which all were shared national credits.
 
Loan Approval Authority. We establish various lending limits for executive management and also maintain a loan committee comprised of our directors and management. Generally, loan officers have authority to approve secured loan relationships in amounts up to $100,000 and unsecured loan relationships in amounts up to $25,000. For loans exceeding a loan officer's approval authority, we utilize two methods for approvals: (1) credit officers and (2) the Bank's loan committee. Loan relationships between $100,000 and $500,000 are approved by a combination of credit officers and executive management. The loan committee approves loan relationships of between $500,000 and up to $10.0 million. Any loan relationship exceeding $10.0 million requires the approval of the board of directors. Syndicated loans are approved by the Bank's syndicate loan committee in amounts up to $10.0 million.
 
Our lending activities are also subject to Louisiana statutes and internal guidelines limiting the amount we can lend to any one borrower. Subject to certain exceptions, under Louisiana law the Bank may not lend on an unsecured basis to any single borrower (i.e., any one individual or business entity and his or its affiliates) an amount in excess of 20% of the sum of the Bank's capital stock and surplus, or on a secured basis an amount in excess of 50% of the sum of the Bank's capital stock and surplus. At December 31, 2017, our secured legal lending limit was approximately $50.5 million and our unsecured legal lending limit was approximately $20.2 million. None of our borrowers are currently approaching these limits.
 
Deposit Products
 
Consumer and commercial deposits are attracted principally from within our primary market area through the offering of a selection of deposit instruments including noninterest-bearing and interest-bearing demand, savings accounts and time accounts. Deposit account terms vary according to the minimum balance required, the time period the funds must remain on deposit, and the interest rate. At December 31, 2017, we held $1.5 billion in deposits.
 
We actively seek to obtain public funds deposits. At December 31, 2017, public funds deposits totaled $640.7 million. We have developed a program for the retention and management of public funds deposits. These deposits are from local government entities such as school districts, hospital districts, sheriff departments and other municipalities. We solicit their operating, savings, and time deposits and we are often the fiscal agent for the municipality. The majority of these deposits are under contractual terms of up to three years. Public funds deposit accounts are collateralized by FHLB letters of credit and by eligible government and government agency securities such as those issued by the FHLB, FFCB, Fannie Mae, and Freddie Mac. We believe that public funds provide a low cost and stable source of funding. The public funds deposit portfolio has been a key driver of earnings for First Guaranty as we have profitability deployed these funds into investment securities and loans.
 
The interest rates paid by us on deposits are set at the direction of our executive management. Interest rates are determined based on our liquidity requirements, interest rates paid by our competitors, and our growth goals and applicable regulatory restrictions and requirements. At December 31, 2017, we had $115.9 million in brokered deposits.
 
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Investments
 
Our investment policy is to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk and to meet pledging requirements for our public funds and other borrowings. Our investment securities consist of: (1) U.S. Treasury obligations; (2) U.S. government agency obligations; (3) mortgage-backed securities; (4) collateralized mortgage obligations; (5) corporate and other debt securities; (6) mutual funds and other equity securities and (7) municipal bonds. Our U.S. government agency securities, primarily consisting of government-sponsored enterprises, comprise the largest share of our investment securities, having a fair value of $223.5 million, of which $196.0 million were classified as available for sale and $27.5 million as held to maturity, at December 31, 2017.
 
The Bank's management asset liability committee and board investment committee are responsible for regular review of our investment activities and the review and approval of our investment policy. These committees monitor our investment securities portfolio and direct our overall acquisition and allocation of funds, with the goal of structuring our portfolio such that our investment securities provide us with a stable source of income but without exposing us to an excessive degree of market risk. During the last five years, our securities portfolio has generated $77.0 million of pre-tax income. For the year ended December 31, 2017, we had no securities with other than temporary impairment that was recognized.
 
Competition
 
We face intense competition both in making loans and attracting deposits. Our market areas in Louisiana and Texas have a high concentration of financial institutions, many of which are branches of large money center, super-regional and regional banks that have resulted from consolidation of the banking industry in Louisiana and Texas. Many of these competitors have greater resources than we do and may offer services that we do not provide, including more attractive pricing than we offer and more extensive branch networks for which they can offer their financial products.
 
Our larger competitors have a greater ability to finance wide-ranging advertising campaigns through their greater capital resources. Our marketing efforts depend heavily upon referrals from officers, directors and shareholders, selective advertising in local media and direct mail solicitations. We compete for business principally on the basis of personal service to customers, customer access to our officers and directors and competitive interest rates and fees. We also offer new technologies such as our mobile app and mobile check deposit for consumers and remote deposit capture for commercial customers.
 
In the financial services industry in recent years, intense market demands, technological and regulatory changes and economic pressures have eroded industry classifications that were once clearly defined. Financial institutions have been forced to diversify their services, increase rates paid on deposits and become more cost effective as a result of competition with one another and with new types of financial services companies, including non-banking competitors. Some of the results of these market dynamics in the financial services industry have been a number of new bank and non-bank competitors, increased merger activity, and increased customer awareness of product and service differences among competitors. These factors could affect our business prospects.
 
Employees
 
At December 31, 2017, we had 327 full-time and 22 part-time employees. None of our employees is represented by a collective bargaining group or are parties to a collective bargaining agreement. We believe that our relationship with our employees is good.
 
Subsidiaries
 
Other than our wholly-owned bank subsidiary, First Guaranty Bank, we have no subsidiaries.
 
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Supervision and Regulation
 
General
 
First Guaranty Bank is a Louisiana-chartered commercial bank and is the wholly-owned subsidiary of First Guaranty Bancshares, a Louisiana-chartered banking holding company. First Guaranty Bank's deposits are insured up to applicable limits by the FDIC. First Guaranty Bank is subject to extensive regulation by the Louisiana Office of Financial Institutions (the "OFI"), as its chartering agency, and by the FDIC, its primary federal regulator and deposit insurer. First Guaranty Bank is required to file reports with, and is periodically examined by, the FDIC and the OFI concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. As a registered bank holding company, First Guaranty Bancshares is regulated by the Federal Reserve Board.
 
The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors and the deposit insurance funds, rather than for the protection of shareholders and creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees, classification of assets and establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Louisiana legislature, the OFI, the FDIC, the Federal Reserve Board or the United States Congress, could have a material adverse impact on the financial condition and results of operations of First Guaranty Bancshares and First Guaranty Bank. As is further described below, the Dodd-Frank Act has significantly changed the bank regulatory structure and may affect the lending, investment and general operating activities of depository institutions and their holding companies.
 
Set forth below is a summary of certain material statutory and regulatory requirements applicable to First Guaranty Bancshares and First Guaranty Bank. The summary is not intended to be a complete description of such statutes and regulations and their effects on First Guaranty Bancshares and First Guaranty Bank.
 
The Dodd-Frank Act
 
The Dodd-Frank Act significantly changed bank regulation and has affected the lending, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act also created the Consumer Financial Protection Bureau (CFPB) with extensive powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB also has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as First Guaranty Bank, will continue to be examined by their applicable federal bank regulators. The Dodd-Frank Act also gave state attorneys general the ability to enforce applicable federal consumer protection laws.
 
The Dodd-Frank Act broadened the base for FDIC assessments for deposit insurance, permanently increasing the maximum amount of deposit insurance to $250,000 per depositor. The Dodd-Frank Act also, among other things, requires originators of certain securitized loans to retain a portion of the credit risk, stipulates regulatory rate-setting for certain debit card interchange fees, repeals restrictions on the payment of interest on commercial demand deposits and contains a number of reforms related to mortgage originations. The Dodd-Frank Act increased the ability of shareholders to influence boards of directors by requiring companies to give shareholders a non-binding vote on executive compensation and so-called "golden parachute" payments. The Dodd-Frank Act also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to company executives, regardless of whether the company is publicly traded or not.
 
SBLF Participation
 
On December 22, 2015, First Guaranty redeemed all of the 39,435 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series C, that had been issued to the United States Department of Treasury pursuant to SBLF in September 2011.  The shares were redeemed at their liquidation value of $1,000 per share plus accrued and unpaid dividends for a total redemption price of $39.5 million.
 
Louisiana Bank Regulation
 
As a Louisiana-chartered bank, First Guaranty Bank is subject to the regulation and supervision of the OFI. Under Louisiana law, First Guaranty Bank may establish additional branch offices within Louisiana, subject to the approval of OFI. After the Dodd-Frank Act, we can also establish additional branch offices outside of Louisiana, subject to prior regulatory approval, as long as the laws of the state where the branch is to be located would permit such expansion. In addition, First Guaranty Bank is the primary source of First Guaranty's dividend payments, and its ability to pay dividends will be subject to any restrictions applicable to the Bank. Under Louisiana law, a Louisiana bank may not pay cash dividends unless the bank has unimpaired surplus equal to 50% of its outstanding capital stock, both before and after giving effect to the dividend payment. Subject to satisfying such requirement, First Guaranty Bank may pay dividends to First Guaranty without the approval of the OFI so long as the amount of the dividend does not exceed its net profits earned during the current year combined with its retained earnings for the immediately preceding year. The OFI must approve any proposed dividend in excess of this threshold.
 
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Federal Regulations
 
Capital Requirements. Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards:  a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
 
For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders' equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions such as First Guaranty Bank, that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income ("AOCI"), up to 45% of net unrealized gains on available for sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
 
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one-to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
 
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. For 2018, the capital conservation buffer will be 1.875% of risk-weighted assets.
 
In assessing an institution's capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
 
At December 31, 2017, First Guaranty Bank was well-capitalized based on FDIC guidelines.
 
Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits and, more recently, safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.
 
Business and Investment Activities. Under federal law, all state-chartered FDIC-insured banks have been limited in their activities as principal and in their equity investments to the type and the amount authorized for national banks, notwithstanding state law. Federal law permits exceptions to these limitations. For example, certain state-chartered banks may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. The maximum permissible investment is the lesser of 100.0% of Tier 1 capital or the maximum amount permitted by Louisiana law.
 
The FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the FDIC insurance fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specified that a state bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a "financial subsidiary," if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.
 
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Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
 
The applicable FDIC regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. Under the amended regulations, an institution is deemed to be "well capitalized" if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is "undercapitalized" if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
 
"Undercapitalized" banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank's compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution's total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. "Critically undercapitalized" institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
 
Transactions with Related Parties. Transactions between a bank (and, generally, its subsidiaries) and its related parties or affiliates are limited by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act limit the extent to which the bank or its subsidiaries may engage in "covered transactions" with any one affiliate to 10% of such institution's capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution's capital stock and surplus. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions. In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in accordance with specified requirements. The law also requires that affiliate transactions be on terms and conditions that are substantially the same, or at least as favorable to the institution, as those provided to non-affiliates.
 
First Guaranty Bank's authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:
 
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
 
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of First Guaranty Bank's capital.
 
In addition, extensions of credit in excess of certain limits must be approved by First Guaranty Bank's board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
 
Enforcement. The FDIC has extensive enforcement authority over insured state banks, including First Guaranty Bank. That enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The FDIC also has authority under federal law to appoint a conservator or receiver for an insured bank under certain circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was "critically undercapitalized" on average during the calendar quarter beginning 270 days after the date on which the institution became "critically undercapitalized."
 
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Federal Insurance of Deposit Accounts. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.
 
Under the FDIC's risk-based assessment system, insured institutions were assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates were based on each institution's risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates.
 
The FDIC published a final rule under the Dodd-Frank Act to reform the deposit insurance assessment system. The rule redefined the assessment base used for calculating deposit insurance assessments effective April 1, 2011. Under the rule, assessments are based on an institution's average consolidated total assets minus average tangible equity instead of total deposits. The rule revised the assessment rate schedule to establish assessments ranging from 2.5 to 45 basis points.

Effective July 1, 2016, the FDIC adopted changes that eliminated the risk categories.  Assessments for most institutions are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years.  In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.5%, the assessment range (inclusive of possible adjustments) was reduced for most banks and savings associations to 1.5 basis points to 30 basis points.
 
In addition to the FDIC assessments, the Financing Corporation ("FICO") is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2019. For the quarter ended December 31, 2017, the annualized Financing Corporation assessment was equal to 0.54 of a basis point of total assets less tangible capital.
 
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. It is intended that insured institutions with assets of $10 billion or more will fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC and the FDIC has exercised that discretion by establishing a long-term fund ratio of 2%.
 
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of First Guaranty Bank. Management cannot predict what assessment rates will be in the future.
 
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
 
Community Reinvestment Act. Under the CRA, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to establish or acquire branches and merger with other depository institutions. The CRA requires the FDIC to provide a written evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system. First Guaranty Bank's latest FDIC CRA rating, dated February 8, 2016, was "satisfactory."
 
Federal Reserve System. The Federal Reserve Board regulations require savings institutions to maintain non interest-earning reserves against their transaction accounts (primarily negotiable order of withdrawal (NOW) and regular checking accounts). For 2018, the regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $122.3 million; a 10% reserve ratio is applied above $122.3 million. The first $16.0 million of otherwise reservable balances are exempted from the reserve requirements. The amounts are adjusted annually. First Guaranty Bank complies with the foregoing requirements.
 
FHLB System. First Guaranty Bank is a member of the FHLB System, which consists of twelve regional FHLBs. The FHLB System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the FHLB, First Guaranty Bank is required to acquire and hold a specified amount of shares of capital stock in the FHLB. As of December 31, 2017, First Guaranty Bank complies with this requirement.
 
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Other Regulations
 
Interest and other charges collected or contracted for by First Guaranty Bank are subject to state usury laws and federal laws concerning interest rates. First Guaranty Bank's operations are also subject to federal laws applicable to credit transactions, such as the:
 
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
 
Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
 
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
 
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
 
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
 
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
 
Truth in Savings Act; and
 
Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
 
The operations of First Guaranty Bank also are subject to the:
 
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
 
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services;
 
Check Clearing for the 21st Century Act (also known as "Check 21"), which gives "substitute checks," such as digital check images and copies made from that image, the same legal standing as the original paper check;
 
USA PATRIOT Act, which requires banks operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
 
Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution's privacy policy and provide such customers the opportunity to "opt out" of the sharing of certain personal financial information with unaffiliated third parties.
 
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Holding Company Regulation
 
As a bank holding company, First Guaranty is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board. We are required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval would be required for us to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company.
 
A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be closely related to banking are: (1) making or servicing loans; (2) performing certain data processing services; (3) providing securities brokerage services; (4) acting as fiduciary, investment or financial advisor; (5) leasing personal or real property under certain conditions; (6) making investments in corporations or projects designed primarily to promote community welfare; and (7) acquiring a savings association.
 
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including depository institutions subsidiaries that are "well capitalized" and "well managed," to opt to become a "financial holding company." A "financial holding company" may engage in a broader array of financial activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. We have elected "financial holding company" status.
 
The Dodd-Frank Act required the Federal Reserve Board to revise its consolidated capital requirements for holding companies so that they are no less stringent, both quantitatively and in terms of components of capital, than those applicable to the subsidiary banks. This eliminated certain instruments from tier 1 capital, such as trust preferred securities that were previously includable for bank holding companies. The previously mentioned new capital rules were also effective for First Guaranty on January 1, 2015 and are the same rules as apply to First Guaranty Bank.
 
We are subject to the Federal Reserve Board's consolidated capital adequacy guidelines for bank holding companies as we have more than $1.0 billion in total assets, subject to certain grandfathered rules.
 
A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company's consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an exception to that approval requirement for well-capitalized bank holding companies that meet certain other conditions.
 
The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve Board's policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization's capital needs, asset quality and overall financial condition. The Federal Reserve Board's policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by using available resources to provide capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength policy and requires the promulgation of implementing regulations. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions.
 
The Federal Deposit Insurance Act makes depository institutions liable to the FDIC for losses suffered or anticipated by the insurance fund in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. That law would have potential applicability if we ever held as a separate subsidiary a depository institution in addition to the Bank.
 
We are affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect of such changes on our business or financial condition.
 
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Federal Securities Laws
 
First Guaranty's common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. First Guaranty is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
 
Sarbanes-Oxley Act
 
The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. We have prepared policies, procedures and systems designed to ensure compliance with these regulations.
 
Concentrated Commercial Real Estate Lending Regulations.
 
The Federal Reserve Board and FDIC have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a company has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multi-family and non-farm residential properties and loans for construction, land development, and other land represent 300% or more of total capital and the outstanding balance of such loans has increased 50% or more during the prior 36 months. If a concentration is present, Management must employ heightened risk management practices including board and Management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and increasing capital requirements. First Guaranty is subject to these regulations.
 
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Item 1A. – Risk Factors
 
An investment in shares of our common stock involves substantial risks. You should carefully consider, among other matters, the factors set forth below as well as the other information included in this Annual Report on Form 10-K. If any of the risks described herein develop into actual events, our business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected, the market price of our common stock could decline and you may lose all or part of your investment.
 
Risks Related to Our Business and Operations
 
Adverse events in Louisiana and North Central Texas, where our business is concentrated, could adversely affect our results of operations and future growth.
 
Our business, the location of our branches and the real estate used as collateral on our real estate loans are primarily concentrated in Louisiana and North Central Texas. At December 31, 2017, approximately 76.6% of the secured loans in our loan portfolio were secured by real estate and other collateral located in our market area. As a result, we are exposed to risks associated with a lack of geographic diversification. The occurrence of an economic downturn in Louisiana and North Central Texas, the current state budget crisis in Louisiana, or adverse changes in laws or regulations in Louisiana and North Central Texas could impact the credit quality of our assets, the businesses of our customers and our ability to expand our business. Our success significantly depends upon the growth in population, income levels, deposits and housing in our market area. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may be negatively affected.
 
Material fluctuations in the price of oil and gas could adversely affect our business. At December 31, 2017, approximately $27.6 million, or 2.4% of our total loan portfolio was comprised of loans to businesses engaged in support or service activities for oil and gas operations. At December 31, 2017 we had $4.6 million in unfunded loan commitments related to these businesses. In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions. Adverse developments affecting commerce or real estate values in the local economies in our primary market areas could increase the credit risk associated with our loan portfolio. In addition, substantially all of our loans are to individuals and businesses in Louisiana and North Central Texas. Our business customers may not have customer bases that are as diverse as businesses serving regional or national markets. Consequently, any decline in the economy of our market area could have an adverse impact on our revenues and financial condition. In particular, we may experience increased loan delinquencies, which could result in a higher provision for loan losses and increased charge-offs. Any sustained period of increased non-payment, delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues, results of operations and financial condition.
 
We have a significant number of loans secured by real estate, and a downturn in the local real estate market could negatively impact our profitability.
 
At December 31, 2017, approximately 74.1% of our total loan portfolio was secured by real estate, almost all of which is located in Louisiana and North Central Texas. As a result of the severe recession in 2008 and 2009, real estate values nationally and in our Louisiana markets declined. Recently, real estate values both nationally and in our market areas have shown improvement. Future declines in the real estate values in our Louisiana and North Central Texas markets could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower's obligations to us. This could require increasing our allowance for loan losses to address the decrease in the value of the real estate securing our loans which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
 
Our loan portfolio consists of a high percentage of loans secured by non-farm non-residential real estate. These loans carry a greater credit risk than loans secured by one- to four-family properties.
 
Our loan portfolio includes non-farm non-residential real estate loans, primarily loans secured by commercial real estate such as office buildings, hotels and retail facilities. At December 31, 2017, our non-farm non-residential loans totaled $540.2 million, or 46.9% of our total loan portfolio. Our non-farm non-residential real estate loans expose us to greater risk of nonpayment and loss than one- to four-family family residential mortgage loans because repayment of the loans often depends on the successful operation and income stream of the borrowers. If we foreclose on these loans, our holding period for the collateral typically is longer than for a one- to four-family residential property because there are fewer potential purchasers of the collateral. In addition, non-farm non-residential real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential loans. Accordingly, charge-offs on non-farm non-residential loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. An unexpected adverse development on one or more of these types of loans can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.
 
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A large portion of our loan portfolio is comprised of commercial and industrial loans secured by receivables, inventory, equipment or other commercial collateral, the deterioration in value of which could increase the potential for future losses.
 
At December 31, 2017, $220.7 million, or 19.2% of our total loans, was comprised of commercial and industrial loans to businesses collateralized by general business assets including, among other things, accounts receivable, inventory and equipment and generally backed by a personal guaranty of the borrower or principal. These commercial and industrial loans are typically larger in amount than loans to individuals and, therefore, have the potential for larger losses on a single loan basis. Additionally, the repayment of commercial and industrial loans is subject to the ongoing business operations of the borrower. The collateral securing such loans generally includes movable property such as equipment and inventory, which may decline in value more rapidly than we anticipate, or may be difficult to market and sell, exposing us to increased credit risk. Significant adverse changes in the economy or local market conditions in which our commercial lending customers operate could cause rapid declines in loan collectibility and the values associated with general business assets, resulting in inadequate collateral coverage that may expose us to credit losses and could adversely affect our business, financial condition and results of operations.
 
A portion of our loan portfolio consists of syndicated loans, including syndicated loans known as shared national credits, secured by assets located generally outside of our market area. Syndicated loans may have a higher risk of loss than other loans we originate because we are not the lead lender and we have limited control over credit monitoring.
 
Over the last ten years, we have pursued a focused program to participate in select syndicated loans (loans made by a group of lenders, including us, who share or participate in a specific loan) with a larger regional financial institution as the lead lender. Syndicated loans are typically made to large businesses (which are referred to as shared national credits) or middle market companies (which do not meet the regulatory definition of shared national credits), both of which are secured by business assets or equipment, and commercial real estate located generally outside of our market area. The syndicate group for both types of loans usually consists of two to three other financial institutions. First Guaranty's commitment typically ranges between $5.0 million to $10.0 million.  At December 31, 2017, we had $70.4 million in syndicated loans, or 6.1% of our total loan portfolio. At December 31, 2017, we did not have any syndicated loans that were not shared national credits. On December 21, 2017 the Federal Reserve, FDIC, and Office of Comptroller of the Currency issued a change to the definition of a Shared National Credit. Effective January 1, 2018, the aggregate loan commitment threshold for inclusion in the Shared National Credit (SNC) program increased from $20 million to $100 million. First Guaranty's syndicated loans that meet the revised definition if it was in effect at December 31, 2017 was $22.6 million.At December 31, 2017, we had one syndicated loan that totaled $4.6 million that was non-performing. Syndicated loans may have a higher risk of loss than other loans we originate because we rely on the lead lender to monitor the performance of the loan. Moreover, our decision regarding the classification of a syndicated loan and loan loss provisions associated with a syndicated loan are made in part based upon information provided by the lead lender. A lead lender also may not monitor a syndicated loan in the same manner as we would for other loans that we originate. If our underwriting of these syndicated loans is not sufficient, our non-performing loans may increase and our earnings may decrease.
 
Curtailment of government guaranteed loan programs could affect a segment of our business, and government agencies may not honor their guarantees if we do not originate loans in compliance with their guidelines.
 
As of December 31, 2017, $51.5 million, or 4.5% of our total loan portfolio, was comprised of loans where all or some portion of the loans were guaranteed through the SBA, USDA or FSA lending programs, and we intend to grow this segment of our portfolio in the future. From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans. In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to small business, industrial and agricultural borrowers of the types that now qualify for government guaranteed loans could decline. Also, the profitability of these loans could decline.
 
In addition, while we follow the SBA's, USDA's and FSA's underwriting guidelines, our ability to do so depends on the knowledge and diligence of our employees and the effectiveness of controls we have established. If our employees do not follow the SBA, USDA or FSA guidelines in originating loans and if our loan review and audit programs fail to identify and rectify such failures, the government agencies that guarantee these loans may refuse to honor their guarantee obligations and we may incur losses as a result.
 
Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results of operations.
 
The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our earnings and cash flows depend to a great extent upon the level of our net interest income, or the difference between the interest income we earn on loans, investments and other interest-earning assets, and the interest we pay on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or decrease our net interest income, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes.
 
When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income. Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans and decrease loan repayment rates. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan portfolio and increased competition for deposits. Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, loan origination volume and our overall results. Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside of our control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets.
 
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We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
 
While we attempt to invest a significant percentage of our assets in loans (our loan to deposit ratio was 74.2% at December 31, 2017), we invest a portion of our total assets (28.7% at December 31, 2017) in investment securities with the primary objectives of providing a source of liquidity, generating an appropriate return on funds invested, managing interest rate risk, meeting pledging requirements of our public funds deposits and meeting regulatory capital requirements. At December 31, 2017, the carrying value of our securities portfolio was $501.7 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could cause an other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. At December 31, 2017, First Guaranty had two corporate debt securities with other-than-temporary impairment. In 2017, no credit related impairment was charged to earnings and no non-credit related other-than-temporary impairment was recorded in other comprehensive income. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our business, financial condition and results of operations.
 
Public funds deposits are an important source of funds for us and a reduced level of those deposits may hurt our profits.
 
Public funds deposits are a significant source of funds for our lending and investment activities. At December 31, 2017, $640.7 million, or 41.4% of our total deposits, consisted of public funds deposits from local government entities such as school districts, hospital districts, sheriff departments and other municipalities, which are collateralized by letters of credit from the Federal Home Loan Bank ("FHLB") and investment securities. Given our dependence on high-average balance public funds deposits as a source of funds, our inability to retain such funds could significantly and adversely affect our liquidity. Further, our public funds deposits are primarily demand deposit accounts or short-term time deposits and are therefore more sensitive to interest rate risks. If we are forced to pay higher rates on our public funds accounts to retain those funds, or if we are unable to retain such funds and we are forced to resort to other sources of funds for our lending and investment activities, such as borrowings from the FHLB, the interest expense associated with these other funding sources may be higher than the rates we are currently paying on our public funds deposits, which would adversely affect our net income.
 
Our strategy of pursuing acquisitions exposes us to financial, execution and operational risks that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
 
On June 16, 2017, we completed our merger with Premier and its subsidiary Synergy Bank, SSB headquartered in McKinney, Texas. We intend to continue pursuing a strategy that includes acquisitions. An acquisition strategy involves significant risks, including the following:
 
finding suitable candidates for acquisition;
 
attracting funding to support additional growth within acceptable risk tolerances;
 
maintaining asset quality;
 
retaining customers and key personnel;
 
obtaining necessary regulatory approvals;
 
conducting adequate due diligence and managing known and unknown risks and uncertainties;
 
integrating acquired businesses; and
 
maintaining adequate regulatory capital.
 
The market for acquisition targets is highly competitive, which may adversely affect our ability to find acquisition candidates that fit our strategy and standards. To the extent that we are unable to find suitable acquisition targets, an important component of our growth strategy may not be realized. Acquisitions will be subject to regulatory approvals, and we may be unable to obtain such approvals. Acquisitions of financial institutions also involve operational risks and uncertainties, and acquired companies may have unknown or contingent liabilities with no available manner of recourse, exposure to unexpected problems such as asset quality, the retention of key employees and customers and other issues that could negatively affect our business. We may not be able to complete future acquisitions or, if completed, we may not be able to successfully integrate the operations, technology platforms, management, products and services of the entities that we acquire and to realize our attempts to eliminate redundancies. The integration process may also require significant time and attention from our management that they would otherwise be able to direct toward servicing existing business and developing new business. Acquisitions typically involve the payment of a premium over book and market trading values and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future acquisition of a financial institution or service company, and the carrying amount of any goodwill that we acquire may be subject to impairment in future periods. Failure to successfully integrate the entities we acquire into our existing operations may increase our operating costs significantly and adversely affect our business, financial condition and results of operations.
 
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We may not be able to successfully maintain and manage our growth.
 
Continued growth depends, in part, upon the ability to expand market presence, to successfully attract core deposits, and to identify attractive commercial lending opportunities. Management may not be able to successfully manage increased levels of assets and liabilities. We may be required to make additional investments in equipment and personnel to manage higher asset levels and loan balances, which may adversely impact our efficiency, earnings and shareholder returns. In addition, franchise growth may increase through acquisitions and de novo branching. The ability to successfully integrate such acquisitions into our consolidated operations will have a direct impact on our financial condition and results of operations.
 
We depend primarily on net interest income for our earnings rather than noninterest income.
 
Net interest income is the most significant component of our operating income. For the year ended December 31, 2017, our net interest income totaled $53.2 million in comparison to our total noninterest income of $8.3 million earned during the same year. We do not rely on nontraditional sources of fee income utilized by some community banks, such as fees from sales of insurance, securities or investment advisory products or services. The amount of our net interest income is influenced by the overall interest rate environment, competition, and the amount of interest-earning assets relative to the amount of interest-bearing liabilities. In the event that one or more of these factors were to result in a decrease in our net interest income, we have limited sources of noninterest income to offset any decrease in our net interest income.
 
If our nonperforming assets increase, our earnings will be adversely affected.
 
At December 31, 2017, our non-performing assets, which consist of non-performing loans and other real estate owned, were $14.7 million, or 0.84% of total assets. Our non-performing assets adversely affect our net income in various ways:
 
we record interest income only on the cash basis or cost-recovery method for nonaccrual loans and we do not record interest income for other real estate owned;
 
we must provide for probable loan losses through a current period charge to the provision for loan losses;
 
noninterest expense increases when we write down the value of properties in our other real estate owned portfolio to reflect changing market values;
 
there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees; and
 
the resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.
 
If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.
 
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If the allowance for loan losses is not sufficient to cover actual loan losses, earnings could decrease.
 
Loan customers may not repay their loans according to the terms of their loans, and the collateral securing the payment of their loans may be insufficient to assure repayment. We may experience significant credit losses, which could have a material adverse effect on our operating results. Various assumptions and judgments about the collectibility of the loan portfolio are made, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of many loans. In determining the amount of the allowance for loan losses, management reviews the loans and the loss and delinquency experience and evaluates economic conditions.
 
At December 31, 2017, our allowance for loan losses as a percentage of total loans, net of unearned income, was 0.80% and as a percentage of total non-performing loans was 68.9%. The determination of the appropriate level of allowance is subject to judgment and requires us to make significant estimates of current credit risks and future trends, all of which are subject to material changes. If assumptions prove to be incorrect, the allowance for loan losses may not cover inherent losses in the loan portfolio at the date of the financial statements. Significant additions to the allowance would materially decrease net income. Non-performing loans may increase and non-performing or delinquent loans may adversely affect future performance. In addition, federal and state regulators periodically review the allowance for loan losses and may require an increase in the allowance for loan losses or recognize further loan charge-offs. Any significant increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a material adverse effect on our results of operations and financial condition.
 
Emphasis on the origination of short-term loans could expose us to increased lending risks.
 
At December 31, 2017, $806.2 million, or 70.2% of our total loans consisted of short-term loans, defined as loans whose payments are typically based on ten to 20-year amortization schedules but have maturities typically ranging from one to five years. This results in our borrowers having significantly higher final payments due at maturity, known as a "balloon payment." In the event our borrowers are unable to make their balloon payments when they are due, we may incur significant losses in our loan portfolio. Moreover, while the shorter maturities of our loan portfolio help us to manage our interest rate risk, they also increase the reinvestment risk associated with new loan originations. During an economic slow-down, we might incur significant losses as our loan portfolio matures.
 
We rely on our management team and our board of directors for the successful implementation of our business strategy.
 
Our success depends significantly on the continued service and skills of our senior management team and our board of directors, particularly Marshall T. Reynolds, our Chairman, Alton B. Lewis Jr., our President and Chief Executive Officer and Eric J. Dosch, our Chief Financial Officer. The implementation of our business and growth strategies also depends significantly on our ability to attract, motivate and retain highly qualified executives and directors. The loss of services of one or more of these individuals could have a negative impact on our business because of their skills, years of industry experience and difficulty of promptly finding qualified replacement personnel.
 
We obtain a significant portion of our noninterest revenue through service charges on core deposit accounts, and regulations impacting service charges could reduce our fee income.
 
A significant portion of our noninterest revenue is derived from service charge income. During the year ended December 31, 2017, service charges, commissions and fees represented $2.6 million, or 31.0% of our total noninterest income. During the year ended December 31, 2016, service charges, commissions and fees represented $2.4 million, or 25.3% of our total noninterest income. The largest component of this service charge income is overdraft-related fees. Management believes that changes in banking regulations pertaining to rules on certain overdraft payments on consumer accounts have and will continue to have an adverse impact on our service charge income. Additionally, changes in customer behavior, as well as increased competition from other financial institutions, may result in declines in deposit accounts or in overdraft frequency resulting in a decline in service charge income. A reduction in deposit account fee income could have a material adverse effect on our earnings.
 
We may be unable to successfully compete with others for business.
 
The area in which we operate is considered attractive from an economic and demographic viewpoint, and is a highly competitive banking market. We compete for loans and deposits with numerous regional and national banks and other community banking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers and private lenders. Many competitors have substantially greater resources than we do. The differences in resources may make it harder for us to compete profitably, reduce the rates that we can earn on loans and investments, increase the rates we must offer on deposits and other funds, and adversely affect our overall financial condition and earnings.
 
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Hurricanes or other adverse weather conditions in Louisiana can have an adverse impact on our market area.
 
Our market area in Southeast Louisiana is close to New Orleans and the Gulf of Mexico, areas which are susceptible to hurricanes, tropical storms and other natural disasters and adverse weather conditions. For example, Hurricane Katrina hit the greater New Orleans area in August 2005 causing widespread damage. In August 2016, Louisiana experienced severe flooding which affected several of our markets. Similar future events could potentially cause widespread property damage, require the relocation of an unprecedented number of residents and business operations, and severely disrupt normal economic activity in our market areas, which may have an adverse effect on our operations, loan originations and deposit base. Moreover, our ability to compete effectively with financial institutions whose operations are not concentrated in areas affected by hurricanes or other adverse weather conditions or whose resources are greater than ours will depend primarily on our ability to continue normal business operations following such event. The severity and duration of the effects of hurricanes or other adverse weather conditions will depend on a variety of factors that are beyond our control, including the amount and timing of government, private and philanthropic investments including deposits in the region, the pace of rebuilding and economic recovery in the region and the extent to which a hurricane's property damage is covered by insurance. The occurrence of any such event could have a material adverse effect on our business, financial condition and results of operations.
 
We face risks related to our operational, technological and organizational infrastructure.
 
Our ability to grow and compete is dependent on our ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure as we expand. Similar to other large corporations, operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or outside persons and exposure to external events. As discussed below, we are dependent on our operational infrastructure to help manage these risks. In addition, we are heavily dependent on the strength and capability of our technology systems which we use both to interface with our customers and to manage our internal financial and other systems. Our ability to develop and deliver new products that meet the needs of our existing customers and attract new ones depends on the functionality of our technology systems. Additionally, our ability to run our business in compliance with applicable laws and regulations is dependent on these infrastructures.
 
We continuously monitor our operational and technological capabilities and make modifications and improvements when we believe it will be cost effective to do so. In some instances, we may build and maintain these capabilities ourselves. We also outsource some of these functions to third parties. These third parties may experience errors or disruptions that could adversely impact us and over which we may have limited control. We also face risk from the integration of new infrastructure platforms and/or new third party providers of such platforms into its existing businesses.
 
A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our businesses, result in the unauthorized disclosure of confidential information, damage our reputation and cause financial losses.
 
Our businesses are dependent on their ability to process and monitor, on a daily basis, a large number of transactions, many of which are highly complex, across numerous and diverse markets. These transactions, as well as the information technology services we provide to clients, often must adhere to client-specific guidelines, as well as legal and regulatory standards. Due to the breadth of our client base and following the Premier merger, our geographical reach, developing and maintaining our operational systems and infrastructure is challenging, particularly as a result of rapidly evolving legal and regulatory requirements and technological shifts. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a spike in transaction volume, cyber-attack or other unforeseen catastrophic events, which may adversely affect our ability to process these transactions or provide services.
 
In addition, our operations rely on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. Although we take protective measures to maintain the confidentiality, integrity and availability of information across all geographic and product lines, and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve. As a result, our computer systems, software and networks may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks and other events that could have an adverse security impact. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties such as foreign governments, organized crime and other hackers, and outsourced or infrastructure-support providers and application developers, or may originate internally from within our organization. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified.
 
-25-

Changes in accounting policies or in accounting standards could materially affect how we report our financial condition and results of operations.
 
Accounting policies are essential to understanding our financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain, and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.
 
From time to time, the Financial Accounting Standards Board ("FASB") and the Securities and Exchange Commission change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our financial statements. These changes are beyond our control, can be difficult to predict and could materially affect how we report our financial condition and results of operations. We could also be required to apply a new or revised standard retroactively, which may result in our restating our prior period financial statements.

In June 2016, the FASB issued a standard, Financial Instruments – Credit Losses, that will significantly change how banks measure and recognize credit impairment for many financial assets from an incurred loss methodology to a current expected loss model.  The current expected credit loss model will require banks to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard.  We are currently evaluating the impact of an adoption of this standard.

We hold certain intangible assets that could be classified as impaired in the future. If these assets are considered to be either partially or fully impaired in the future, our earnings and the book values of these assets would decrease.
 
We are required to test goodwill and core deposit intangible assets for impairment on a periodic basis. The impairment testing process considers a variety of factors, including macroeconomic conditions, industry and market considerations, cost factors, and financial performance. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment which would adversely affect our financial performance.
 
A lack of liquidity could adversely affect our operations and jeopardize our business, financial condition and results of operations.
 
Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations. An inability to raise funds through deposits, borrowings, the sale of our investment securities, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our most important source of funds is deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments such as money market funds, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income. As stated above, public funds are a sizeable portion of our deposits. Loss of a large public funds depositor at the end of a contract would negatively impact liquidity.
 
Other primary sources of funds consist of cash flows from operations and, maturities and sales of investment securities. Additional liquidity is provided by the ability to borrow from the FHLB or the Federal Reserve. We also may borrow funds from third-party lenders, such as other financial institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Our access to funding sources could also be affected by a decrease in the level of our business activity as a result of a downturn in our target markets or by one or more adverse regulatory actions against us.
 
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.
 
We are subject to environmental liability risk associated with lending activities.
 
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property's value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
 
-26-

Risks Related to Our Industry
 
We operate in a highly regulated environment and may be adversely affected by changes in federal, state and local laws and regulations.
 
We are subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change in applicable regulations or federal, state or local legislation could have a substantial impact on us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on our results of operations and financial condition. Like other bank holding companies and financial institutions, we must comply with significant anti-money laundering and anti-terrorism laws. Under these laws, we are required, among other things, to enforce a customer identification program and file currency transaction and suspicious activity reports with the federal government. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws or make required reports.
 
Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination findings.
 
The Federal Reserve Board, the FDIC and the OFI, periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. If we become subject to any regulatory actions, it could have a material adverse effect on our business, results of operations, financial condition and growth prospects.
 
Financial reform legislation enacted by Congress has, among other things, tightened capital standards and resulted in new laws and regulations that have increased our costs of operations.
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act") significantly changed the then-existing bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act changed the regulatory structure to which we are subject in numerous ways, including, but not limited to, the following:
 
the base for FDIC insurance assessments has been changed to a bank's average consolidated total assets minus average tangible equity, rather than upon its deposit base, while the FDIC's authority to raise insurance premiums has been expanded;
 
the current standard deposit insurance limit has been permanently raised to $250,000;
 
the FDIC must raise the ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September 30, 2020 and to "offset the effect" of increased assessments on insured depository institutions with assets of less than $10.0 billion;
 
the interchange fees payable on debit card transactions have been limited;
 
there are multiple new provisions affecting corporate governance and executive compensation at all publicly traded companies; and
 
all federal prohibitions on the ability of financial institutions to pay interest on commercial demand deposit accounts have been repealed.
 
In addition to the foregoing, the Dodd-Frank Act established the Consumer Financial Protection Bureau (the "CFPB") as an independent entity within the Federal Reserve. The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards, as well as with respect to certain mortgage-related matters, such as steering incentives, determinations as to a borrower's ability to repay and prepayment penalties.
 
As a result of the Dodd-Frank Act our operating and compliance costs have increased, and may continue to increase in the future.
 
-27-

We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.
 
In July 2013, the FDIC and the Federal Reserve Board approved a new rule that substantially amended the regulatory risk-based capital rules applicable to First Guaranty Bancshares, on a consolidated basis, and First Guaranty Bank, on a stand-alone basis. The final rule implements the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act.
 
The final rule includes new minimum risk-based capital and leverage ratios, which became effective for First Guaranty Bancshares and First Guaranty Bank on January 1, 2015, and refines the definition of what constitutes "capital" for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from former rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a "capital conservation buffer" of 2.5%, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. For 2018, the capital conservation buffer will be 1.875% of risk-weighted assets. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
 
The application of more stringent capital requirements for First Guaranty Bank and First Guaranty Bancshares could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we are unable to comply with such requirements.
 
We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties.
 
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The CFPB, the United States Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution's performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion activity. Private parties may also have the ability to challenge an institution's performance under fair lending laws in private class action litigation.
 
Difficult market conditions have adversely affected the industry in which we operate.
 
If capital and credit markets experience volatility and disruption as they did during the past financial crisis, we may face the following risks:
 
increased regulation of our industry;
 
compliance with such regulation may increase our costs and limit our ability to pursue business opportunities;
 
market developments and the resulting economic pressure on consumers may affect consumer confidence levels and may cause increases in delinquencies and default rates, which, among other effects, could affect our charge-offs and provision for loan losses. Competition in the industry could intensify as a result of the increasing consolidation of financial institutions in connection with the current market conditions;
 
market disruptions make valuation even more difficult and subjective, and our ability to measure the fair value of our assets could be adversely affected. If we determine that a significant portion of our assets have values significantly below their recorded carrying value, we could recognize a material charge to earnings in the quarter in which such determination was made, our capital ratios would be adversely affected and a rating agency might downgrade our credit rating or put us on credit watch; and
 
the downgrade of the United States government's sovereign credit rating, any related rating agency action in the future, and the downgrade of the sovereign credit ratings for several European nations could negatively impact our business, financial condition and results of operations.
 
Changes in the policies of monetary authorities and other government action could adversely affect our profitability.
 
Our results of operations are affected by credit policies of monetary authorities, particularly the policies of the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in U.S. government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, particularly in light of the continuing threat of terrorist attacks and the current military operations in the Middle East, we cannot predict possible future changes in interest rates, deposit levels, loan demand or our business and earnings. Furthermore, the actions of the United States government and other governments in responding to such terrorist attacks or the military operations in the Middle East may result in currency fluctuations, exchange controls, market disruption and other adverse effects.
 
-28-

Risk Associated with an Investment in our Common Stock
 
An active, liquid market for our common stock may not develop or be sustained.
 
Our shares of common stock began trading on the NASDAQ Global Market in November 2015. However, an active trading market for shares of our common stock may never develop on NASDAQ or be sustained. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to expand our business by using our common stock as consideration in an acquisition.
 
We are an emerging growth company within the meaning of the JOBS Act, and if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.
 
We are an "emerging growth company," as defined in the JOBS Act. We are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a non-binding advisory vote on executive compensation. In addition, we will not be subject to certain requirements of Section 404 of the Sarbanes Oxley Act of 2002, as amended ("Sarbanes-Oxley Act"), including the additional level of review of our internal control over financial reporting that may occur when outside auditors attest to our internal control over financial reporting.
 
We could remain an emerging growth company for up to five years following the completion of our stock offering in November 2015, or until the earliest of: (1) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion; (2) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter; or (3) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.
 
If we choose to take advantage of any of these exemptions while we are an emerging growth company, investors would have access to less information and analysis about our executive compensation, which may make it difficult for investors to evaluate our executive compensation practices. Additionally, investors may become less comfortable with the effectiveness of our internal control and the risk that material weaknesses or other deficiencies in our internal controls go undetected may increase. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions and provide reduced disclosure. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
 
Failure to maintain effective internal controls over financial reporting in the future could impair our ability to accurately and timely report our financial results or prevent fraud.
 
Effective internal controls over financial reporting are necessary to provide reliable financial reports and prevent fraud. As a bank holding company, we are subject to regulation that focuses on effective internal controls and procedures. Such controls and procedures are modified, supplemented, and changed from time-to-time as necessary in relation to our growth and in reaction to external events and developments. Any failure to maintain, in the future, an effective internal control environment could impact our ability to report our financial results on an accurate and timely basis, which could result in regulatory actions, loss of investor confidence, and adversely impact our business.
 
We have several large shareholders, and such shareholders may independently vote their shares in a manner that you may not consider to be consistent with your best interest or the best interest of our shareholders as a whole.
 
Our principal shareholders (Marshall T. Reynolds, William K. Hood and Edgar R. Smith III) beneficially own, approximately 39% of our outstanding common stock as of December 31, 2017. Each of these shareholders will continue to have the ability to independently vote a meaningful percentage of our outstanding common stock on all matters put to a vote of our shareholders, including the election of our board of directors and certain other significant corporate transactions, such as a merger or acquisition transaction. On any such matter, the interests of these shareholders may not coincide with the interests of the other holders of our common stock and any such difference in interests may result in that shareholder voting its shares in a manner inconsistent with the interests of other shareholders.
 
Our dividend policy may change without notice, and our future ability to pay dividends is also subject to regulatory restrictions.
 
Holders of our common stock are entitled to receive only such cash dividends as our board of directors may declare out of funds legally available for the payment of dividends. First Guaranty is obligated to make payments on its senior debt and subordinated debt before making dividend payments to common shareholders.
 
Although First Guaranty Bancshares, and First Guaranty Bank prior to the Share Exchange, paid a quarterly dividend to our shareholders for 98 consecutive quarters as of December 31, 2017, we have no obligation to continue paying dividends, and we may change our dividend policy at any time without prior notice to our shareholders. In addition, our ability to pay dividends will continue to be subject, among other things, to certain regulatory guidance and/or restrictions.

-29-

Risks Associated with the Premier Merger

First Guaranty may be unable to successfully integrate Premier's operations or otherwise realize the expected benefits from the Merger, which would adversely affect First Guaranty's results of operations and financial condition.
The Merger involves the integration of two companies that have previously operated independently. The difficulties of combining the operations of the two companies include:

integrating personnel with diverse business backgrounds;
 
converting customers to new systems;
 
combining different corporate cultures; and

retaining key employees.

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the business and the loss of key personnel. The integration of the two companies will require the experience and expertise of certain key employees of Premier who are expected to be retained by First Guaranty. First Guaranty may not be successful in retaining these employees for the time period necessary to successfully integrate Premier's operations with those of First Guaranty. The diversion of management's attention and any delay or difficulty encountered in connection with the Merger and the integration of the two companies' operations could have an adverse effect on the business and results of operations of First Guaranty following the Merger.
The success of the Merger will depend, in part, on First Guaranty's ability to realize the anticipated benefits and cost savings from combining the business of Premier with First Guaranty. If First Guaranty is unable to successfully integrate Premier, the anticipated benefits and cost savings of the Merger may not be realized fully or may take longer to realize than expected. For example, First Guaranty may fail to realize the anticipated increase in earnings and cost savings anticipated to be derived from the Merger. In addition, as with regard to any merger, a significant decline in asset valuations or cash flows may also cause First Guaranty not to realize expected benefits.

Goodwill incurred in the Merger may negatively affect First Guaranty's financial condition.
To the extent that the merger consideration, consisting of cash plus the number of shares of First Guaranty common stock issued in the Merger, exceeded the fair value of the net assets, including identifiable intangibles of Premier, that amount was reported as goodwill by First Guaranty. In accordance with current accounting guidance, goodwill will not be amortized but will be evaluated for impairment annually. A failure to realize expected benefits of the Merger could adversely impact the carrying value of the goodwill recognized in the Merger, and in turn negatively affect First Guaranty's financial condition. 
Risks Associated with an At the Market Offering

Stockholders may experience dilution as a result of our current ATM Offering or future equity offerings.

In order to raise capital for future acquisitions or for general corporate purposes, we may offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at a price per share that may be lower than the current price. In November 2017, First Guaranty announced the launch of the ATM Offering.  First Guaranty may sell up to $25.0 million of common stock under the ATM Offering. If we sell shares of our common stock in the ATM Offering or another future offering, First Guaranty stockholders will experience dilution in their ownership interest in First Guaranty. 

Item 1B – Unresolved Staff Comments
 
None.
 
-30-

Item 2 - Properties
 
First Guaranty does not directly own any real estate, but it does own real estate indirectly through the Bank. The Bank operates 27 banking centers, including one drive-up facility. The following table sets forth certain information relating to each office. The net book value of premises at all branch locations, including the raw land of branches under development, at December 31, 2017 totaled $38.0 million. We believe that our properties are adequate for our business operations as they are currently being conducted.
 
Location
 
Use of Facilities
 
Year Facility
Opened or Acquired
 
Owned/Leased
First Guaranty Square
400 East Thomas Street
Hammond, LA  70401
 
First Guaranty Bank's Main Office
 
1975
 
Owned
2111 West Thomas Street
Hammond, LA  70401
 
Guaranty West Banking Center
 
1974
 
Owned
100 East Oak Street
Amite, LA  70422
 
Amite Banking Center
 
1970
 
Owned
455 West Railroad Avenue
Independence, LA  70443
 
Independence Banking Center
 
1979
 
Owned
301 Avenue F
Kentwood, LA  70444
 
Kentwood Banking Center
 
1975
 
Owned
189 Burt Blvd
Benton, LA  71006
 
Benton Banking Center
 
2010
 
Owned
126 South Hwy. 1
Oil City, LA  71061
 
Oil City Banking Center
 
1999
 
Owned
401 North 2nd Street
Homer, LA  71040
 
Homer Main Banking Center
 
1999
 
Owned
10065 Hwy 79
Haynesville, LA  71038
 
Haynesville Banking Center
 
1999
 
Owned
117 East Hico Street
Dubach, LA 71235
 
Dubach Banking Center
 
1999
 
Owned
102 East Louisiana Avenue
Vivian, LA  71082
 
Vivian Banking Center
 
1999
 
Owned
500 North Cary Avenue
Jennings, LA  70546
 
Jennings Banking Center
 
1999
 
Owned
799 West Summers Drive
Abbeville, LA  70510
 
Abbeville Banking Center
 
1999
 
Owned
105 Berryland
Ponchatoula, LA  70454
 
Berryland Banking Center
 
2004
 
Leased
2231 S. Range Avenue
Denham Springs, LA 70726
 
Denham Springs Banking Center
 
2005
 
Owned
500 West Pine Street
Ponchatoula, LA  70454
 
Ponchatoula Banking Center
 
2016
 
Owned
29815 Walker Rd S
Walker, LA 70785
 
Walker Banking Center
 
2007
 
Owned
6151 Hwy 10
Greensburg, LA 70441
 
Greensburg Banking Center
 
2011
 
Owned
723 Avenue G
Kentwood, LA 70444
 
Kentwood West Banking Center
 
2011
 
Owned
35651 Hwy 16
Montpelier, LA 70422
 
Montpelier Banking Center
 
2011
 
Owned
33818 Hwy 16
Denham Springs, LA 70706
 
Watson Banking Center
 
2011
 
Owned
8951 Synergy Dr. #100
McKinney, TX 75070
 
McKinney Banking Center
 
2017
 
Owned
7600 Woodway Drive
Waco, TX 76712
 
Waco Banking Center
 
2017
 
Owned
2209 W. University Dr.
Denton, TX 76201
 
Denton Banking Center
 
2017
 
Owned
2001 N. Handley Ederville Road
Fort Worth, TX 76118
 
Fort Worth Banking Center
 
2017
 
Owned
603 Main Street #101
Garland, TX 75040
 
Garland Banking Center
 
2017
 
Leased
4221 Airline Drive
Bossier City, LA 71111
 
Bossier City Banking Center
 
2017
 
Owned
 
 
-31-

Item 3 - Legal Proceedings
 
First Guaranty is subject to various legal proceedings in the normal course of its business. At December 31, 2017, we were not involved in any legal proceedings, the outcome of which would have a material adverse effect on the financial condition or results of operation of First Guaranty.
 
Item 4 - Mine Safety Disclosures
 
Not applicable.
 
-32-

PART II
 
Item 5 - Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
Shares of our common stock are traded on the NASDAQ Global Marketplace under the symbol "FGBI". As of December 31, 2017, there were approximately 1,500 holders of record of our common stock.
 
The following table sets forth the quarterly high and low reported sales prices for our common stock for the years ended December 31, 2017 and 2016. These reported sales prices represent trades that were quoted on the NASDAQ. 
 
 
2017
   
2016
 
Quarter Ended*:
 
High
   
Low
   
Dividend
   
High
   
Low
   
Dividend
 
March 31,
 
$
22.00
   
$
21.37
   
$
0.16
   
$
16.83
   
$
15.50
   
$
0.16
 
June 30,
 
$
24.82
   
$
24.69
   
$
0.16
   
$
16.15
   
$
15.95
   
$
0.16
 
September 30,
 
$
24.55
   
$
24.24
   
$
0.16
   
$
16.41
   
$
16.17
   
$
0.16
 
December 31,
 
$
25.02
   
$
24.63
   
$
0.16
   
$
23.93
   
$
23.32
   
$
0.16
 
 
*
Data above has not been adjusted to reflect the ten percent stock dividend paid December 14, 2017 to shareholders of record as of December 8, 2017.
 
Our shareholders are entitled to receive dividends when, and if, declared by the Board of Directors, out of funds legally available for dividends. We have paid consecutive quarterly cash dividends on our common stock for each of the last 98 quarters dating back to the third quarter of 1993. The Board of Directors intends to continue to pay regular quarterly cash dividends. The ability to pay dividends in the future will depend on earnings and financial condition, liquidity and capital requirements, regulatory restrictions, the general economic and regulatory climate and ability to service any equity or debt obligations senior to common stock. There are legal restrictions on the ability of First Guaranty Bank to pay cash dividends to First Guaranty Bancshares, Inc. Under federal and state law, we are required to maintain certain surplus and capital levels and may not distribute dividends in cash or in kind, if after such distribution we would fall below such levels. Specifically, an insured depository institution is prohibited from making any capital distribution to its shareholders, including by way of dividend, if after making such distribution, the depository institution fails to meet the required minimum level for any relevant capital measure including the risk-based capital adequacy and leverage standards.
 
Additionally, under the Louisiana Business Corporation Act, First Guaranty Bancshares, Inc. is prohibited from paying any cash dividends to shareholders if, after the payment of such dividend First Guaranty Bancshares would not be able to pay its debts as they became due in the usual course of business or its total assets would be less than its total liabilities or where net assets are less than the liquidation value of shares that have a preferential right to participate in First Guaranty Bancshares, Inc.'s assets in the event First Guaranty Bancshares, Inc. were to be liquidated.
 

-33-

Item 6 - 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 %)
 
2017
   
2016
   
2015
   
2014
   
2013
 
Year End Balance Sheet Data:
                             
Investment securities
 
$
501,656
   
$
499,336
   
$
546,121
   
$
641,603
   
$
634,504
 
Federal funds sold
 
$
823
   
$
271
   
$
582
   
$
210
   
$
665
 
Loans, net of unearned income
 
$
1,149,014
   
$
948,921
   
$
841,583
   
$
790,321
   
$
703,166
 
Allowance for loan losses
 
$
9,225
   
$
11,114
   
$
9,415
   
$
9,105
   
$
10,355
 
Total assets
 
$
1,750,430
   
$
1,500,946
   
$
1,459,753
   
$
1,518,876
   
$
1,436,441
 
Total deposits
 
$
1,549,286
   
$
1,326,181
   
$
1,295,870
   
$
1,371,839
   
$
1,303,099
 
Borrowings
 
$
52,938
   
$
43,230
   
$
42,221
   
$
3,255
   
$
6,288
 
Shareholders' equity
 
$
143,983
   
$
124,349
   
$
118,224
   
$
139,583
   
$
123,405
 
Common shareholders' equity
 
$
143,983
   
$
124,349
   
$
118,224
   
$
100,148
   
$
83,970
 
 
                                       
Performance Ratios and Other Data:
                                       
Return on average assets
   
0.71
%
   
0.97
%
   
0.97
%
   
0.77
%
   
0.65
%
Return on average common equity
   
8.59
%
   
11.18
%
   
12.98
%
   
11.40
%
   
9.31
%
Return on average tangible assets
   
0.73
%
   
0.98
%
   
0.99
%
   
0.79
%
   
0.67
%
Return on average tangible common equity
   
9.15
%
   
11.64
%
   
13.60
%
   
12.10
%
   
9.99
%
Net interest margin
   
3.33
%
   
3.39
%
   
3.26
%
   
3.11
%
   
2.92
%
Average loans to average deposits
   
72.23
%
   
68.57
%
   
61.31
%
   
55.72
%
   
53.58
%
Efficiency ratio(1)
   
62.64
%
   
56.85
%
   
55.11
%
   
62.85
%
   
65.61
%
Efficiency ratio (excluding amortization of intangibles and securities transactions)(1)
   
63.38
%
   
60.19
%
   
57.74
%
   
62.58
%
   
67.17
%
Full time equivalent employees (year end)
   
338
     
293
     
277
     
271
     
278
 
 
(Footnotes follow on next page)
 
-34-

Item 6- Selected Financial Data continued
 
 
 
At or For the Years Ended December 31,
 
(in thousands except for % and share data)
 
2017
   
2016
   
2015
   
2014
   
2013
 
Capital Ratios:
                             
Average shareholders' equity to average assets
   
8.31
%
   
8.63
%
   
9.88
%
   
9.24
%
   
9.28
%
Average tangible equity to average tangible assets
   
8.01
%
   
8.44
%
   
9.67
%
   
9.00
%
   
9.02
%
Common shareholders' equity to total assets
   
8.23
%
   
8.28
%
   
8.10
%
   
6.59
%
   
5.85
%
Tier 1 leverage capital consolidated
   
8.27
%
   
8.68
%
   
8.17
%
   
9.33
%
   
9.14
%
Tier 1 capital consolidated
   
10.35
%
   
10.59
%
   
10.85
%
   
13.16
%
   
13.61
%
Total risk-based capital consolidated
   
12.14
%
   
12.79
%
   
13.13
%
   
14.05
%
   
14.71
%
Common equity tier one capital consolidated
   
10.35
%
   
10.59
%
   
10.85
%
   
N/A
     
N/A
 
Tangible common equity to tangible assets(2)
   
7.87
%
   
8.10
%
   
7.89
%
   
6.37
%
   
5.59
%
 
                                       
Income Data:
                                       
Interest income
 
$
67,546
   
$
58,532
   
$
56,079
   
$
53,297
   
$
50,886
 
Interest expense
 
$
14,393
   
$
10,140
   
$
8,608
   
$
9,202
   
$
11,134
 
Net interest income
 
$
53,153
   
$
48,392
   
$
47,471
   
$
44,095
   
$
39,752
 
Provision for loan losses
 
$
3,822
   
$
3,705
   
$
3,864
   
$
1,962
   
$
2,520
 
Noninterest income (excluding securities transactions)
 
$
6,943
   
$
5,656
   
$
5,656
   
$
5,882
   
$
5,907
 
Securities gains
 
$
1,397
   
$
3,799
   
$
3,300
   
$
295
   
$
1,571
 
Noninterest expense
 
$
38,521
   
$
32,885
   
$
31,095
   
$
31,594
   
$
30,987
 
Earnings before income taxes
 
$
19,150
   
$
21,257
   
$
21,468
   
$
16,716
   
$
13,723
 
Net income
 
$
11,751
   
$
14,093
   
$
14,505
   
$
11,224
   
$
9,146
 
Net income available to common shareholders
 
$
11,751
   
$
14,093
   
$
14,121
   
$
10,830
   
$
8,433
 
 
                                       
Per Common Share Data(4):
                                       
Net earnings
 
$
1.37
   
$
1.68
   
$
1.83
   
$
1.42
   
$
1.11
 
Cash dividends paid
 
$
0.60
   
$
0.58
   
$
0.54
   
$
0.53
   
$
0.53
 
Book value
 
$
16.35
   
$
14.86
   
$
14.13
   
$
13.16
   
$
11.03
 
Tangible book value (3)
 
$
15.59
   
$
14.50
   
$
13.73
   
$
12.68
   
$
10.52
 
Dividend payout ratio
   
44.34
%
   
34.56
%
   
30.07
%
   
37.18
%
   
47.75
%
Weighted average number of shares outstanding
   
8,608,088
     
8,369,424
     
7,714,620
     
7,611,397
     
7,611,397
 
Number of shares outstanding
   
8,807,175
     
8,369,424
     
8,369,424
     
7,611,397
     
7,611,397
 
 
                                       
Asset Quality Ratios:
                                       
Non-performing assets to total assets
   
0.84
%
   
1.48
%
   
1.51
%
   
0.99
%
   
1.27
%
Non-performing assets to total loans
   
1.28
%
   
2.34
%
   
2.62
%
   
1.90
%
   
2.60
%
Non-performing loans to total loans
   
1.17
%
   
2.30
%
   
2.43
%
   
1.62
%
   
2.12
%
Loan loss reserve to non-performing assets
   
62.88
%
   
50.04
%
   
42.74
%
   
60.74
%
   
56.72
%
Net charge-offs to average loans
   
0.54
%
   
0.23
%
   
0.44
%
   
0.45
%
   
0.38
%
Provision for loan loss to average loans
   
0.36
%
   
0.42
%
   
0.47
%
   
0.27
%
   
0.38
%
Allowance for loan loss to total loans
   
0.80
%
   
1.17
%
   
1.12
%
   
1.15
%
   
1.47
%
 
(1)
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."
 
(2)
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."

(3)
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."
 
(4)
Historical share and per share amounts have been adjusted to reflect the ten percent stock dividend paid December 14, 2017 to shareholders of record as of December 8, 2017.
 
-35-

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 %)
 
2017
   
2016
   
2015
   
2014
   
2013
 
Tangible Common Equity
                             
Total shareholders' equity
 
$
143,983
   
$
124,349
   
$
118,224
   
$
139,583
   
$
123,405
 
Adjustments:
                                       
Preferred
   
-
     
-
     
-
     
39,435
     
39,435
 
Goodwill
   
3,472
     
1,999
     
1,999
     
1,999
     
1,999
 
Acquisition intangibles
   
3,249
     
978
     
1,298
     
1,618
     
1,938
 
Tangible common equity
 
$
137,262
   
$
121,372
   
$
114,927
   
$
96,531
   
$
80,033
 
Common shares outstanding
   
8,807,175
     
8,369,424
     
8,369,424
     
7,611,397
     
7,611,397
 
Book value per common share
 
$
16.35
   
$
14.86
   
$
14.13
   
$
13.16
   
$
11.03
 
Tangible book value per common share
 
$
15.59
   
$
14.50
   
$
13.73
   
$
12.68
   
$
10.52
 
Tangible Assets
                                       
Total Assets
 
$
1,750,430
   
$
1,500,946
   
$
1,459,753
   
$
1,518,876
   
$
1,436,441
 
Adjustments:
                                       
Goodwill
   
3,472
     
1,999
     
1,999
     
1,999
     
1,999
 
Acquisition intangibles
   
3,249
     
978
     
1,298
     
1,618
     
1,938
 
Tangible Assets
 
$
1,743,709
   
$
1,497,969
   
$
1,456,456
   
$
1,515,259
   
$
1,432,504
 
Tangible common equity to tangible assets
   
7.87
%
   
8.10
%
   
7.89
%
   
6.37
%
   
5.59
%
 
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 %)
 
2017
   
2016
   
2015
   
2014
   
2013
 
GAAP-based efficiency ratio
   
62.64
%
   
56.85
%
   
55.11
%
   
62.85
%
   
65.61
%
Noninterest expense
 
$
38,521
   
$
32,885
   
$
31,095
   
$
31,594
   
$
30,987
 
Amortization of intangibles
   
432
     
320
     
320
     
320
     
320
 
Noninterest expense, excluding amortization
   
38,089
     
32,565
     
30,775
     
31,274
     
30,667
 
Net interest income
   
53,153
     
48,392
     
47,471
     
44,095
     
39,752
 
Noninterest income
   
8,340
     
9,455
     
8,956
     
6,177
     
7,478
 
Adjustments:
                                       
Securities transactions
   
1,397
     
3,739
     
3,125
     
295
     
1,571
 
Noninterest income, excluding securities transactions
 
$
6,943
   
$
5,716
   
$
5,831
   
$
5,882
   
$
5,907
 
Efficiency ratio
   
63.38
%
   
60.19
%
   
57.74
%
   
62.58
%
   
67.17
%
 
-36-

Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6, "Selected Financial Data" and our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under "Forward-Looking Statements," "Risk Factors" and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements.
 
Special Note Regarding Forward-Looking Statements
 
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a Company's anticipated future financial performance. This act provides a safe harbor for such disclosure, which protects us from unwarranted litigation, if actual results are different from Management expectations. This discussion and analysis contains forward-looking statements and reflects Management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "may," "should," "expect," "anticipate," "intend," "plan," "continue," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of factors and uncertainties, including, changes in general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities, if any; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans; changes in our financial condition or results of operations that reduce capital available to pay dividends; and changes in the financial condition or future prospects of issuers of securities that we own, which could cause our actual results and experience to differ from the anticipated results and expectations, expressed in such forward-looking statements.
 
Overview
 
First Guaranty Bancshares is a Louisiana-chartered bank 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 27 banking facilities primarily located in the MSAs of Hammond, Baton Rouge, Lafayette, Shreveport-Bossier City, Dallas-Fort Worth-Arlington, and Waco. 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. First Guaranty entered the Texas markets in 2017 with the acquisition of Premier Bancshares, Inc. and its wholly owned subsidiary, Synergy Bank.
 
Total assets were $1.8 billion at December 31, 2017 and $1.5 billion at December 31, 2016. Total deposits were $1.5 billion at December 31, 2017 and $1.3 billion at December 31, 2016. Total loans were $1.1 billion at December 31, 2017, an increase of $200.1 million, or 21.1%, compared with December 31, 2016. Common shareholders' equity was $144.0 million and $124.3 million at December 31, 2017 and December 31, 2016, respectively. The growth in assets and liabilities in 2017 as compared to 2016 was primarily due to the acquisition of Premier in June 2017.
 
Net income was $11.8 million, $14.1 million and $14.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. We generate most of our revenues from interest income on loans, interest income on securities, sales of securities and service charges, commissions and fees. We incur interest expense on deposits and other borrowed funds and noninterest expense such as salaries and employee benefits and occupancy and equipment expenses. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowings which are used to fund those assets. Net interest income is our largest source of revenue. To evaluate net interest income, we measure and monitor: (1) yields on our loans and other interest-earning assets; (2) the costs of our deposits and other funding sources; (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.
 
Changes in market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and 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. During the extended period of historically low interest rates, we continue to evaluate our investments in interest-earning assets in relation to the impact such investments have on our financial condition, results of operations and shareholders' equity.
 
-37-

Financial highlights for 2017 and 2016:

During the fourth quarter of 2017, First Guaranty elected to become a financial holding company because First Guaranty acquired a fifty percent ownership in an insurance brokerage in November 2017.

First Guaranty completed its merger with Premier Bancshares, Inc. ("Premier") and its wholly owned subsidiary, Synergy Bank, on June 16, 2017. First Guaranty acquired a total of $158.3 million in assets and assumed an $137.4 million in liabilities. First Guaranty issued 397,988 shares of its common stock at a price of $25.86 and paid $10.3 million in cash to Premier shareholders (unadjusted for the 10% stock dividend in December 2017). Total consideration was $21.0 million. First Guaranty acquired a total of $128.0 million in loans, securities of $5.9 million, cash and due from banks of $4.5 million, Fed funds sold of $2.9 million, premises of $9.5 million, other real estate owned of $0.2 million and other assets that totaled $2.0 million. Intangibles recorded from the transaction were a total of $5.3 million, including goodwill of $1.5 million. Total assumed liabilities included deposits of $127.2 million, an FHLB advance of $9.7 million and other liabilities of $0.4 million. Expenses related to the merger totaled $1.4 million in 2017.

Total assets at December 31, 2017 increased $249.5 million, or 16.6%, to $1.8 billion when compared to December 31, 2016. Total loans at December 31, 2017 were $1.1 billion, an increase of $200.1 million, or 21.1%, compared with December 31, 2016. Common shareholders' equity was $144.0 million and $124.3 million at December 31, 2017 and 2016, respectively.
 
Net income for the years ended December 31, 2017 and 2016 was $11.8 million and $14.1 million, respectively.
  
Earnings per common share were $1.37 and $1.68 for the years ended December 31, 2017 and 2016, respectively. Total weighted average shares outstanding were 8,608,088 at December 31, 2017 compared to 8,369,424 at December 31, 2016. The change in shares was due to First Guaranty's acquisition of Premier in June 2017 and the 10% common stock dividend issued in December 2017. 
 
Net interest income for 2017 was $53.2 million compared to $48.4 million for 2016.
 
The provision for loan losses totaled $3.8 million for 2017 compared to $3.7 million in 2016.  
 
The net interest margin for 2017 was 3.33%, which was a decrease of six basis points from the net interest margin of 3.39% for 2016. First Guaranty attributed the decrease in the net interest margin to a rise in interest expense associated with deposits.
 
Investment securities totaled $501.7 million at December 31, 2017, an increase of $2.3 million when compared to $499.3 million at December 31, 2016. At December 31, 2017, available for sale securities, at fair value, totaled $381.5 million, a decrease of $15.9 million when compared to $397.5 million at December 31, 2016. At December 31, 2017, held to maturity securities, at amortized cost, totaled $120.1 million, an increase of $18.3 million when compared to $101.9 million at December 31, 2016.

Total loans net of unearned income were $1.1 billion at December 31, 2017 compared to $948.9 million at December 31, 2016. The net loan portfolio at December 31, 2017 totaled $1.1 billion, a net increase of $202.0 million from $937.8 million at December 31, 2016. Total loans net of unearned income are reduced by the allowance for loan losses which totaled $9.2 million at December 31, 2017 and $11.1 million at December 31, 2016.
 
Total impaired loans decreased $13.2 million to $15.6 million at December 31, 2017 compared to $28.8 million at December 31, 2016.
 
Nonaccrual loans decreased $9.1 million to $12.6 million at December 31, 2017 compared to $21.7 million at December 31, 2016.

 
The allowance for loan losses was 0.80% of loans at December 31, 2017. The allowance for loan losses as a percentage of total loans was 0.90% prior to the inclusion of the acquired loans from Premier.

Return on average assets was 0.71% and 0.97% for the years ended December 31, 2017 and 2016, respectively. Return on average common equity was 8.59% and 11.18% for 2017 and 2016, respectively. Return on average assets is calculated by dividing net income before preferred dividends by average assets. Return on average common equity is calculated by dividing net income to common shareholders by average common equity.
 
Book value per common share was $16.35 as of December 31, 2017 compared to $14.86 as of December 31, 2016. Tangible book value per common share was $15.59 as of December 31, 2017 compared to $14.50 as of December 31, 2016.
 
The increase in book value was due primarily to the issuance of shares related to the acquisition of Premier adjusted for the 10% common stock dividend, the changes in accumulated other comprehensive income/loss ("AOCI") and an increase in retained earnings. AOCI is comprised of unrealized gains and losses on available for sale securities.
 
First Guaranty's Board of Directors declared and First Guaranty paid cash dividends of $0.60 and $0.58 per common share in 2017 and 2016. First Guaranty has paid 98 consecutive quarterly dividends as of December 31, 2017.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act permanently lowers the federal corporate income tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018. First Guaranty recorded a one-time income tax expense of $0.9 million in 2017 related to the estimated net impact from the remeasurement of deferred tax assets and liabilities.


-38-

 
Application of Critical Accounting Policies
 
Our accounting and reporting policies conform to generally accepted accounting principles in the United States and to predominant accounting practices within the banking industry. Certain critical accounting policies require judgment and estimates which are used in the preparation of the financial statements.
 
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance, which is based on evaluation of the collectability of loans and prior loan loss experience, is an amount that, in the opinion of management, reflects the risks inherent in the existing loan portfolio and exists at the reporting date. The evaluations take into consideration a number of subjective factors including changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect a borrower's ability to pay, adequacy of loan collateral and other relevant factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require additional recognition of losses based on their judgments about information available to them at the time of their examination.
 
The following are general credit risk factors that affect our loan portfolio segments. These factors do not encompass all risks associated with each loan category. Construction and land development loans have risks associated with interim construction prior to permanent financing and repayment risks due to the future sale of developed property. Farmland and agricultural loans have risks such as weather, government agricultural policies, fuel and fertilizer costs, and market price volatility. One- to four-family residential, multi-family, and consumer credits are strongly influenced by employment levels, consumer debt loads and the general economy. Non-farm non-residential loans include both owner-occupied real estate and non-owner occupied real estate. Common risks associated with these properties is the ability to maintain tenant leases and keep lease income at a level able to service required debt and operating expenses. Commercial and industrial loans generally have non-real estate secured collateral which requires closer monitoring than real estate collateral.
 
Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values and future cash flows on impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term. However, the amount of the change that is reasonably possible cannot be estimated. The evaluation of the adequacy of loan collateral is often based upon estimates and appraisals. Because of changing economic conditions, the valuations determined from such estimates and appraisals may also change. Accordingly, we may ultimately incur losses that vary from management's current estimates. Adjustments to the allowance for loan losses will be reported in the period such adjustments become known or can be reasonably estimated. All loan losses are charged to the allowance for loan losses when the loss actually occurs or when the collectability of the principal is unlikely. Recoveries are credited to the allowance at the time of recovery.
 
The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, and impaired. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Also, a specific reserve is allocated for our syndicated loans. The general component covers non-classified loans and special mention loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect the estimate of probable losses.
 
The allowance for loan losses is reviewed on a monthly basis. The monitoring of credit risk also extends to unfunded credit commitments, such as unused commercial credit lines and letters of credit. A reserve is established as needed for estimates of probable losses on such commitments.
 
Other-Than-Temporary Impairment of Investment Securities. Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses.  In estimating other-than-temporary losses, management considers the length of time and extent that fair value has been less than cost and the financial condition and near term prospects of the issuer.  Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
 
-39-

Valuation of Goodwill, Intangible Assets and Other Purchase Accounting Adjustments. First Guaranty accounts for acquisitions in accordance with ASC Topic No. 805, Business Combinations, which requires the use of the acquisition method of accounting. Under this method, First Guaranty is required to record the assets acquired, including identified intangible assets, and liabilities assumed, at their respective fair values, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective, as is the appropriate amortization method for such intangible assets. In addition, business combinations typically result in recording goodwill.

Intangible assets are comprised of goodwill, core deposit intangibles and mortgage servicing rights. Goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. Our goodwill is tested for impairment on an annual basis, or more often if events or circumstances indicate impairment may exist. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. If the implied fair value is less than the carrying amount, a loss would be recognized in other noninterest expense to reduce the carrying amount to implied fair value of goodwill. Our goodwill impairment test includes two steps that are preceded by a "step zero" qualitative test. The qualitative test allows management to assess whether qualitative factors indicate that it is more likely than not that impairment exists. If it is not more likely than not that impairment exists, then the two step quantitative test would not be necessary. These qualitative indicators include factors such as earnings, share price, market conditions, etc. If the qualitative factors indicate that it is more likely than not that impairment exists, then the two step quantitative test would be necessary. Step one is used to identify potential impairment and compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit's goodwill, an impairment loss is recognized in an amount equal to the excess. First Guaranty concluded goodwill was not impaired as of October 1, 2017. Further, no events or changes in circumstances between October 1, 2017 and December 31, 2017 indicated that it was more likely than not the fair value of any reporting unit had been reduced below its carrying value.

Goodwill impairment evaluations require management to utilize significant judgments and assumptions including, but not limited to, the general economic environment and banking industry, reporting unit future performance (i.e., forecasts), events or circumstances affecting a respective reporting unit (e.g., interest rate environment), and changes in First Guaranty's stock price, amongst other relevant factors. Management's judgments and assumptions are based on the best information available at the time. Results could vary in subsequent reporting periods if conditions differ substantially from the assumptions utilized in completing the evaluations.
 
Identifiable intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or legal rights or because the assets are capable of being sold or exchanged either on their own or in combination with related contract, asset or liability. Our intangible assets primarily relate to core deposits. Management periodically evaluates whether events or circumstances have occurred that would result in impairment of value.
-40-

Financial Condition

First Guaranty completed the acquisition of Premier Bancshares, Inc. and its wholly owned subsidiary Synergy Bank, S.S.B. on June 16, 2017. This acquisition added five branches, an estimated $127.2 million in deposits, and an estimated $128.0 million in loans to First Guaranty's balance sheet. The results of operations since the date of acquisition reflect the impact of the transaction.
 
Assets.
 
Our total assets were $1.8 billion at December 31, 2017, an increase of $249.5 million, or 16.6%, from total assets at December 31, 2016, primarily due to the growth in our loan portfolio of $202.0 million, an increase in cash and cash equivalents of $19.9 million and of our investment securities portfolio of $2.3 million, a substantial portion of which was due to the Premier acquisition.
 
Loans.
 
Net loans increased $202.0 million, or 21.5%, to $1.1 billion at December 31, 2017 from $937.8 million at December 31, 2016. Net loans increased during 2017 primarily due to a $123.2 million increase in non-farm non-residential loans, a $28.4 million increase in construction and land development loans, a $26.7 million increase in commercial and industrial loans, a $23.5 million increase in one- to four-family residential loans, a $4.5 million increase in farmland loans, and a $4.4 million increase in multi-family loans, partially offset by a $7.8 million decrease in consumer and other loans and a $2.3 million decrease in agricultural loans. Non-farm non-residential loan balances increased primarily due to local originations and the acquisition of loans from Premier. Construction and land development loans increased principally due to the funding of unfunded commitments on various construction projects. Commercial and industrial loans increased primarily due to acquired loans from Premier and due to growth in First Guaranty's legacy portfolio. One-to four-family residential loans increased primarily due to the continued growth in local loan originations and acquired loans. Farmland loans increased due to seasonal fundings on agricultural loan commitments. Multi-family loans increased primarily due to acquired loans from Premier. Consumer and other loans decreased due to the sale of the government guaranteed student loans portfolio acquired from Premier and paydowns on commercial leases. Agricultural loans decreased due to seasonal fluctuations. Syndicated loans declined during 2017 from $82.8 million at December 31, 2016 to $70.4 million at December 31, 2017. First Guaranty had approximately 2.4% of funded and 0.4% of unfunded commitments in our loan portfolio to businesses engaged in support or service activities for oil and gas operations. The balances in this portfolio were not materially changed by the Premier acquisition. There are no significant concentrations of credit to any individual borrower.
 
As of December 31, 2017, 74.1% of our loan portfolio was secured primarily or secondarily by real estate. The largest portion of our loan portfolio, at 46.9% at December 31, 2017, was non-farm non-residential loans secured by real estate. Approximately 40.4% of the loan portfolio is based on a floating interest rate tied to the prime rate or London InterBank Offered Rate, or LIBOR, at December 31, 2017. Approximately 70.2% of the loan portfolio is scheduled to mature within five years from December 31, 2017.

First Guaranty acquired in the Premier acquisition a portfolio of loans comprised of loans guaranteed principally by the U.S. Small Business Administration ("SBA") or by the U.S. Department of Agriculture ("USDA") and the unguaranteed portion of SBA and USDA loans for which the guaranteed portion had been sold into the secondary market. At December 31, 2017 First Guaranty's balance of SBA and USDA loans was $38.2 million of which $13.2 million retained the government guarantee and $25.0 million was the unguaranteed residual balance. At December 31, 2017, First Guaranty also serviced 55 SBA and USDA loans that totaled $50.5 million. First Guaranty receives servicing fee income on this portfolio.
 
Loan Portfolio Composition. The tables below sets forth the balance of loans, excluding loans held for sale, outstanding by loan type as of the dates presented, and the percentage of each loan type to total loans.
 
 
 
At December 31,
 
 
 
2017
   
2016
   
2015
   
2014
   
2013
 
(in thousands except for %)
 
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Real Estate:
                                                           
Construction & land development
 
$
112,603
     
9.8
%
 
$
84,239
     
8.9
%
 
$
56,132
     
6.6
%
 
$
52,094
     
6.6
%
 
$
47,550
     
6.7
%
Farmland
   
25,691
     
2.2
%
   
21,138
     
2.2
%
   
17,672
     
2.1
%
   
13,539
     
1.7
%
   
9,826
     
1.4
%
1- 4 Family
   
158,733
     
13.8
%
   
135,211
     
14.2
%
   
129,610
     
15.4
%
   
118,181
     
14.9
%
   
103,764
     
14.7
%
Multi-family
   
16,840
     
1.4
%
   
12,450
     
1.3
%
   
12,629
     
1.5
%
   
14,323
     
1.8
%
   
13,771
     
2.0
%
Non-farm non-residential
   
540,231
     
46.9
%
   
417,014
     
43.9
%
   
323,363
     
38.3
%
   
328,400
     
41.5
%
   
336,071
     
47.7
%
Total Real Estate
   
854,098
     
74.1
%
   
670,052
     
70.5
%
   
539,406
     
63.9
%
   
526,537
     
66.5
%
   
510,982
     
72.5
%
Non-real Estate:
                                                                               
Agricultural
   
21,514
     
1.9
%
   
23,783
     
2.5
%
   
25,838
     
3.1
%
   
26,278
     
3.3
%
   
21,749
     
3.1
%
Commercial and industrial
   
220,700
     
19.2
%
   
193,969
     
20.4
%
   
224,201
     
26.6
%
   
196,339
     
24.8
%
   
151,087
     
21.4
%
Consumer and other
   
55,185
     
4.8
%
   
63,011
     
6.6
%
   
54,163
     
6.4
%
   
42,991
     
5.4
%
   
20,917
     
3.0
%
Total Non-real Estate
   
297,399
     
25.9
%
   
280,763
     
29.5
%
   
304,202
     
36.1
%
   
265,608
     
33.5
%
   
193,753
     
27.5
%
Total Loans Before Unearned Income
   
1,151,497
     
100.0
%
   
950,815
     
100.0
%
   
843,608
     
100.0
%
   
792,145
     
100.0
%
   
704,735
     
100.0
%
Less: Unearned income
   
(2,483
)
           
(1,894
)
           
(2,025
)
           
(1,824
)
           
(1,569
)
       
Total Loans Net of Unearned Income
 
$
1,149,014
           
$
948,921
           
$
841,583
           
$
790,321
           
$
703,166
         
 
-41-

Loan Portfolio Maturities. The following tables summarize the scheduled repayments of our loan portfolio at December 31, 2017 and 2016. 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, 2017
 
(in thousands)
 
One Year or Less
   
More Than One Year
Through Five Years
   
After Five Years
   
Total
 
Real Estate:
                       
Construction & land development
 
$
22,729
   
$
71,796
   
$
18,078
   
$
112,603
 
Farmland
   
4,693
     
15,628
     
5,370
     
25,691
 
1 - 4 family
   
16,054
     
47,614
     
95,065
     
158,733
 
Multi-family
   
1,962
     
11,746
     
3,132
     
16,840
 
Non-farm non-residential
   
56,734
     
290,654
     
192,843
     
540,231
 
Total Real Estate
   
102,172
     
437,438
     
314,488
     
854,098
 
Non-real Estate:
                               
Agricultural
   
7,923
     
4,613
     
8,978
     
21,514
 
Commercial and industrial
   
40,145
     
170,103
     
10,452
     
220,700
 
Consumer and other
   
19,223
     
35,616
     
346
     
55,185
 
Total Non-Real Estate
   
67,291
     
210,332
     
19,776
     
297,399
 
Total Loans Before Unearned Income
 
$
169,463
   
$
647,770
   
$
334,264
     
1,151,497
 
Less: unearned income
                           
(2,483
)
Total Loans Net of Unearned Income
                         
$
1,149,014
 
 
 
 
December 31, 2016
 
(in thousands)
 
One Year or Less
   
More Than One Year
Through Five Years
   
After Five Years
   
Total
 
Real Estate:
                       
Construction & land development
 
$
25,096
   
$
49,820
   
$
9,323
   
$
84,239
 
Farmland
   
8,833
     
4,584
     
7,721
     
21,138
 
1 - 4 family
   
13,476
     
42,778
     
78,957
     
135,211
 
Multi-family
   
642
     
8,629
     
3,179
     
12,450
 
Non-farm non-residential
   
53,408
     
258,300
     
105,306
     
417,014
 
Total Real Estate
   
101,455
     
364,111
     
204,486
     
670,052
 
Non-real Estate:
                               
Agricultural
   
9,964
     
4,340
     
9,479
     
23,783
 
Commercial and industrial
   
22,667
     
163,802
     
7,500
     
193,969
 
Consumer and other
   
19,446
     
43,202
     
363
     
63,011
 
Total Non-Real Estate
   
52,077
     
211,344
     
17,342
     
280,763
 
Total Loans Before Unearned Income
 
$
153,532
   
$
575,455
   
$
221,828
     
950,815
 
Less: unearned income
                           
(1,894
)
Total Loans Net of Unearned Income
                         
$
948,921
 
 
-42-

The following table sets forth the scheduled repayments of fixed and adjustable-rate loans at December 31, 2017 that are contractually due after December 31, 2018.
 
 
 
Due After December 31, 2017
 
(in thousands)
 
Fixed
   
Floating
   
Total
 
One to five years
   
390,333
     
251,135
     
641,468
 
Over Five to 15 years
   
124,215
     
70,273
     
194,488
 
Over 15 years
   
70,366
     
67,881
     
138,247
 
Subtotal
 
$
584,914
   
$
389,289
   
$
974,203
 
Nonaccrual loans
                   
12,550
 
Total
                 
$
961,653
 
 
As of December 31, 2017, $95.4 million of floating rate loans were at their interest rate floor. At December 31, 2016, $127.7 million of floating rate loans were at the floor rate. Nonaccrual loans have been excluded from these totals.
 
-43-

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.
 
-44-

The following table shows the principal amounts and categories of our non-performing assets at December 31, 2017, 2016, 2015, 2014 and 2013.
 
 
 
December 31,
 
(in thousands)
 
2017
   
2016
   
2015
   
2014
   
2013
 
Nonaccrual loans:
                             
Real Estate:
                             
Construction and land development
 
$
371
   
$
551
   
$
558
   
$
486
   
$
73
 
Farmland
   
65
     
105
     
117
     
153
     
130
 
1 - 4 family
   
1,953
     
2,242
     
4,538
     
3,819
     
4,248
 
Multi-family
   
-
     
5,014
     
9,045
     
-
     
-
 
Non-farm non-residential
   
3,758
     
2,753
     
2,934
     
4,993
     
7,539
 
Total Real Estate
   
6,147
     
10,665
     
17,192
     
9,451
     
11,990
 
Non-Real Estate:
                                       
Agricultural
   
1,496
     
1,958
     
2,628
     
832
     
526
 
Commercial and industrial
   
4,826
     
8,070
     
48
     
1,907
     
1,946
 
Consumer and other
   
81
     
981
     
171
     
4
     
23
 
Total Non-Real Estate
   
6,403
     
11,009
     
2,847
     
2,743
     
2,495
 
Total nonaccrual loans
   
12,550
     
21,674
     
20,039
     
12,194
     
14,485
 
 
                                       
Loans 90 days and greater delinquent & still accruing:
                                       
Real Estate:
                                       
Construction and land development
   
-
     
34
     
-
     
-
     
-
 
Farmland
   
-
     
-
     
19
     
-
     
-
 
1 - 4 family
   
-
     
145
     
391
     
599
     
414
 
Multi-family
   
-
     
-
     
-
     
-
     
-
 
Non-farm non-residential
   
-
     
-
     
-
     
-
     
-
 
Total Real Estate
   
-
     
179
     
410
     
599
     
414
 
Non-Real Estate:
                                       
Agricultural
   
41
     
-
     
-
     
-
     
-
 
Commercial and industrial
   
798
     
-
     
-
     
-
     
-
 
Consumer and other
   
-
     
-
     
-
     
-
     
-
 
Total Non-Real Estate
   
839
     
-
     
-
     
-
     
-
 
Total loans 90 days and greater delinquent & still accruing
   
839
     
179
     
410
     
599
     
414
 
 
                                       
Total non-performing loans
 
$
13,389
   
$
21,853
   
$
20,449
   
$
12,793
   
$
14,899
 
 
                                       
Other real estate owned and foreclosed assets:
                                       
Real Estate: