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First Guaranty Bancshares, Inc. - Quarter Report: 2016 September (Form 10-Q)

Submission Documents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarter Ended September 30, 2016
Commission File Number: 001-37621
 
FGB LOGO
 
 
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)
 
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 x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer oAccelerated filer oNon-accelerated filer oSmaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes oNo x

As of November 10, 2016 the registrant had 7,609,194 shares of $1 par value common stock outstanding.
 
 
1

Table of Contents
     
   
Page
Part I.
 
     
Item 1.
3
     
 
3
     
 
4
     
  5
     
  6
     
  7
     
 
8
     
Item 2.
26
     
Item 3.
46
     
Item 4.
49
     
Part II.
49
     
Item 1.
49
     
Item 1A.
49
     
Item 6.
50
   
Signatures
51
 
2

Item 1. Consolidated Financial Statements
 
 
CONSOLIDATED BALANCE SHEETS (unaudited)
 
 
(in thousands, except share data)  
September 30, 2016
   
December 31, 2015
 
Assets
       
Cash and cash equivalents:
       
Cash and due from banks
  $ 23,528    
$
36,690
 
Federal funds sold
    285      
582
 
Cash and cash equivalents
    23,813      
37,272
 
                 
Interest-earning time deposits with banks     -       997  
                 
Investment securities:
               
Available for sale, at fair value
    382,711      
376,369
 
Held to maturity, at cost (estimated fair value of $93,858 and $168,148 respectively)
    92,396      
169,752
 
Investment securities
    475,107      
546,121
 
                 
Federal Home Loan Bank stock, at cost
    1,609      
935
 
                 
Loans, net of unearned income
    910,745      
841,583
 
Less: allowance for loan losses
    10,251      
9,415
 
Net loans
    900,494      
832,168
 
                 
Premises and equipment, net
   
22,572
     
22,019
 
Goodwill
    1,999      
1,999
 
Intangible assets, net
    1,139      
1,394
 
Other real estate, net
    781      
1,577
 
Accrued interest receivable
    6,388      
6,015
 
Other assets
    6,598      
9,256
 
Total Assets
  $ 1,440,500    
$
1,459,753
 
                 
Liabilities and Shareholders' Equity
               
Deposits:
               
Noninterest-bearing demand
  $ 231,210    
$
213,203
 
Interest-bearing demand
    398,296      
409,209
 
Savings
    93,749      
81,448
 
Time
    533,716      
592,010
 
Total deposits
    1,256,971      
1,295,870
 
                 
Short-term borrowings
    9,500      
1,800
 
Accrued interest payable
    2,103      
1,707
 
Senior long-term debt     23,504       25,824  
Junior subordinated debentures     14,622       14,597  
Other liabilities
    4,653      
1,731
 
Total Liabilities
    1,311,353      
1,341,529
 
                 
Shareholders' Equity
               
Common stock:1
               
$1 par value - authorized 100,600,000 shares; issued 7,609,194 shares
    7,609      
7,609
 
Surplus
    61,584      
61,584
 
Retained earnings
    57,210      
49,932
 
Accumulated other comprehensive income (loss)
    2,744      
(901
Total Shareholders' Equity
    129,147      
118,224
 
Total Liabilities and Shareholders' Equity
  $ 1,440,500    
$
1,459,753
 
               
See Notes to Consolidated Financial Statements
               
1 All share amounts have been restated to reflect the ten percent stock dividend paid December 17, 2015 to shareholders of record as of December 10, 2015.                
3

 
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
 
             
    Three Months Ended September 30,     Nine Months Ended September 30,  
(in thousands, except share data)   2016     2015     2016     2015  
Interest Income:
                     
Loans (including fees)
  $ 11,642     $ 10,551     $ 33,749     $ 31,680  
Deposits with other banks
    11       14       55       56  
Securities (including FHLB stock)
    2,998       3,312        10,013       10,256  
Total Interest Income
    14,651       13,877        43,817        41,992  
                                 
Interest Expense:
                               
Demand deposits
    662       348       1,902        1,052  
Savings deposits
    19       9       54        26  
Time deposits
    1,470       1,727        4,541        5,369  
Borrowings
    369       35       1,126        104  
Total Interest Expense
    2,520       2,119       7,623       6,551  
                                 
Net Interest Income
    12,131       11,758        36,194       35,441  
Less: Provision for loan losses
    1,242       1,868       2,978        2,878  
Net Interest Income after Provision for Loan Losses
    10,889       9,890       33,216        32,563  
                                 
Noninterest Income:
                               
Service charges, commissions and fees
    573       717        1,839       2,045  
ATM and debit card fees     451       441        1,366        1,328  
Net gains on securities
    1,171       2,233        3,756        3,172  
Net gain on sale of loans     6       -       9        4  
Other
    350       320       1,056       1,022  
Total Noninterest Income
    2,551       3,711       8,026        7,571  
                                 
Noninterest Expense:
                               
Salaries and employee benefits
    4,170       3,841       12,411        11,747  
Occupancy and equipment expense
    1,125       951        3,096        2,920  
Other
    3,003       2,976       9,207       8,716  
Total Noninterest Expense
    8,298       7,768       24,714        23,383  
                                 
Income Before Income Taxes
    5,142       5,833        16,528       16,751  
Less: Provision for income taxes
    1,763       1,951        5,597       5,614  
Net Income
    3,379       3,882       10,931       11,137  
Preferred Stock Dividends
    -       (99 )     -        (296
Income Available to Common Shareholders
  $ 3,379     $ 3,783     $ 10,931     $ 10,841  
                                 
Per Common Share:1
                               
Earnings   $ 0.44     $ 0.55     $ 1.44     $ 1.57  
Cash dividends paid    $ 0.16     $ 0.15     $ 0.48     $ 0.45  
                                 
Weighted Average Common Shares Outstanding
    7,609,194       6,920,022       7,609,194       6,920,022  
                                 
 See Notes to Consolidated Financial Statements                                
1 All share amounts have been restated to reflect the ten percent stock dividend paid December 17, 2015 to shareholders of record as of December 10, 2015.                         
4

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY        
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
 
             
    Three Months Ended September 30,         Nine Months Ended September 30,  
(in thousands)   2016     2015      2016      2015  
Net Income   $ 3,379     $ 3,882     $ 10,931     $ 11,137  
Other comprehensive income:                                
Unrealized gains on securities:                                
Unrealized holding gains (losses) arising during the period     522       1,927       9,278       4,567  
Reclassification adjustments for gains included in net income     (1,171 )     (2,233 )     (3,756 )     (3,172
Change in unrealized gains (losses) on securities     (649     (306     5,522       1,395  
Tax impact         221     104     (1,877 )      (474 )
Other comprehensive income (loss)     (428     (202     3,645        921  
Comprehensive Income   $ 2,951     $ 3,680     $ 14,576     $ 12,058  
                 
See Notes to Consolidated Financial Statements                  
 
5

 
 
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY  
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)  
 
    Series C                     Accumulated      
    Preferred     Common                 Other      
    Stock     Stock         Treasury     Retained     Comprehensive      
    $1,000 Par     $1 Par     Surplus     Stock     Earnings     Income/(Loss)     Total  
(in thousands, except per share data)                            
Balance December 31, 2014
  $ 39,435     $ 6,923    
$
51,646
    $ (54 )  
$
41,392
   
$
241
 
 
$
139,583
 
Net income
    -      
-
     
-
      -      
11,137
     
-
     
11,137
 
Reclassification of treasury stock under the LBCA (1)     -       (3     -       54       (51     -       -  
Other comprehensive income
    -       -      
-
      -      
-
      921       921  
Cash dividends on common stock ($0.45 per share) (2)
    -      
-
     
-
      -      
(3,020
)
   
-
     
(3,020
)
Preferred stock dividend
    -       -      
-
      -      
(296
)
   
-
     
(296
)
Balance September 30, 2015 (unaudited)
  $ 39,435    
$
6,920
    $ 51,646     $ -
 
 
$
49,162
   
$
1,162
 
 
$
148,325
 
                                                         
Balance December 31, 2015
  $ -    
$
7,609
   
$
61,584
    $ -
 
 
$
49,932
   
$
(901
  $ 118,224  
Net income     -       -       -       -       10,931       -       10,931  
Other comprehensive income
    -      
-
     
-
      -      
-
     
3,645
     
3,645
 
Cash dividends on common stock ($0.48 per share)
    -       -      
-
      -       (3,653
)
   
-
     
(3,653
)
Balance September 30, 2016 (unaudited)
  $ -     $ 7,609    
$
61,584
    $ -    
$
57,210
   
$
2,744
   
$
129,147
 
 
See Notes to Consolidated Financial Statements
 
 
(1) Effective January 1, 2015, companies incorporated under Louisiana law became subject to the Louisiana Business Corporation Act (which replaced the Louisiana Business Corporation Law). Provisions of the Louisiana Business Corporation Act eliminate the concept of treasury stock and provide that shares reacquired by a company are to be treated as authorized but unissued shares. As a result of this change in law, shares previously classified as treasury stock were reclassified as a reduction to issued shares of common stock in the consolidated financial statements as of September 30, 2015, reducing the stated value of common stock and retained earnings.  
(2) All share amounts have been restated to reflect the ten percent stock dividend paid December 17, 2015 to shareholders of record as of December 10, 2015.  
 
6

 
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
 
   
Nine Months Ended September 30,
 
(in thousands)  
2016
   
2015
 
Cash Flows From Operating Activities
       
Net income
  $ 10,931    
$
11,137
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
   
2,978
      2,878  
Depreciation and amortization
   
1,625
     
1,515
 
Amortization/Accretion of investments
    1,665      
1,590
 
Gain on sale/call of securities    
(3,756
)     (3,172 )
Gain on sale of assets     (72 )     (6 )
Repossed asset write downs, gains and losses on dispositions
    163      
169
 
FHLB stock dividends     (3 )     (3 )
Change in other assets and liabilities, net
   
3,648
   
(3,466
Net Cash Provided By Operating Activities
   
17,179
      10,642  
                 
Cash Flows From Investing Activities
               
Proceeds from maturities, calls and sales of certificates of deposit     1,001       8,500  
Proceeds from maturities and calls of HTM securities     76,946       10,466  
Proceeds from maturities, calls and sales of AFS securities     892,005       603,522  
Funds Invested in HTM securities     -       (33,431
Funds Invested in AFS securities     (890,330 )     (452,235 )
Proceeds from sale/redemption of Federal Home Loan Bank stock
    -       3,554  
Funds invested in Federal Home Loan Bank stock
    (671 )      (2,845
Net increase in loans
    (71,385 )      (69,321
Purchase of premises and equipment
    (2,724 )      (2,745
Proceeds from sales of premises and equipment     983       4  
Proceeds from sales of other real estate owned
    714       429  
Net Cash Provided By Investing Activities
   
6,539
      65,898  
                 
Cash Flows From Financing Activities
               
Net decrease in deposits
    (38,899 )     (99,700
Net increase in federal funds purchased and short-term borrowings
   
7,700
      -  
Repayment of long-term borrowings
   
(2,325
)     (450 )
Dividends paid
   
(3,653
)
    (3,316
Net Cash Used In Financing Activities
   
(37,177
)     (103,466
                 
Net Decrease In Cash and Cash Equivalents
   
(13,459
)     (26,926
Cash and Cash Equivalents at the Beginning of the Period
   
37,272
      44,575  
Cash and Cash Equivalents at the End of the Period
 
$
23,813
    $ 17,649  
                 
Noncash Activities:
               
Loans transferred to foreclosed assets
 
$
81     $ 738  
                 
Cash Paid During The Period:
               
Interest on deposits and borrowed funds
  $ 7,227     $ 6,597  
Income taxes
  $ 3,000     $ 6,500  
                 
See Notes to the Consolidated Financial Statements.
 
7

Note 1. Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements and the footnotes of First Guaranty Bancshares, Inc. ("First Guaranty" or the “Company”) thereto should be read in conjunction with the audited financial statements and note disclosures for First Guaranty previously filed with the Securities and Exchange Commission in First Guaranty’s Annual Report filed on Form 10-K for the year ended December 31, 2015.
 
The consolidated financial statements include the accounts of First Guaranty Bancshares, Inc. and its wholly owned subsidiary First Guaranty Bank (the "Bank"). All significant intercompany balances and transactions have been eliminated in consolidation.
 
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the consolidated financial statements. Those adjustments are of a normal recurring nature. The results of operations at September 30, 2016 and for the three and nine month periods ended September 30, 2016 and 2015 are not necessarily indicative of the results expected for the full year or any other interim period. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are susceptible to significant change in the near term are the allowance for loan losses, valuation of goodwill, intangible assets and other purchase accounting adjustments.

Note 2. Recent Accounting Pronouncements
 
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments". This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The ASU amendments require the measurement of all expected credit losses for financial assets held at the reporting date be based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU requires assets held at cost basis to reflect the Company's current estimate of all expected credit losses. For available for sale debt securities, credit losses should be presented as an allowance rather than as a write-down. In addition, this ASU amends the accounting for purchased financial assets with credit deterioration. This ASU is effective for annual and interim periods beginning after December 15, 2019. We are currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
8

Note 3. Securities
 
A summary comparison of securities by type at September 30, 2016 and December 31, 2015 is shown below.
 
   
September 30, 2016
   
December 31, 2015
 
(in thousands)  
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Available-for-sale:
                               
U.S Treasuries   $ 34,999     $ -     $ (1   $ 34,998     $ 29,999     $ -     $ -     $ 29,999  
U.S. Government Agencies
    183,155       425       (49 )     183,531       165,364       -       (1,553 )     163,811  
Corporate debt securities
    110,280       3,547       (561 )     113,266       105,680       2,259       (2,803 )     105,136  
Mutual funds or other equity securities
    580       9       -       589       580       2       -       582  
Municipal bonds
    18,640       374       -     19,014       47,339       899       (5     48,233  
Mortgage-backed securities     30,900       413       -       31,313       28,891       -       (283     28,608  
Total available-for-sale securities
  $ 378,554     $ 4,768     $ (611 )   $ 382,711     $ 377,853     $ 3,160     $ (4,644 )   $ 376,369  
                                                                 
Held-to-maturity:
                                                               
U.S. Government Agencies
  $ 9,990     $ 7     $ -   $ 9,997     $ 77,343     $ -     $ (721 )   $ 76,622  
Mortgage-backed securities     82,406       1,455       -     83,861       92,409       9       (892 )     91,526  
Total held-to-maturity securities
  $ 92,396     $ 1,462     $ -   $ 93,858     $ 169,752     $ 9     $ (1,613 )   $ 168,148  
 
The scheduled maturities of securities at September 30, 2016, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to call or prepayments. Mortgage-backed securities are not due at a single maturity because of amortization and potential prepayment of the underlying mortgages. For this reason they are presented separately in the maturity table below.
 
    September 30, 2016  
(in thousands)  
Amortized Cost
   
Fair Value
 
Available For Sale:
       
Due in one year or less
  $ 43,132     $ 43,234  
Due after one year through five years
    85,066       86,684  
Due after five years through 10 years
    192,788       194,440  
Over 10 years
    26,668       27,040  
Subtotal     347,654       351,398  
Mortgage-backed Securities     30,900       31,313  
Total available-for-sale securities
  $ 378,554     $ 382,711  
                 
Held to Maturity:
               
Due in one year or less
 
$
-
   
$
-
 
Due after one year through five years
    9,990       9,997  
Due after five years through 10 years
    -       -  
Over 10 years
   
-
     
-
 
Subtotal     9,990       9,997  
Mortgage-backed Securities     82,406       83,861  
Total held to maturity securities
  $ 92,396     $ 93,858  
 
At September 30, 2016 $363.7 million of First Guaranty's securities were pledged to secure public fund deposits and borrowings. The pledged securities had a market value of $365.2 million as of September 30, 2016.
 
9

The following is a summary of the fair value of securities with gross unrealized losses and an aging of those gross unrealized losses at September 30, 2016.
 
      At September 30, 2016      
   Less Than 12 Months    12 Months or More    Total  
(in thousands) Number of Securities  
Fair Value
 
Gross Unrealized Losses
   Number of Securities  
Fair Value
 
Gross Unrealized Losses
   Number of Securities  
Fair Value
 
Gross Unrealized Losses
 
Available for sale:
                                   
U.S. Treasuries 4   $ 29,999   $ (1 ) -   $ -   $ -   4   $ 29,999   $ (1 )
U.S. Government agencies
16    
51,943
    (49 ) -    
-
 
 
-
16     51,943     (49 )
Corporate debt securities
10    
3,169
    (27 ) 33    
7,246
   
(534
) 43    
10,415
   
(561
)
Mutual funds or other equity securities
-    
-
   
-
  -     -    
-
  -    
-
   
-
 
Municipal bonds -     -     - -     -     -   -     -     -
Mortgage-backed securities -     -     -   -     -     -   -     -     -
Total available-for-sale securities
30  
$
85,111
 
$
(77
) 33  
$
7,246
 
$
(534
) 63  
$
92,357
 
$
(611
)
                                                 
Held to maturity:
                                               
U.S. Government agencies
-    
-
 
 
-
-  
 
-
 
 
- -  
 
-
 
 
-
Mortgage-backed securities -     -     -   -     -     -   -     -     -
Total held to maturity
-  
$
-
 
$
-
-  
$
-
 
$
-
-  
$
-  
$
-
 
The following is a summary of the fair value of securities with gross unrealized losses and an aging of those gross unrealized losses at December 31, 2015.
 
      At December 31, 2015      
   Less Than 12 Months    12 Months or More    Total  
(in thousands)
Number
of Securities
 
Fair Value
 
Gross Unrealized Losses
   Number of Securities  
Fair Value
 
Gross Unrealized Losses
   Number of Securities  
Fair Value
 
Gross Unrealized Losses
 
Available for sale:
                                   
U.S. Treasuries 2   $ 9,999   $ -   -   $ -   $ -   2   $ 9,999   $ -  
U.S. Government agencies
49    
116,473
   
(921
) 11    
47,338
 
 
(632
60    
163,811
   
(1,553
)
Corporate debt securities
112    
31,414
   
(1,509
) 27    
5,344
   
(1,294
) 139    
36,758
   
(2,803
)
Mutual funds or other equity securities
-    
-
   
-
  -    
-
   
-
  -    
-
   
-
 
Municipal bonds  2     679     (5  -     -     -    2     679     (5
Mortgage-backed securities  14     28,608     (283  -     -     -    14     28,608     (283
Total available for sale
179  
$
187,173
 
$
(2,718
) 38  
$
52,682
 
$
(1,926
) 217  
$
239,855
 
$
(4,644
)
                                                 
Held to maturity:
                                               
U.S. Government agencies
16  
$
51,865
 
$
(404
) 7  
$
23,852
 
$
(317
23  
$
75,717
 
$
(721
)
Mortgage-backed securities 39     82,863     (892 -     -     - 39     82,863     (892
Total held to maturity
55  
$
134,728
 
$
(1,296
) 7  
$
23,852
 
$
(317
62  
$
158,580
 
$
(1,613
)
 
As of September 30, 2016, 63 of First Guaranty's debt securities had unrealized losses totaling 0.7% of the individual securities' amortized cost basis and 0.1% of First Guaranty's total amortized cost basis of the investment securities portfolio. 33 of the 63 securities had been in a continuous loss position for over 12 months at such date. The 33 securities had an aggregate amortized cost basis of $7.8 million and an unrealized loss of $0.5 million at September 30, 2016. Management has the intent and ability to hold these debt securities until maturity or until anticipated recovery.
10

Securities are evaluated for other-than-temporary impairment at least quarterly and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the recovery of contractual principal and interest and (iv) the intent and ability of First Guaranty to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
 
Investment securities issued by the U.S. Government and Government sponsored enterprises with unrealized losses and the amount of unrealized losses on those investment securities are the result of changes in market interest rates will not be other-than-temporarily impaired. First Guaranty has the ability and intent to hold these securities until recovery, which may not be until maturity.
 
Corporate debt securities in a loss position consist primarily of corporate bonds issued by businesses in the financial, insurance, utility, manufacturing, industrial, consumer products and oil and gas industries. Two issuers were determined during the fourth quarter of 2015 to have other-than-temporary impairment losses. First Guaranty believes that the remaining issuers will be able to fulfill the obligations of these securities based on evaluations described above. First Guaranty has the ability and intent to hold these securities until they recover, which could be at their maturity dates.
 
The following table presents a roll-forward of the amount of credit losses on debt securities held by First Guaranty for which a portion of OTTI was recognized in other comprehensive income for the quarter ending September 30, 2016:
 
(in thousands)        
Beginning balance of credit losses at December 31, 2015
 
$
175
 
Other-than-temporary impairment credit losses on securities not previously OTTI
   
-
 
Increases for additional credit losses on securities previously determined to be OTTI
   
-
 
Reduction for increases in cash flows
   
-
 
Reduction due to credit impaired securities sold or fully settled
   
(175
Ending balance of cumulative credit losses recognized in earnings at September 30, 2016
 
$
-
 
 
In the first nine months of 2016 there were no other-than-temporary impairment credit losses on securities for which we had previously recognized OTTI. For securities that have indications of credit related impairment, management analyzes future expected cash flows to determine if any credit related impairment is evident. Estimated cash flows are determined using management's best estimate of future cash flows based on specific assumptions. The assumptions used to determine the cash flows were based on estimates of loss severity and credit default probabilities. Management reviews reports from credit rating agencies and public filings of issuers. 
 
The total non-credit related other-than-temporary impairment losses included in other comprehensive income was $0.1 million at September 30, 2016. 
 
At September 30, 2016, First Guaranty's exposure to bond issuers that exceeded 10% of shareholders’ equity is below:
 
   
At September 30, 2016
 
(in thousands)
 
Amortized Cost
   
Fair Value
 
U.S. Government Treasuries (U.S.)     34,999       34,998  
Federal Home Loan Bank (FHLB)
    54,347      
54,488
 
Federal Home Loan Mortgage Corporation (Freddie Mac-FHLMC)
   
49,177
     
49,871
 
Federal National Mortgage Association (Fannie Mae-FNMA)
   
113,764
     
114,928
 
Federal Farm Credit Bank (FFCB)
   
89,163
      89,415  
Total
 
$
341,450
    $ 343,700  
 
11

Note 4. Loans
 
The following table summarizes the components of First Guaranty's loan portfolio as of September 30, 2016 and December 31, 2015:
 
   
September 30, 2016
   
December 31, 2015
 
(in thousands except for %)  
Balance
   
As % of Category
   
Balance
   
As % of Category
 
Real Estate:
               
 Construction & land development
 
$
78,659
     
8.6
%
 
$
56,132
     
6.6
%
 Farmland
   
21,561
      2.4
%
   
17,672
     
2.1
%
 1- 4 Family
   
139,651
     
15.3
%
   
129,610
     
15.4
%
 Multifamily
   
12,585
     
1.4
%
   
12,629
     
1.5
%
 Non-farm non-residential
   
366,400
     
40.1
%
   
323,363
     
38.3
%
Total Real Estate
   
618,856
      67.8
%
   
539,406
     
63.9
%
Non-Real Estate:                                
 Agricultural
   
29,866
     
3.3
%
   
25,838
     
3.1
%
 Commercial and industrial
   
206,630
     
22.6
%
   
224,201
     
26.6
%
 Consumer and other
    57,393      
6.3
%
   
54,163
     
6.4
%
Total Non-Real Estate     293,889       32.2 %     304,202       36.1 %
Total loans before unearned income
   
912,745
     
100.0
%
   
843,608
     
100.0
%
Unearned income
   
(2,000
)
           
(2,025
)
       
Total loans net of unearned income
 
$
910,745
           
$
841,583
         
 
The following table summarizes fixed and floating rate loans by contractual maturity, excluding nonaccrual loans, as of September 30, 2016 and December 31, 2015 unadjusted for scheduled principal payments, prepayments, or repricing opportunities. The average life of the loan portfolio may be substantially less than the contractual terms when these adjustments are considered.
 
   
September 30, 2016
    December 31, 2015  
(in thousands)  
Fixed
   
Floating
   
Total
    Fixed     Floating     Total  
One year or less
 
$
105,777    
$
54,991    
$
160,768    
$
86,975
   
$
48,111
   
$
135,086
 
More Than One to five years
    324,484       215,595       540,079      
315,685
     
246,374
     
562,059
 
More Than Five to 15 years
    89,666       43,445       133,111      
49,197
     
31,456
     
80,653
 
Over 15 years
    50,108       7,590       57,698      
36,438
     
9,333
     
45,771
 
Subtotal
 
$
570,035    
$
321,621       891,656    
$
488,295
   
$
335,274
     
823,569
 
Nonaccrual loans
                    21,089                      
20,039
 
Total loans before unearned income
                    912,745                      
843,608
 
Unearned income
                   
(2,000
)
                    (2,025 )
Total loans net of unearned income                   $ 910,745                     $ 841,583  
 
As of September 30, 2016 $144.0 million of floating rate loans were at their interest rate floor. At December 31, 2015 $132.9 million of floating rate loans were at the floor rate. Nonaccrual loans have been excluded from these totals.
 
12

The following tables present the age analysis of past due loans at September 30, 2016 and December 31, 2015:
 
   
As of September 30, 2016
 
(in thousands)
 
30-89 Days Past Due
   
90 Days or Greater
   
Total Past Due
   
Current
   
Total Loans
   
Recorded Investment 90 Days Accruing
 
Real Estate:
                       
 Construction & land development
  $ 481     $ 551     $ 1,032     $ 77,627     $ 78,659    
$
-
 
 Farmland
   
-
      108       108       21,453       21,561      
-
 
 1 - 4 family
    677       3,267       3,944       135,707      
139,651
      688  
 Multifamily
    -       5,097       5,097       7,488      
12,585
     
-
 
 Non-farm non-residential
    2,124       1,526       3,650       362,750      
366,400
     
-
 
Total Real Estate
    3,282       10,549       13,831       605,025       618,856      
688
 
Non-Real Estate:
                                               
 Agricultural
   
12
      2,393       2,405       27,461      
29,866
     
-
 
 Commercial and industrial
   
532
      7,790       8,322       198,308      
206,630
     
-
 
 Consumer and other
    86       1,045       1,131       56,262       57,393      
-
 
Total Non-Real Estate
   
630
      11,228       11,858       282,031      
293,889
     
-
 
Total loans before unearned income
  $ 3,912     $ 21,777     $ 25,689     $ 887,056     $ 912,745     $ 688  
Unearned income
                                    (2,000
)
       
Total loans net of unearned income
                                 
$
910,745
         
 
 
   
As of December 31, 2015
 
(in thousands)
 
30-89 Days Past Due
   
90 Days or Greater
   
Total Past Due
   
Current
   
Total Loans
   
Recorded Investment 90 Days Accruing
 
Real Estate:
                       
 Construction & land development
 
$
12
   
$
558
   
$
570
   
$
55,562
   
$
56,132
   
$
-
 
 Farmland
   
-
     
136
     
136
     
17,536
     
17,672
     
19
 
 1 - 4 family
   
2,546
     
4,929
     
7,475
     
122,135
     
129,610
     
391
 
 Multifamily
   
-
     
9,045
     
9,045
     
3,584
     
12,629
     
-
 
 Non-farm non-residential
   
1,994
     
2,934
     
4,928
     
318,435
     
323,363
     
-
 
Total Real Estate
   
4,552
     
17,602
     
22,154
     
517,252
     
539,406
     
410
 
Non-Real Estate:                                                
 Agricultural
   
2,346
     
2,628
     
4,974
     
20,864
     
25,838
     
-
 
 Commercial and industrial
   
314
     
48
     
362
     
223,839
     
224,201
     
-
 
 Consumer and other
   
965
     
171
     
1,136
     
53,027
     
54,163
     
-
 
Total Non-Real Estate     3,625       2,847       6,472       297,730       304,202       -  
Total loans before unearned income
 
$
8,177
   
$
20,449
   
$
28,626
   
$
814,982
   
$
843,608
   
$
410
 
Unearned income
                                   
(2,025
)
       
Total loans net of unearned income
                                 
$
841,583
         
 
The tables above include $21.1 million and $20.0 million of nonaccrual loans at September 30, 2016 and December 31, 2015, respectively. See the tables below for more detail on nonaccrual loans.
 
13

The following is a summary of nonaccrual loans by class at the dates indicated:
 
(in thousands)
 
As of September 30,
2016
    As of December 31, 2015  
Real Estate:
       
 Construction & land development
  $ 551    
$
558
 
 Farmland
    108      
117
 
 1 - 4 family
    2,579      
4,538
 
 Multifamily
    5,097       9,045  
 Non-farm non-residential
   
1,526
     
2,934
 
Total Real Estate
    9,861      
17,192
 
Non-Real Estate:                
 Agricultural
    2,393      
2,628
 
 Commercial and industrial
    7,790      
48
 
 Consumer and other
    1,045      
171
 
Total Non-Real Estate     11,228       2,847  
Total Nonaccrual Loans
  $ 21,089    
$
20,039
 
 
14

 

The following table identifies the credit exposure of the loan portfolio by specific credit ratings as of the dates indicated:
 
   
As of September 30, 2016
    As of December 31, 2015  
(in thousands)
 
Pass
   
Special
Mention
   
Substandard
    Doubtful    
Total
    Pass    
Special
Mention
    Substandard     Doubtful     Total  
Real Estate:
                                       
 Construction & land development
 
$
73,518    
$
1,192     $ 3,949     $ -    
$
78,659
   
$
51,681
   
$
386
   
$
4,065
    $ -    
$
56,132
 
 Farmland
    21,072       381       108       -      
21,561
     
17,554
      -      
118
      -      
17,672
 
 1 - 4 family
    127,417       4,873       7,361       -      
139,651
     
115,878
     
6,425
     
7,307
      -      
129,610
 
 Multifamily
    4,304       1,148       7,133       -      
12,585
     
3,584
     
-
     
9,045
      -      
12,629
 
 Non-farm non-residential
    345,546       2,469       18,385       -      
366,400
     
296,682
     
3,288
     
23,393
      -      
323,363
 
Total Real Estate
    571,857       10,063       36,936       -       618,856      
485,379
     
10,099
     
43,928
      -      
539,406
 
Non-Real Estate:                                                                                
 Agricultural
    26,650       823       2,393       -      
29,866
     
20,860
     
4
     
4,974
      -      
25,838
 
 Commercial and industrial
    195,130      
812
      2,958       7,730       206,630      
214,184
     
471
     
9,546
      -      
224,201
 
 Consumer and other
    54,756      
1,578
      1,059       -      
57,393
     
53,779
     
178
     
206
      -      
54,163
 
Total Non-Real Estate     276,536       3,213       6,410       7,730       293,889       288,823       653       14,726       -       304,202  
Total loans before unearned income
 
$
848,393    
$
13,276     $ 43,346     $ 7,730     $ 912,745    
$
774,202
   
$
10,752
   
$
58,654
    $ -    
$
843,608
 
Unearned income
                                   
(2,000
)
                                   
(2,025
)
Total loans net of unearned income
                                 
$
910,745
                                   
$
841,583
 
 
 
15


 
Note 5. Allowance for Loan Losses
 
A summary of changes in the allowance for loan losses, by portfolio type, for the nine months ended September 30, 2016 and 2015 are as follows:
 
    For the Nine Months Ended September 30,  
   
2016
    2015  
(in thousands)
 
Beginning
Allowance (12/31/15)
   
Charge-offs
   
Recoveries
    Provision    
Ending
Allowance (9/30/16)
   
Beginning
Allowance (12/31/14)
   
Charge-offs
   
Recoveries
    Provision    
Ending Allowance(9/30/15)
 
Real Estate:
                                       
 Construction & land development
 
$
962
   
$
-
  $ 3     $ 289     $ 1,254    
$
702
    $ (329 )  
$
4
    $ 597    
$
974
 
 Farmland
   
54
     
-
      -       (35     19      
21
      -      
-
      25      
46
 
 1 - 4 family
   
1,771
      (192 )     33       (182 )     1,430      
2,131
     
(288
)    
76
      (349 )    
1,570
 
 Multifamily
   
557
      -     391       (282 )     666      
813
     
(948
   
31
      933      
829
 
 Non-farm non-residential
   
3,298
      (1,373 )     12       1,148       3,085      
2,713
     
(154
)    
5
      879      
3,443
 
Total real estate
   
6,642
      (1,565 )     439       938       6,454      
6,380
     
(1,719
)    
116
      2,085      
6,862
 
Non-Real Estate:                                                                                
 Agricultural
    16       (83 )     10       162      
105
     
293
     
(394
)    
2
      136    
37
 
 Commercial and industrial
   
2,527
      (542 )     15       1,140      
3,140
     
1,797
     
(25
)    
14
      722    
2,508
 
 Consumer and other
   
230
      (547 )     131       738      
552
     
371
     
(280
)    
116
      185      
392
 
 Unallocated     -      
-
      -       -     -       264       -       -       (250     14  
Total Non-Real Estate     2,773      
(1,172
)     156       2,040       3,797       2,725       (699 )     132       793       2,951  
Total
 
$
9,415
   
$
(2,737
)  
$
595     $ 2,978    
$
10,251    
$
9,105
   
$
(2,418
)   $ 248     $ 2,878     $ 9,813  
 
Negative provisions are caused by changes in the composition and credit quality of the loan portfolio. The result is an allocation of the loan loss reserve from one category to another.
 
16

 
A summary of the allowance and loans individually and collectively evaluated for impairment are as follows:
 
    As of September 30, 2016  
(in thousands)
 
Allowance
Individually
Evaluated
for Impairment
   
Allowance
Collectively Evaluated
for Impairment
   
Total Allowance for
Credit Losses
   
Loans
Individually Evaluated for Impairment
   
Loans
Collectively Evaluated for Impairment
   
Total Loans before Unearned Income
 
Real Estate:
                       
 Construction & land development
 
$
-     $ 1,254     $ 1,254     $ 361     $ 78,298     $ 78,659  
 Farmland
    -       19       19      
-
      21,561      
21,561
 
 1 - 4 family
    14       1,416       1,430       1,252       138,399      
139,651
 
 Multifamily
    247       419       666       5,097       7,488       12,585  
 Non-farm non-residential
    265       2,820       3,085       9,638       356,762       366,400  
Total Real Estate
   
526
      5,928       6,454       16,348       602,508       618,856  
Non-Real Estate:                                              
 Agricultural
   
-
      105       105       1,983       27,883      
29,866
 
 Commercial and industrial
    1,562       1,578       3,140      
8,982
      197,648      
206,630
 
 Consumer and other
    -       552       552      
965
      56,428      
57,393
 
 Unallocated     -       -       -       -       -       -  
Total Non-Real Estate     1,562       2,235       3,797       11,930       281,959       293,889  
Total
 
$
2,088     $ 8,163     $ 10,251     $ 28,278     $ 884,467    
$
912,745
 
Unearned Income                                             (2,000 )
Total loans net of unearned income                                           $ 910,745  
 
 
    As of December 31, 2015  
(in thousands)
 
Allowance
Individually
Evaluated for
Impairment
   
Allowance
Collectively Evaluated
for Impairment
   
Total Allowance for Credit Losses
   
Loans
Individually Evaluated for Impairment
   
Loans
Collectively Evaluated for Impairment
   
Total Loans before Unearned Income
 
Real Estate:
                       
 Construction & land development
 
$
-
    $ 962    
$
962
   
$
368
    $ 55,764    
$
56,132
 
 Farmland
   
-
      54      
54
     
-
      17,672      
17,672
 
 1 - 4 family
   
611
      1,160      
1,771
     
3,049
      126,561      
129,610
 
 Multifamily
   
454
      103      
557
     
9,045
      3,584      
12,629
 
 Non-farm non-residential
   
1,298
      2,000      
3,298
     
13,646
      309,717      
323,363
 
Total Real Estate
   
2,363
      4,279      
6,642
     
26,108
      513,298      
539,406
 
Non-Real Estate:                                                
 Agricultural
   
-
      16      
16
     
4,863
      20,975      
25,838
 
 Commercial and industrial
   
-
      2,527      
2,527
     
-
      224,201      
224,201
 
 Consumer and other
   
-
      230      
230
     
171
      53,992      
54,163
 
 Unallocated     -       -       -       -       -       -  
Total Non-Real Estate     -       2,773       2,773       5,034       299,168       304,202  
Total
 
$
2,363
    $ 7,052    
$
9,415
   
$
31,142
    $ 812,466    
$
843,608
 
Unearned Income                                             (2,025 )
Total loans net of unearned income                                           $ 841,583  
 
A loan is considered impaired when, based on current information and events, it is probable that First Guaranty will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Payment status, collateral value and the probability of collecting scheduled principal and interest payments when due are considered in evaluating loan impairment. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
 
 
17

The following is a summary of impaired loans by class as of the date indicated:
 
   
As of September 30, 2016
 
(in thousands)  
Recorded Investment
   
Unpaid Principal
Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
    Interest Income Cash Basis  
Impaired Loans with no related allowance:
                       
Real Estate:
                       
 Construction & land development
 
$
361    
$
823
   
$
-
   
$
363    
$
-
    $ -  
 Farmland
   
-
     
-
     
-
     
-
     
-
      -  
 1 - 4 family
    978       1,303      
-
      1,058      
30
      32  
 Multifamily
   
-
     
-
     
-
     
-
     
-
      -  
 Non-farm non-residential
    7,318       8,235      
-
      7,830      
119
      118  
Total Real Estate
    8,657       10,361      
-
      9,251      
149
      150  
Non-Real Estate:                                                
 Agricultural
    1,983       2,213      
-
     
2,525
     
30
      -  
 Commercial and industrial
    -       -      
-
     
-
     
-
      -  
 Consumer and other
    965       965      
-
     
1,023
     
26
      19  
Total Non-Real Estate     2,948       3,178       -       3,548       56       19  
Total Impaired Loans with no related allowance     11,605       13,539       -       12,799       205       169  
                                                 
Impaired Loans with an allowance recorded:
                                               
Real Estate:
                                               
 Construction & land development
    -       -       -      
-
      -       -  
 Farmland
    -      
-
     
-
     
-
     
-
      -  
 1 - 4 family
    274       304       14       283       -       -  
 Multifamily
    5,097       5,323       247      
5,207
     
-
      -  
 Non-farm non-residential
    2,320       2,320       265       2,341       90       71  
Total Real Estate
    7,691       7,947       526      
7,831
     
90
      71  
Non-Real Estate:                                                
 Agricultural
   
-
     
-
     
-
     
-
     
-
      -  
 Commercial and industrial
   
8,982
     
9,143
     
1,562
     
9,172
     
122
      119  
 Consumer and other
   
-
     
-
     
-
     
-
     
-
      -  
Total Non-Real Estate     8,982       9,143       1,562       9,172       122       119  
Total Impaired Loans with an allowance recorded     16,673       17,090       2,088       17,003       212       190  
                                                 
Total Impaired Loans
 
$
28,278    
$
30,629     $ 2,088     $ 29,802    
$
417
    $ 359  
18

 
The following is a summary of impaired loans by class as of the date indicated:
 
   
As of December 31, 2015
 
(in thousands)  
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
    Interest Income Cash Basis  
Impaired Loans with no related allowance:
                       
Real Estate:
                       
 Construction & land development
 
$
368
   
$
823
   
$
-
   
$
825
   
$
41
    $ 44  
 Farmland
   
-
     
-
     
-
     
-
     
-
      -  
 1 - 4 family
   
1,054
     
1,358
     
-
     
1,354
     
79
      84  
 Multifamily
   
3,728
     
4,240
     
-
     
4,305
     
254
      72  
 Non-farm non-residential
   
3,637
     
4,116
     
-
     
4,124
     
165
      147  
Total Real Estate
   
8,787
     
10,537
     
-
     
10,608
     
539
      347  
Non-Real Estate:                                                
 Agricultural
   
4,863
     
5,019
     
-
     
5,036
     
300
      300  
 Commercial and industrial
   
-
     
-
     
-
     
-
     
-
      -  
 Consumer and other
   
171
     
317
     
-
     
335
     
27
      20  
Total Non-Real Estate     5,034       5,336       -       5,371       327       320  
Total Impaired Loans with no related allowance     13,821       15,873       -       15,979       866       667  
                                                 
Impaired Loans with an allowance recorded:
                                               
Real Estate:
                                               
 Construction & land development
   
-
     
-
     
-
     
-
     
-
      -  
 Farmland
   
-
     
-
     
-
     
-
     
-
      -  
 1 - 4 family
   
1,995
     
2,144
     
611
     
2,079
     
103
      125  
 Multifamily
   
-
     
-
     
-
     
-
     
-
      -  
 Non-farm non-residential
   
10,009
     
10,841
     
1,298
     
11,035
     
566
      569  
Total Real Estate
   
12,004
     
12,985
     
1,909
     
13,114
     
669
      694  
Non-Real Estate:                                                
 Agricultural
   
-
     
-
     
-
     
-
     
-
      -  
 Commercial and industrial
   
-
     
-
     
-
     
-
     
-
      -  
 Consumer and other
   
-
     
-
     
-
     
-
     
-
      -  
Total Non-Real Estate     -       -       -       -       -       -  
Total Impaired Loans with an allowance recorded     12,004       12,985       1,909       13,114       669       694  
                                                 
Total Impaired Loans
 
$
25,825
   
$
28,858
   
$
1,909
   
$
29,093
   
$
1,535
    $ 1,361  
19

Troubled Debt Restructurings
 
A troubled debt restructuring ("TDR") is considered such if the lender for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. The modifications to First Guaranty's TDRs were concessions on either the interest rate charged or the amortization. The effect of the modifications to First Guaranty was a reduction in interest income. These loans have an allocated reserve in First Guaranty's allowance for loan losses. First Guaranty has not restructured any loans that are considered troubled debt restructurings in the nine months ended September 30, 2016.

The following table identifies the troubled debt restructurings as of September 30, 2016 and December 31, 2015:
 
    September 30, 2016     December 31, 2015  
    Accruing Loans             Accruing Loans          
(in thousands)   Current     30-89 Days Past Due     Nonaccrual     Total TDRs     Current     30-89 Days Past Due     Nonaccrual     Total TDRs  
Real Estate:                                
 Construction & land development   $ -     $ -     $ 361     $ 361     $ -     $ -     $ 368     $ 368  
 Farmland     -       -       -       -       -       -       -       -  
 1-4 Family     -       -       -       -       -       -       1,702       1,702  
 Multifamily     -       -       -       -       -       -       -       -  
 Non-farm non residential     2,987       -       100       3,087       3,431       -       206       3,637  
Total Real Estate     2,987       -       461       3,448       3,431       -       2,276       5,707  
Non-Real Estate:                                                                
 Agricultural     -       -       -       -       -       -       -       -  
 Commercial and industrial     -       -       -       -       -       -       -       -  
 Consumer and other     -       -       -       -       -       -       -       -  
Total Non-Real Estate     -       -       -       -       -       -       -       -  
Total   $ 2,987     $ -     $ 461     $ 3,448     $ 3,431     $ -     $ 2,276     $ 5,707  
 
The following table discloses TDR activity for the nine months ended September 30, 2016.
 
   
Troubled Debt Restructured Loans Activity
Nine Months Ended September 30, 2016
 
(in thousands)  
Beginning balance December 31, 2015
   
New TDRs
   
Charge-offs
post-
modification
   
Transferred to ORE
   
Paydowns
    Construction to permanent financing    
Restructured
to market
terms
     Other adjustments    
Ending
balance
September 30,
2016
 
Real Estate:
                                                   
 Construction & land development
 
$
368
   
$
-
   
$
-
   
$
-
   
$
(6
)   $ -     $ -     $ (1   $ 361  
 Farmland
   
-
     
-
     
-
     
-
     
-
      -       -       -       -  
 1 - 4 family
   
1,702
     
-
     
-
     
-
     
(32
)     -       (1,670 )     -       -  
 Multifamily
   
-
     
-
     
-
     
-
     
-
      -       -        -       -  
 Non-farm non-residential
   
3,637
     
-
     
(111
)    
-
     
(3
)     -       (441 )     5       3,087  
Total Real Estate
   
5,707
      -      
(111
)    
-
     
(41
)     -       (2,111 )     4       3,448  
Non-Real Estate:                                                                        
 Agricultural
   
-
     
-
     
-
     
-
     
-
      -       -       -       -  
 Commercial and industrial
   
-
     
-
     
-
     
-
     
-
      -       -       -       -  
 Consumer and other
   
-
     
-
     
-
     
-
     
-
      -       -        -       -  
Total Non-Real Estate     -       -       -       -       -       -       -        -       -  
Total   $ 5,707     $ -     $ (111 )   $ -     $ (41 )   $ -     $ (2,111 )     4     $ 3,448  
 
There were no commitments to lend additional funds to debtors whose terms have been modified in a troubled debt restructuring at September 30, 2016.
 
20

Note 6. Goodwill and Other Intangible Assets
 
Goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to impairment testing. Other intangible assets continue to be amortized over their useful lives. First Guaranty's goodwill is the difference in purchase price over the fair value of net assets acquired from its acquisition of Homestead Bancorp in 2007. Goodwill totaled $2.0 million at September 30, 2016 and December 31, 2015. No impairment charges have been recognized on First Guaranty's intangible assets. Mortgage servicing rights decreased $15,000 to $81,000 at September 30, 2016 compared to December 31, 2015. Other intangible assets recorded include core deposit intangibles, which are subject to amortization. The weighted-average amortization period remaining for First Guaranty's core deposit intangibles is 3.8 years at September 30, 2016. The core deposits intangible reflect the value of deposit relationships, including the beneficial rates, which arose from acquisitions.
 
 
Note 7. Other Real Estate (ORE)
 
Other real estate owned consists of the following at the dates indicated:
 
(in thousands)
September 30, 2016   December 31, 2015  
Real Estate Owned Acquired by Foreclosure:            
Residential $ 206   $ 880  
Construction & land development   21     25  
Non-farm non-residential   554     672  
Total Other Real Estate Owned and Foreclosed Property $ 781   $ 1,577  
 
Loans secured by one-to-four family residential properties in the process of foreclosure totaled $0.5 million as of September 30, 2016.
 
Note 8. Commitments and Contingencies
 
Off-balance sheet commitments
 
First Guaranty is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement in particular classes of financial instruments.
 
The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual notional amount of those instruments. The same credit policies are used in making commitments and conditional obligations as it does for balance sheet instruments. Unless otherwise noted, collateral or other security is not required to support financial instruments with credit risk.
 
Below is a summary of the notional amounts of the financial instruments with off-balance sheet risk at September 30, 2016 and December 31, 2015:
 
Contract Amount
(in thousands)
September 30, 2016
 
December 31, 2015
 
Commitments to Extend Credit
$
48,378  
$
88,081
 
Unfunded Commitments under lines of credit
$
136,863  
$
107,581
 
Commercial and Standby letters of credit
$
6,399  
$
7,486
 
 
Litigation
 
The nature of First Guaranty’s business ordinarily results in a certain amount of claims, litigation and legal and administrative cases, all of which are considered incidental to the normal conduct of business. When First Guaranty determines it has defenses to the claims asserted, it defends itself. First Guaranty will consider settlement of cases when it is in the best interests of both First Guaranty and its shareholders.
 
While the final outcome of legal proceedings is inherently uncertain, based on information currently available as of September 30, 2016, any incremental liability arising from First Guaranty’s legal proceedings will not have a material adverse effect on First Guaranty’s financial position.
 
21

Note 9. Fair Value
 
The fair value of a financial instrument is the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Valuation techniques use certain inputs to arrive at fair value. Inputs to valuation techniques are the assumptions that market participants would use in pricing the asset or liability. They may be observable or unobservable. First Guaranty uses a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
 
Level 1 Inputs – Unadjusted quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
 
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds or credit risks) or inputs that are derived principally from or corroborated by market data by correlation or other means.
 
Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
 
A description of the valuation methodologies used for instruments measured at fair value follows, as well as the classification of such instruments within the valuation hierarchy.
 
Securities available for sale. Securities are classified within Level 1 where quoted market prices are available in an active market. Inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are unavailable, fair value is estimated using quoted prices of securities with similar characteristics, at which point the securities would be classified within Level 2 of the hierarchy. Securities classified within Level 3 in First Guaranty's portfolio as of September 30, 2016 include municipal bonds and an equity security.
 
Impaired loans. Loans are measured for impairment using the methods permitted by ASC Topic 310. Fair value of impaired loans is measured by either the fair value of the collateral if the loan is collateral dependent (Level 2 or Level 3), or the present value of expected future cash flows, discounted at the loan's effective interest rate (Level 3). Fair value of the collateral is determined by appraisals or by independent valuation.
 
Other real estate owned. Properties are recorded at the balance of the loan or at estimated fair value less estimated selling costs, whichever is less, at the date acquired. Fair values of other real estate owned ("OREO") are determined by sales agreement or appraisal, and costs to sell are based on estimation per the terms and conditions of the sales agreement or amounts commonly used in real estate transactions. Inputs include appraisal values or recent sales activity for similar assets in the property’s market; thus OREO measured at fair value would be classified within either Level 2 or Level 3 of the hierarchy.
 
Certain non-financial assets and non-financial liabilities are measured at fair value on a non-recurring basis including assets and liabilities related to reporting units measured at fair value in the testing of goodwill impairment, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.
 
The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
(in thousands)
September 30, 2016
 
December 31, 2015
 
Available for Sale Securities Fair Value Measurements Using:
           
Level 1: Quoted Prices in Active Markets For Identical Assets
$
35,508  
$
30,501  
Level 2: Significant Other Observable Inputs
 
334,413  
 
338,167  
Level 3: Significant Unobservable Inputs
 
12,790  
 
7,701  
Securities available for sale measured at fair value $ 382,711   $ 376,369  
 
First Guaranty's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While the methodologies used are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value.

The change in Level 1 securities available for sale from December 31, 2015 was due principally to a net increase in Treasury bills of $5.0 million. The change in Level 2 securities available for sale from December 31, 2015 was due principally to the sale of municipal securities. The change in Level 3 securities from December 31, 2015 was due principally to the purchase of $3.8 million in municipal securities and $2.5 million of subordinated debt securities offset by the maturity of $1.2 million in municipal securities.
 
22

 
The following table measures financial assets and financial liabilities measured at fair value on a non-recurring basis as of September 30, 2016 and December 31, 2015, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
 
 
(in thousands)
At September 30, 2016
 
At December 31, 2015
 
Impaired Loans - Fair Value Measurements Using:
           
Level 1: Quoted Prices in Active Markets For Identical Assets
$
-  
$
-  
Level 2: Significant Other Observable Inputs
 
259  
 
293  
Level 3: Significant Unobservable Inputs
 
17,070  
 
16,401  
Impaired loans measured at fair value $ 17,329   $ 16,694  
 
           
Other Real Estate Owned - Fair Value Measurements Using:
           
Level 1: Quoted Prices in Active Markets For Identical Assets
$
-  
$
-  
Level 2: Significant Other Observable Inputs
 
431  
 
1,104  
Level 3: Significant Unobservable Inputs
 
350  
 
473  
Other real estate owned measured at fair value $ 781   $ 1,577  
 
 
ASC 825-10 provides First Guaranty with an option to report selected financial assets and liabilities at fair value. The fair value option established by this statement permits First Guaranty to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each reporting date subsequent to implementation.
 
First Guaranty has chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States.
 
23

Note 10. Financial Instruments
 
Fair value estimates are generally subjective in nature and are dependent upon a number of significant assumptions associated with each instrument or group of similar instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows and relevant available market information. Fair value information is intended to represent an estimate of an amount at which a financial instrument could be exchanged in a current transaction between a willing buyer and seller engaging in an exchange transaction. However, since there are no established trading markets for a significant portion of First Guaranty’s financial instruments, First Guaranty may not be able to immediately settle financial instruments; as such, the fair values are not necessarily indicative of the amounts that could be realized through immediate settlement. In addition, the majority of the financial instruments, such as loans and deposits, are held to maturity and are realized or paid according to the contractual agreement with the customer.
 
Quoted market prices are used to estimate fair values when available. However, due to the nature of the financial instruments, in many instances quoted market prices are not available. Accordingly, estimated fair values have been estimated based on other valuation techniques, such as discounting estimated future cash flows using a rate commensurate with the risks involved or other acceptable methods. Fair values are estimated without regard to any premium or discount that may result from concentrations of ownership of financial instruments, possible income tax ramifications or estimated transaction costs. The fair value estimates are subjective in nature and involve matters of significant judgment and, therefore, cannot be determined with precision. Fair values are also estimated at a specific point in time and are based on interest rates and other assumptions at that date. As events change the assumptions underlying these estimates, the fair values of financial instruments will change.
 
Disclosure of fair values is not required for certain items such as lease financing, investments accounted for under the equity method of accounting, obligations of pension and other postretirement benefits, premises and equipment, other real estate, prepaid expenses, the value of long-term relationships with depositors (core deposit intangibles) and other customer relationships, other intangible assets and income tax assets and liabilities. Fair value estimates are presented for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses have not been considered in the estimates. Accordingly, the aggregate fair value amounts presented do not purport to represent and should not be considered representative of the underlying market or franchise value of First Guaranty.
 
Because the standard permits many alternative calculation techniques and because numerous assumptions have been used to estimate the fair values, reasonable comparison of the fair value information with other financial institutions' fair value information cannot necessarily be made. The methods and assumptions used to estimate the fair values of financial instruments are as follows:
 
Cash and due from banks, interest-bearing deposits with banks, federal funds sold and federal funds purchased.
 
These items are generally short-term and the carrying amounts reported in the consolidated balance sheets are a reasonable estimation of the fair values.
 
Investment Securities.
 
Fair values are principally based on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or the use of discounted cash flow analyses.
 
Loans Held for Sale.
 
Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices. These loans are classified within level 3 of the fair value hierarchy.
 
Loans, net.
 
Market values are computed present values using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. These loans are classified within level 3 of the fair value hierarchy.
 
Impaired loans
 
Fair value of impaired loans is measured by either the fair value of the collateral if the loan is collateral dependent (Level 2 or Level 3), or the present value of expected future cash flows, discounted at the loan's effective interest rate (Level 3). Fair value of the collateral is determined by appraisals or by independent valuation.
24

 
Accrued interest receivable.
 
The carrying amount of accrued interest receivable approximates its fair value.
 
Deposits.
 
The fair value of demand deposits, savings and interest-bearing demand deposits is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are classified within level 3 of the fair value hierarchy.
 
Accrued interest payable.
 
The carrying amount of accrued interest payable approximates its fair value.
 
Borrowings.
 
The carrying amount of federal funds purchased and other short-term borrowings approximate their fair values. The fair value of First Guaranty’s long-term borrowings is computed using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. Borrowings are classified within level 3 of the fair value hierarchy.
 
Other Unrecognized Financial Instruments.
 
The fair value of commitments to extend credit is estimated using the fees charged to enter into similar legally binding agreements, taking into account the remaining terms of the agreements and customers' credit ratings. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Noninterest-bearing deposits are held at cost. The fair values of letters of credit are based on fees charged for similar agreements or on estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At September 30, 2016 and December 31, 2015 the fair value of guarantees under commercial and standby letters of credit was not material.
 
The estimated fair values and carrying values of the financial instruments at September 30, 2016 and December 31, 2015 are presented in the following table:
 
     
   
September 30, 2016
   
December 31, 2015
 
(in thousands)  
Carrying Value
   
Estimated Fair Value
   
Carrying Value
   
Estimated Fair Value
 
Assets
               
Cash and cash equivalents
  $ 23,813    
$
23,813
   
$
37,272
   
$
37,272
 
Securities, available for sale
   
382,711
     
382,711
     
376,369
     
376,369
 
Securities, held to maturity
    92,396       93,858      
169,752
     
168,148
 
Federal Home Loan Bank stock
   
1,609
      1,609      
935
     
935
 
Loans, net
    900,494       900,814      
832,168
     
831,731
 
Accrued interest receivable
    6,388       6,388      
6,015
     
6,015
 
                                 
Liabilities
                               
Deposits
 
$
1,256,971
   
$
1,257,509    
$
1,295,870
   
$
1,296,468
 
Borrowings
   
33,004
      33,030      
27,624
     
27,624
 
Junior subordinated debentures     14,622       13,998       14,597       14,597  
Accrued interest payable
   
2,103
     
2,103
     
1,707
     
1,707
 
 
There is no material difference between the contract amount and the estimated fair value of off-balance sheet items that are primarily comprised of short-term unfunded loan commitments that are generally at market prices.
 
25

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion of First Guaranty's financial condition and results of operations is intended to highlight the significant factors affecting First Guaranty's financial condition and results of operations presented in the consolidated financial statements included in this Form 10-Q. This discussion is designed to provide readers with a more comprehensive view of the operating results and financial position than would be obtained from reading the consolidated financial statements alone. Reference should be made to those statements for an understanding of the following review and analysis. The financial data at September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 have been derived from unaudited consolidated financial statements and include, in the opinion of management, all adjustments (consisting of normal recurring accruals and provisions) necessary to present fairly First Guaranty's financial position and results of operations for such periods.
 
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.
 
26

Third Quarter and Nine Months Ended 2016 Financial Overview
 
First Guaranty Bancshares, Inc. is a Louisiana corporation and a bank holding company headquartered in Hammond, Louisiana. First Guaranty Bank, the wholly-owned subsidiary of First Guaranty Bancshares, Inc., is a Louisiana chartered commercial bank that provides personalized commercial banking services primarily to Louisiana customers through 21 banking facilities primary located throughout Southeast, Southwest and North Louisiana. We emphasize personal relationships and localized decision making to ensure that products and services are matched to customer needs. First Guaranty competes for business principally on the basis of personal service to customers, customer access to officers and directors and competitive interest rates and fees.
 
Financial highlights for the third quarter and nine months ended September 30, 2016 and 2015 are as follows:
 
 ●
Total assets were $1.4 billion at September 30, 2016 and $1.5 billion at December 31, 2015. Total deposits were $1.3 billion at September 30, 2016 and December 31, 2015. Total loans were $910.7 million at September 30, 2016, an increase of $69.2 million, or 8.2%, compared with December 31, 2015. Shareholders’ equity was $129.1 million and $118.2 million at September 30, 2016 and December 31, 2015, respectively.
   
Net income for the third quarter of 2016 and 2015 was $3.4 million and $3.9 million, respectively. Net income for the nine months ended September 30, 2016 was $10.9 million compared to $11.1 million for the nine months ended September 30, 2015.
   
Net income available to common shareholders after preferred stock dividends was $3.4 million and $3.8 million for the third quarter of 2016 and 2015, respectively. Net income available to common shareholders after preferred stock dividends was $10.9 million and $10.8 million for the nine months ended September 30, 2016 and 2015, respectively. Due to the redemption on December 22, 2015 of First Guaranty's Series C preferred stock issued to the U.S. Treasury Department Small Business Lending Fund, preferred dividends were discontinued.
   
Earnings per common share were $0.44 and $0.55 for the third quarter of 2016 and 2015, respectively and $1.44 and $1.57 for the nine months ended September 30, 2016 and 2015, respectively.  Total shares outstanding were 7,609,194 at September 30, 2016 compared to 6,920,022 at September 30, 2015.  The change in shares was due to First Guaranty's common stock offering in November 2015.
   
Net interest income for the third quarter of 2016 was $12.1 million compared to $11.8 million for the same period in 2015. Net interest income for the nine months ended September 30, 2016 was $36.2 million compared to $35.4 million for the same period in 2015. 
   
●  The provision for loan losses for the third quarter of 2016 was $1.2 million compared to $1.9 million for the same period in 2015. The provision for loan losses for the first nine months of 2016 was $3.0 million compared to $2.9 million for the same period in 2015. 
   
●   The net interest margin for the three months ended September 30, 2016 was 3.41% which was an increase of thirteen basis points from the net interest margin of 3.28% for the same period in 2015. The net interest margin for the first nine months of 2016 was 3.38% which was an increase of seventeen basis points from the net interest margin of 3.21% for the first nine months of 2015. First Guaranty attributed the improvement in the net interest margin to the continued shift in interest earning asset balances from lower yielding securities to higher yielding loans. Loans as a percentage of average interest earning assets increased to 61% at September 30, 2016 compared to 55% at September 30, 2015. 
   
Investment securities totaled $475.1 million at September 30, 2016, a decrease of $71.0 million when compared to $546.1 million at December 31, 2015. At September 30, 2016, available for sale securities, at fair value, totaled $382.7 million, an increase of $6.3 million when compared to $376.4 million at December 31, 2015. At September 30, 2016, held to maturity securities, at amortized cost, totaled $92.4 million, a decrease of $77.4 million when compared to $169.8 million at December 31, 2015.  The decrease in investment securities was primarily associated with early payoffs of government agency securities and the decision to sell corporate bonds and municipal securities to fund loan growth.
   
Total loans net of unearned income were $910.7 million at September 30, 2016 compared to $841.6 million at December 31, 2015. The net loan portfolio at September 30, 2016 totaled $900.5 million, a net increase of $68.3 million from the December 31, 2015 net loan portfolio balance of $832.2 million. Total loans net of unearned income are reduced by the allowance for loan losses which totaled $10.3 million at September 30, 2016 and $9.4 million at December 31, 2015.  
   
Total impaired loans increased $2.5 million to $28.3 million at September 30, 2016 compared to $25.8 million at December 31, 2015. Impaired loans increased $2.3 million during the third quarter of 2016 from $26.0 million at June 30, 2016.
   
Nonaccrual loans increased $1.1 million to $21.1 million at September 30, 2016 compared to $20.0 million at December 31, 2015. Nonaccrual loans decreased $2.4 million during the third quarter of 2016 from $23.5 million at June 30, 2016.
   
Return on average assets for the three months ended September 30, 2016 and 2015 was 0.93% and 1.06%, respectively. Return on average assets for the nine months ended September 30, 2016 and 2015 was 1.00% and 0.99%, respectively. Return on average common equity for the three months ended September 30, 2016 and 2015 was 10.39% and 13.86%, respectively. Return on average common equity for the nine months ended September 30, 2016 and 2015 was 11.66% and 13.58%, respectively. Return on average assets is calculated by dividing annualized net income before preferred dividends by average assets.  Return on average common equity is calculated by dividing net income available to common shareholders by average common equity.
   
Book value per common share was $16.97 as of September 30, 2016 compared to $15.74 as of September 30, 2015. The increase in book value was due to the changes in accumulated other comprehensive income/loss (“AOCI”) and an increase in retained earnings. Our AOCI is comprised of unrealized gains and losses on available for sale securities. 
   
First Guaranty's Board of Directors declared cash dividends of $0.16 and $0.15 per common share in the third quarter of 2016 and 2015, respectively. First Guaranty has paid 93 consecutive quarterly dividends as of September 30, 2016.
 
27

 
Financial Condition
 
Changes in Financial Condition from December 31, 2015 to September 30, 2016
 
General.
 
Total assets at September 30, 2016 were $1.4 billion, a decrease of $19,000, or 1.3%, from December 31, 2015. Assets decreased primarily due to a decrease in investment securities of $71.0 million and in cash and cash equivalents of $13.5 million, partially offset by an increase in net loans of $68.3 million during the nine months ended September 30, 2016. 
 
Loans.
 
Net loans increased $68.3 million, or 8.2%, to $900.5 million at September 30, 2016 from $832.2 million at December 31, 2015. Net loans increased during the first nine months of 2016 primarily due to a $43.0 million increase in non-farm non-residential loans, a $22.5 million increase in construction and land development loans, a $10.0 million increase in one-to-four family residential loans, a $4.0 million increase in agriculture loans, a $3.9 million increase in farmland loans, and a $3.2 million increase in consumer and other loans, partially offset by a decrease of $17.6 million in commercial and industrial loans. Non-farm non-residential loan balances increased due to local originations and the purchase of commercial real estate loans. Construction and land development loans increased principally due to the funding of unfunded commitments on various construction projects. One-to-four-family residential loans increased primarily due to an increase in local loan originations and the purchase of conforming one-to four-family residential loans. Farmland loans increased due to seasonal fundings on agricultural loan commitments. Consumer and other loans increased due to the continued growth in our commercial lease originations.  Commercial and industrial loans decreased primarily due to pay downs in our small business loans and syndicated loans. First Guaranty had approximately 2.8% of funded and 0.3% of unfunded commitments in our loan portfolio to businesses engaged in support or service activities for oil and gas operations. Syndicated loans decreased from $105.9 million at December 31, 2015 to $96.2 million at September 30, 2016.
 
As of September 30, 2016, 67.8% of our loan portfolio was secured primarily by real estate. There are no significant concentrations of credit to any individual borrower. The largest portion of our loan portfolio, at 40.1% as of September 30, 2016, was non-farm non-residential loans secured by real estate. Approximately 36.1% of the loan portfolio is based on a floating rate tied to the prime rate or LIBOR as of September 30, 2016. 78.6% of the loan portfolio is scheduled to mature within 5 years from September 30, 2016.

Net loans are reduced by the allowance for loan losses which totaled $10.2 million at September 30, 2016 and $9.4 million at December 31, 2015. Loan charge-offs increased to $2.7 million during the first nine months of 2016 from $2.4 million during the same period in 2015. Recoveries totaled $0.6 million during the first nine months of 2016 and $0.2 million during the same period in 2015. See Note 4 of the Notes to Consolidated Financial Statements for more information on loans and Note 5 for information on the allowance for loan losses.
 
28

Investment Securities.
 
Investment securities at September 30, 2016 totaled $475.1 million, a decrease of $71.0 million compared to $546.1 million at December 31, 2015. The decrease was primarily attributed to First Guaranty's continuing strategy to transition assets from securities to the loan portfolio. The investment portfolio consisted of available-for-sale securities at fair market value for a total of $382.7 million at September 30, 2016 and held-to-maturity securities at amortized cost of $92.4 million at September 30, 2016.
 
Our investment securities portfolio is comprised of both available-for-sale securities and securities that we intend to hold to maturity. We purchase securities for our investment portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk and to meet pledging requirements for public funds and borrowings.
 
The securities portfolio consists principally of U.S. Government and Government agency securities, agency mortgage-backed securities, corporate debt securities and municipal bonds. U.S. government agencies consist of FHLB, FFCB, Freddie Mac, and Fannie Mae obligations. The mortgage backed securities that we purchased were issued by Freddie Mac and Fannie Mae.  The securities portfolio provides First Guaranty with a balance to credit risk when compared to other categories of assets. Management monitors the securities portfolio for both credit and interest rate risk. First Guaranty generally limits the purchase of corporate securities to individual issuers to manage concentration and credit risk. Corporate securities generally have a maturity of 10 years or less. U.S. Government securities consist of U.S. Treasury bills that have maturities of less than 30 days. Municipal securities usually have maturities of 15 years or less. Government agency securities generally have maturities of 15 years or less. Agency mortgage backed securities have stated final maturities of 15 to 20 years.
 
Our available-for-sale securities portfolio totaled $382.7 million at September 30, 2016, an increase of $6.3 million, or 1.7%, compared to $376.4 million at December 31, 2015. The increase was primarily due to the purchase of U.S. Government agency securities used to collateralize public funds deposits. Partially offsetting this increase was the sale of $15.1 million in municipal and corporate securities in the third quarter of 2016 for which the proceeds were used to fund loan growth.
 
Our held-to-maturity securities portfolio had an amortized cost of $92.4 million at September 30, 2016, a decrease of $77.4 million, or 45.6%, compared to $169.8 million at December 31, 2015. The decrease was due to the early payoffs of existing securities, the continued amortization of our mortgage-backed securities and the decision to keep a higher level of securities in our available-for-sale portfolio in order to manage liquidity and fund loan growth. 
 
At September 30, 2016, $43.2 million, or 9.1%, of the securities portfolio was scheduled to mature in less than one year. $96.7 million, or 20.4%, of the securities portfolio is scheduled to mature between one and five years. Securities, not including mortgage- backed securities, with contractual maturity dates over 10 years totaled $27.0 million, or 5.7%, of the total portfolio at September 30, 2016. The average maturity of the securities portfolio is affected by call options that may be exercised by the issuer of the securities and are influenced by market interest rates. Prepayments of mortgages that collateralize mortgage-backed securities also affect the maturity of the securities portfolio. Based on internal forecasts as of September 30, 2016, management believes that the securities portfolio has a forecasted weighted average life of approximately 3.3 years based on the current interest rate environment. A parallel interest rate shock of 400 basis points is forecasted to increase the weighted average life of the portfolio to approximately 6.1 years. The portfolio had an estimated effective duration of 3.2 years at September 30, 2016.
 
There was no credit related other-than-temporary impairment of securities in the nine months ended September 30, 2016 or September 30, 2015. 
 
29

Nonperforming 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 asset is well secured and in the process of collection. 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 and a reasonable payment performance period is observed (generally considered six months or longer). Other real estate owned consists of property acquired through formal foreclosure, in-substance foreclosure or by deed in lieu of foreclosure.
30


The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
 
(in thousands)
September 30, 2016  
December 31, 2015
 
Nonaccrual loans:
       
Real Estate:
       
 Construction and land development
$
551  
$
558
 
 Farmland
 
108
   
117
 
 1 - 4 family residential
 
2,579
   
4,538
 
 Multifamily
 
5,097
   
9,045
 
 Non-farm non-residential
 
1,526
   
2,934
 
Total Real Estate   9,861     17,192  
Non-Real Estate:
           
 Agricultural
 
2,393
   
2,628
 
 Commercial and industrial
 
7,790
   
48
 
 Consumer and other
  1,045    
171
 
Total Non-Real Estate   11,228     2,847  
Total nonaccrual loans
 
21,089
   
20,039
 
             
Loans 90 days and greater delinquent & accruing:
           
Real Estate:
           
 Construction and land development
 
-
   
-
 
 Farmland
 
-
   
19
 
 1 - 4 family residential
 
688
   
391
 
 Multifamily
 
-
   
-
 
 Non-farm non-residential
 
-
   
-
 
Total Real Estate   688     410  
Non-Real Estate:
           
 Agricultural
 
-
   
-
 
 Commercial and industrial
 
-
   
-
 
 Consumer and other
 
-
   
-
 
Total Non-Real Estate   -     -  
Total loans 90 days and greater delinquent & accruing
 
688
   
410
 
             
Total non-performing loans
 
21,777
   
20,449
 
             
Real Estate Owned:
           
Real Estate Loans:            
 Construction and land development
 
21
   
25
 
 Farmland
 
-
   
-
 
 1 - 4 family residential
 
206
   
880
 
 Multifamily
 
-
   
-
 
 Non-farm non-residential
  554    
672
 
Total Real Estate   781     1,577  
Non-Real Estate Loans:
           
 Agricultural
 
-
   
-
 
 Commercial and industrial
 
-
   
-
 
 Consumer and other
 
-
   
-
 
Total Non-Real Estate
 
-
   
-
 
Total Real Estate Owned   781     1,577  
             
Total non-performing assets
$
22,558
 
$
22,026
 
             
Non-performing assets to total loans   2.48 %   2.62 %
Non-performing assets to total assets   1.57 %   1.51 %
Non-performing loans to total loans   2.39 %   2.43 %
 
31

 
At September 30, 2016, nonperforming assets totaled $22.6 million, or 1.57% of total assets, compared to $22.0 million, or 1.51%, of total assets at December 31, 2015, which represented an increase of $0.6 million, or 2.4%. The increase in non-performing assets occurred primarily as a result of an increase in non-accrual loans from $20.0 million at December 31, 2015 to $21.1 million at September 30, 2016. The increase in non-accrual loans was concentrated in commercial and industrial loans and consumer and other loans. This increase was partially offset by a decrease in other real estate owned of $0.8 million during the nine months ended September 30, 2016.  
 
At September 30, 2016 nonaccrual loans totaled $21.1 million, an increase of $1.1 million, or 5.2%, compared to nonaccrual loans of $20.0 million at December 31, 2015. The increase in non-accrual loans was primarily associated with the decision to transfer a $7.9 million syndicate loan that provides services to the oil and gas industry to non-accrual status during the first quarter of 2016. The current balance on this loan was $7.7 million at September 30, 2016 and it has a specific reserve of $1.4 million. In addition, approximately $1.0 million of commercial leases were transferred to non-accrual status in the second quarter of 2016.  This increase to non-accrual loans was partially offset by the return to accrual status of a $2.8 million loan secured by a multi-family real estate property; a payoff of a $0.9 million non-accrual multi-family loan; and the sale of a $1.8 million non-accrual loan secured by a hotel property. These reductions in non-accrual loans occurred during the first quarter of 2016.  During the second quarter of 2016, the primary reduction in non-accrual loans occurred due to principal reductions on government guaranteed agricultural loans due to the receipt of guarantee proceeds. During the third quarter of 2016, the primary reduction in non-accrual loans occurred due to a $1.6 million one-to-four family lending relationship that was returned to accrual status. Nonaccrual loans were concentrated in three loan relationships that totaled $13.9 million or 66.0% of nonaccrual loans at September 30, 2016.
 
At September 30, 2016 loans 90 days or greater delinquent and still accruing totaled $0.7 million, an increase of $0.3 million, or 67.8%, compared to $0.4 million at December 31, 2015. These loans were all one-to four-family residential loans at September 30, 2016.

Other real estate owned at September 30, 2016 totaled $0.8 million, a decrease of $0.8 million from $1.6 million at December 31, 2015. The decrease in other real estate owned was due to write-downs of $0.2 million and sales of $0.7 million, primarily related to residential properties.

At September 30, 2016, our largest non-performing assets were comprised of the following non-accrual loans: (1) a commercial and industrial loan that totaled $7.7 million; (2) a multi-family real estate loan with a balance of $5.1 million secured by commercial property; and (3) a lending relationship secured by three agriculture loans that in aggregate total $1.1 million.
 
Troubled Debt Restructurings.
 
Another category of assets which contribute to our credit risk is troubled debt restructurings (“TDRs”). A TDR is a loan for which a concession has been granted to the borrower due to a deterioration of the borrower’s financial condition. Such concessions may include reduction in interest rates, deferral of interest or principal payments, principal forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. We strive to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before such loan reaches nonaccrual status. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. TDRs that are not performing in accordance with their restructured terms and are either contractually 90 days past due or placed on nonaccrual status are reported as non-performing loans. Our policy provides that nonaccrual TDRs are returned to accrual status after a period of satisfactory and reasonable future payment performance under the terms of the restructuring. Satisfactory payment performance is generally no less than six consecutive months of timely payments and demonstrated ability to continue to repay.
 
The following is a summary of loans restructured as TDRs at September 30, 2016 and December 31, 2015:
 
(in thousands)   September 30, 2016    
December 31, 2015
 
Restructured Loans:        
In Compliance with Modified Terms  
$
2,987
   
$
3,431
 
Past Due 30 through 89 days and still accruing     -       -  
Past Due 90 days and greater and still accruing     -       -  
Nonaccrual     361       368  
Restructured Loans that subsequently defaulted     100       1,908  
Total Restructured Loans   $ 3,448     $ 5,707  
 
At September 30, 2016, we had three outstanding TDRs: (1) a $2.9 million non-farm non-residential loan secured by commercial real estate, which is performing in accordance with its modified terms; (2) a $0.4 million construction and land development loan secured by raw land that is on non-accrual; (3) a $0.1 million loan secured by commercial real estate that subsequently defaulted and is on non-accrual. The restructuring of these loans was related to interest rate or amortization concessions.  The decline in TDRs occurred due to two credit relationships in the aggregate amount of $2.1 million that had returned to market terms and been in compliance with their modified terms for 12 months. 
 
32

Allowance for Loan Losses.
 
The allowance for loan losses is maintained to absorb potential losses in the loan portfolio. The allowance is increased by the provision for loan losses, offset by recoveries of previously charged-off loans and is decreased by loan charge-offs. The provision is a charge to current expense to provide for current loan losses and to maintain the allowance commensurate with management’s evaluation of the risks inherent in the loan portfolio. Various factors are taken into consideration when determining the amount of the provision and the adequacy of the allowance. These factors include but are not limited to:
 
past due and non-performing assets;
 
specific internal analysis of loans requiring special attention;
 
the current level of regulatory classified and criticized assets and the associated risk factors with each;
 
changes in underwriting standards or lending procedures and policies;
 
charge-off and recovery practices;
 
national and local economic and business conditions;
 
nature and volume of loans;
 
overall portfolio quality;
 
adequacy of loan collateral;
 
quality of loan review system and degree of oversight by our board of directors;
 
competition and legal and regulatory requirements on borrowers;
 
examinations of the loan portfolio by federal and state regulatory agencies and examinations; and
 
review by our internal loan review department and independent accountants.
 
The data collected from all sources in determining the adequacy of the allowance is evaluated on a regular basis by management with regard to current national and local economic trends, prior loss history, underlying collateral values, credit concentrations and industry risks. An estimate of potential loss on specific loans is developed in conjunction with an overall risk evaluation of the total loan portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.
 
The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, and impaired. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Also, a specific reserve is allocated for our syndicated loans, including shared national credits. The general component covers non-classified loans and special mention loans and is based on historical loss experience for the past three years adjusted for qualitative factors described above. An unallocated component is maintained to cover uncertainties that could affect the estimate of probable losses.
 
The balance in the allowance for loan losses is principally influenced by the provision for loan losses and by net loan loss experience.  Additions to the allowance are charged to the provision for loan losses.  Losses are charged to the allowance as incurred and recoveries on losses previously charged to the allowance are credited to the allowance at the time recovery is collected.
 
The allowance for loan losses was $10.2 million or 1.13% of total loans and 47.1% of nonperforming loans at September 30, 2016.

Comparing September 30, 2016 to December 31, 2015, the increase in the allowance was attributed to growth in the loan portfolio. There were changes within the specific components of the allowance balance. The primary changes were an increase in the balance associated with commercial and industrial loans while the balance associated with real estate secured loans declined.  The reasons for these changes were due to the $7.7 million commercial and industrial loan mentioned above that was determined to be impaired and the reduction in real estate secured impaired loans due to the previously mentioned payoffs and upgrades of impaired real estate loans. Special mention loans increased by $2.5 million during the first nine months of 2016. Substandard loans declined by $15.3 million during the first nine months of 2016, due primarily to payoffs and sales of loans along with the decision to transfer one loan to doubtful status.  Doubtful loans increased by $7.7 million due to the transfer of the previously mentioned $7.7 million commercial and industrial loan from substandard to doubtful status as of September 30, 2016. 
 
33

First Guaranty charged off $2.7 million in loan balances during the first nine months of 2016. The charged-off loan balances were concentrated in five loan relationships which totaled $1.4 million or 51.1% of the total charged off amount. The details of the $1.4 million in charged off loans were as follows:
 
 1. First Guaranty charged off $0.6 million on a non-farm non-residential real estate loan in the first quarter of 2016.  This loan which had a remaining balance of $1.2 million was subsequently sold in the first quarter of 2016.
 2. First Guaranty charged off $0.2 million on a commercial and industrial loan in the first quarter of 2016 and had no remaining principal balance at September 30, 2016.
 3. First Guaranty charged off $0.2 million on a commercial and industrial loan in the second quarter of 2016 and had no remaining principal balance at September 30, 2016.
 4. First Guaranty charged off $0.2 million on a non-farm non-residential real estate loan in the second quarter of 2016 and had no remaining principal balance at September 30, 2016.
 5. First Guaranty charged off $0.2 million on a non-farm non-residential real estate loan in the third quarter of 2016 and had a remaining principal balance of $0.1 million at September 30, 2016.
 6. $1.3 million of charge-offs for the first nine months of 2016 were comprised of smaller loans and overdrawn deposit accounts.
 
The provision for loan losses increased to $3.0 million in the first nine months of 2016 from $2.9 million for the same period in 2015. The provisions made in the first nine months of 2016 were taken to provide for current loan and deposit losses and to maintain the allowance proportionate to risks inherent in the loan portfolio. Total charge-offs were $2.7 million for the first nine months of 2016 as compared to $2.4 million for the same period in 2015.  Recoveries totaled $0.6 million during the first nine months of 2016 and $0.2 million during the first nine months of 2015. For more information, see Note 5 to Consolidated Financial Statements.

Other information related to the allowance for loan losses are as follows:
 
  Nine Months Ended    Nine Months Ended   
(in thousands)
September 30, 2016   September 30, 2015  
Loans:            
Average outstanding balance
$
869,325  
$
805,947
 
Balance at end of period
$
910,745
 
$
856,734
 
             
Allowance for Loan Losses:
           
Balance at beginning of year
$
9,415  
$
9,105
 
Charge-offs
 
(2,737
)
 
(2,418
Recoveries
 
595
   
248
 
Provision   2,978     2,878  
Balance at end of period
$
10,251  
$
9,813
 
 
34

 
Deposits.
 
Managing the mix and pricing the maturities of deposit liabilities is an important factor affecting our ability to maximize our net interest margin. The strategies used to manage interest-bearing deposit liabilities are designed to adjust as the interest rate environment changes. We regularly assess our funding needs, deposit pricing and interest rate outlooks. From December 31, 2015 to September 30, 2016, total deposits decreased $38.9 million, or 3.0%, to $1.3 billion. Noninterest-bearing demand deposits increased $18.0 million during the first nine months of 2016 to $231.2 million at September 30, 2016. Interest-bearing demand deposits decreased $10.9 million during the first nine months of 2016 to $398.3 million at September 30, 2016. Time deposits decreased $58.3 million, or 9.8%, to $533.7 million at September 30, 2016 compared to $592.0 million at December 31, 2015. At September 30, 2016, we had $34.1 million in brokered deposits. As we seek to strengthen our net interest margin and improve our earnings, attracting noninterest-bearing deposits will be a primary emphasis. Management will continue to evaluate and update our product mix in its efforts to attract additional customers. We currently offer a number of deposit products that are competitively priced and designed to attract and retain customers with primary emphasis on noninterest-bearing deposits.

As of September 30, 2016, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $379.3 million. At September 30, 2016, approximately $169.5 million of First Guaranty's certificates of deposit had a remaining term greater than one year.
 
The following table compares deposit categories for the periods indicated.

 
Total Deposits
For the Nine Months Ended September 30,    For the Years Ended December 31,
 
2016
 
2015
 
2014
 
(in thousands except for %)
Average Balance
 
Percent
 
Weighted Average Rate
 
Average Balance
 
Percent
 
Weighted Average Rate
 
Average Balance
 
Percent
 
Weighted Average Rate
 
Noninterest-bearing Demand
$
217,474   16.9
%
  0.0
%
 
$
211,584
 
15.9
%
 
0.0
%
 
$
200,127
 
15.3
%
 
0.0
%
 
Interest-bearing Demand
  414,633   32.1
%
  0.6
%
   
401,617
 
30.2
%
 
0.4
%
   
386,363
 
29.6
%
 
0.3
%
 
Savings
  87,344   6.8
%
  0.1
%
   
77,726
 
5.8
%
 
0.0
%
   
69,719
 
5.4
%
 
0.0
%
 
Time
  570,615   44.2
%
  1.1
%
   
640,134
 
48.1
%
 
1.1
%
   
649,165
 
49.7
%
 
1.2
%
 
Total Deposits
$
1,290,066   100.0
%
  0.7
%
 
$
1,331,061
 
100.0
%
 
0.6
%
 
$
1,305,374
 
100.0
%
 
0.8
%
 
 
Individual and Business Deposits
For the Nine Months Ended September 30,   For the Years Ended December 31,
 
2016
 
2015
 
2014
 
(in thousands except for %)
Average Balance
 
Percent
 
Weighted Average Rate
 
Average Balance
 
Percent
 
Weighted Average Rate
 
Average Balance
 
Percent
 
Weighted Average Rate
 
Noninterest-bearing Demand
$
212,823
 
29.7
%
  0.0
%
 
$
207,334
 
27.6
%
 
0.0
%
 
$
197,332
 
25.3
%
 
0.0
%
 
Interest-bearing Demand
 
113,586
 
15.8
%
  0.3
%
   
112,864
 
15.0
%
 
0.2
%
   
105,569
 
13.5
%
 
0.2
%
 
Savings
 
71,728
 
10.0
%
  0.1
%
   
65,775
 
8.7
%
 
0.1
%
   
61,288
 
7.9
%
 
0.0
%
 
Time
 
319,085
 
44.5
%
  1.3
%
   
366,244
 
48.7
%
 
1.4
%
   
414,975
 
53.3
%
 
1.4
%
 
Total Deposits
$
717,222
 
100.0
%
  0.6
%
 
$
752,217
 
100.0
%
 
0.7
%
 
$
779,164
 
100.0
%
 
0.8
%
 

Public Fund Deposits
For the Nine Months Ended September 30,   For the Years Ended December 31,
 
2016
 
2015
 
2014
 
(in thousands except for %)
Average Balance
 
Percent
 
Weighted Average Rate
 
Average Balance
 
Percent
 
Weighted Average Rate
 
Average Balance
 
Percent
 
Weighted Average Rate
 
Noninterest-bearing Demand
$
4,651
  0.8
%
 
0.0
%
 
$
4,250
 
0.7
%
 
0.0
%
 
$
2,795
 
0.5
%
 
0.0
%
 
Interest-bearing Demand
 
301,047
  52.6
%
  0.7
%
   
288,753
 
49.9
%
 
0.4
%
   
280,794
 
53.4
%
 
0.4
%
 
Savings
 
15,616
  2.7
%
  0.2
%
   
11,951
 
2.1
%
 
0.0
%
   
8,431
 
1.6
%
 
0.0
%
 
Time
 
251,530
  43.9
%
  0.8
%
   
273,890
 
47.3
%
 
0.7
%
   
234,190
 
44.5
%
 
0.7
%
 
Total Deposits
$
572,844
 
100.0
%
  0.7
%
 
$
578,844
 
100.0
%
 
0.5
%
 
$
526,210
 
100.0
%
 
0.5
%
 
The following table sets forth the distribution of our time deposit accounts.
 
(in thousands)
September 30, 2016  
Time deposits of less than $100,000 $ 154,399  
Time deposits of $100,000 through $250,000   112,285  
Time deposits of more than $250,000   267,032  
Total Time Deposits $ 533,716  
35

At September 30, 2016, public funds deposits totaled $535.0 million compared to $568.7 million at December 31, 2015. Public fund time deposits totaled $226.2 million at September 30, 2016 compared to $252.7 million at December 31, 2015. We have developed a program for the retention and management of public funds deposits. Since 2012, we have maintained public funds deposits in excess of $400.0 million. These deposits are from local government entities such as school districts, hospital districts, sheriff departments and other municipalities. $433.7 million, or 81%, of these accounts at September 30, 2016, are under contracts with terms of three years or less. Three of these relationships account for 40% of our total public funds deposits, each of which is currently under contract with us. These deposits generally have stable balances as we maintain both operating accounts and time deposits for these entities. There is a seasonal component to public deposit levels associated with annual tax collections. Public funds will increase at the end of the year and during the first quarter. Public funds generally decline in the second and third quarters. Public funds deposit accounts are collateralized by FHLB letters of credit, by Louisiana municipal bonds and by eligible government and government agency securities such as those issued by the FHLB, FFCB, Fannie Mae, and Freddie Mac. We invest the majority of these public deposits in our investment portfolio, but have increasingly invested more public funds into loans during the last three years.
 
The following table sets forth public funds as a percent of total deposits.
(in thousands except for %)
  September 30, 2016     December 31, 2015     December 31, 2014     December 31, 2013     December 31, 2012  
Public Funds:                          
Noninterest-bearing Demand
  $ 4,015     $ 4,906     $ 3,241     $ 3,016     $ 3,735  
Interest-bearing Demand      284,973       296,416       321,382       296,739       265,296  
Savings     19,763       14,667       10,142       7,209       6,415  
Time      226,225       252,688       266,743       208,614       195,052  
Total Public Funds   $ 534,976     $ 568,677     $ 601,508     $ 515,578     $ 470,498  
Total Deposits   $ 1,256,971     $ 1,295,870     $ 1,371,839     $ 1,303,099     $ 1,252,612  
Total Public Funds as a percent of Total Deposits     42.6 %     43.9 %     43.9 %     39.6 %     37.6 %
 
36

 
Borrowings.
 
First Guaranty maintains borrowing relationships with other financial institutions as well as the Federal Home Loan Bank on a short and long-term basis to meet liquidity needs. Short-term borrowings totaled $9.5 million at September 30, 2016 and $1.8 million at December 31, 2015. Short-term borrowings consisted of a line of credit of $2.5 million, with no outstanding balance at September 30, 2016 and collateralized short-term borrowings from the Federal Home Loan Bank totaling $9.5 million at September 30, 2016. First Guaranty had senior long-term debt totaling $23.5 million as of September 30, 2016 and $25.8 million at December 31, 2015.
 
First Guaranty also had junior subordinated debentures totaling $14.6 million at September 30, 2016 and December 31, 2015.
 
At September 30, 2016, First Guaranty had $222.2 million in Federal Home Loan Bank letters of credit outstanding obtained primarily for collateralizing public deposits.
 
Total Shareholders' Equity.
 
Total shareholders' equity increased to $129.1 million at September 30, 2016 from $118.2 million at December 31, 2015. The increase in shareholders' equity was principally the result of a $7.3 million increase in retained earnings and an increase of $3.7 million in accumulated other comprehensive income. The increase in accumulated other comprehensive income was primarily attributed to the increase in unrealized gains on available-for-sale securities during the period. The $7.3 million increase in retained earnings was due to net income of $10.9 million during the nine month period ended September 30, 2016, partially offset by $3.7 million in cash dividends paid on our common stock. 

Results of Operations for the Third Quarter and Nine Months Ended September 30, 2016 and 2015
 
Performance Summary
 
Three months ended September 30, 2016 compared to the three months ended September 30, 2015. Net income for the three months ended September 30, 2016 was $3.4 million, a decrease of $0.5 million, or 13.0%, from $3.9 million for the three months ended September 30, 2015. Net income available to common shareholders for the three months ended September 30, 2016 was $3.4 million which was a decrease of $0.4 million from $3.8 million for the same period in 2015. The decrease in net income for the three months ended September 30, 2016 as compared to the prior year period was primarily the result of decreased noninterest income associated with gains on securities and an increase in noninterest expense, partially offset by increased net interest income. Earnings per common share for the three months ended September 30, 2016 was $0.44 per common share, a decrease of 20.0% or $0.11 per common share from $0.55 per common share for the three months ended September 30, 2015.  The decrease in earnings per share was caused by lower earnings and by the increased number of shares following First Guaranty's capital raise in November 2015.
 
Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. Net income for the nine months ended September 30, 2016 was $10.9 million, a decrease of $0.2 million, or 1.8%, from $11.1 million for the nine months ended September 30, 2015. Net income available to common shareholders for the nine months ended September 30, 2016 was $10.9 million which was an increase of $0.1 million from $10.8 million for the same period in 2015. The decrease in net income for the nine months ended September 30, 2016 as compared to the prior year period was primarily the result of increased interest expense and noninterest expense, partially offset by increased interest income and noninterest income. Earnings per common share for the nine months ended September 30, 2016 was $1.44 per common share, a decrease of 8.3% or $0.13 per common share from $1.57 per common share for the nine months ended September 30, 2015. The decrease in earnings per share was caused by the increased number of shares following First Guaranty's capital raise in November 2015.
 
37

Net Interest Income
 
Our operating results depend primarily on our net interest income, which is the difference between interest income earned on interest-earning assets, including loans and securities, and interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. Interest rate fluctuations, as well as changes in the amount and type of interest-earning assets and interest-bearing liabilities, combine to affect net interest income. Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities. It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds.
 
A financial institution’s asset and liability structure is substantially different from that of a non-financial company, in that virtually all assets and liabilities are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a financial institution’s performance. The impact of interest rate changes depends on the sensitivity to the change of our interest-earning assets and interest-bearing liabilities. The effects of the low interest rate environment in recent years and our interest sensitivity position is discussed below.
 
Three months ended September 30, 2016 compared to the three months ended September 30, 2015. Net interest income for the three months ended September 30, 2016 and 2015 was $12.1 million and $11.8 million, respectively. The increase in net interest income for the three months ended September 30, 2016 was primarily due to a decrease in the average balance of our total interest-bearing liabilities and an increase in the average yield of our total interest-earning assets partially offset by the increase in the average rate of our total interest-bearing liabilities and a decrease in the average balance of our total interest-earning assets. For the three months ended September 30, 2016, the average balance of our total interest-bearing liabilities decreased by $1.4 million to $1.1 billion, and the average yield of interest-earning assets increased by twenty-five basis points to 4.12% from 3.87% for the three months ended September 30, 2015.  The average rate of our total interest-bearing liabilities increased by fifteen basis points to 0.92% for the three months ended September 30, 2016 compared to 0.77% for the three months ended September 30, 2015. As a result, our net interest rate spread increased ten basis points to 3.20% for the three months ended September 30, 2016 from 3.10% for the three months ended September 30, 2015.  Our net interest margin also increased thirteen basis points to 3.41% for the three months ended September 30, 2016 from 3.28% for the three months ended September 30, 2015.
 
Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. Net interest income for the nine months ended September 30, 2016 and 2015 was $36.2 million and $35.4 million, respectively. The increase in net interest income for the nine months ended September 30, 2016 was primarily due to a decrease in the average balance of our total interest-bearing liabilities and an increase in the average yield of our total interest-earning assets partially offset by the increase in the average rate of our total interest-bearing liabilities and a decrease in the average balance of our total interest-earning assets. For the nine months ended September 30, 2016, the average balance of our total interest-bearing liabilities decreased by $30.5 million to $1.1 billion, and the average yield of interest-earning assets increased by twenty-nine basis points to 4.10% from 3.81% for the nine months ended September 30, 2015.  The average rate of our total interest-bearing liabilities increased by fifteen basis points to 0.91% for the nine months ended September 30, 2016 compared to 0.76% for the nine months ended September 30, 2015. As a result, our net interest rate spread increased fourteen basis points to 3.19% for the nine months ended September 30, 2016 from 3.05% for the nine months ended September 30, 2015.  Our net interest margin also increased seventeen basis points to 3.38% for the nine months ended September 30, 2016 from 3.21% for the nine months ended September 30, 2015.
 
38

Interest Income
 
Three months ended September 30, 2016 compared to the three months ended September 30, 2015. Interest income increased $0.8 million, or 5.6%, to $14.7 million for the three months ended September 30, 2016.  First Guaranty continues to transition assets from lower yielding securities to higher yielding loans in order to increase interest income.  The increase in interest income resulted primarily from an increase in the average yield of interest-earning assets by twenty-five basis points to 4.12% for the three months ended September 30, 2016 compared to 3.87% for the three months ended September 30, 2015. This increase was partially offset by a $9.7 million decrease in the average balance of our interest-earnings assets to $1.4 billion for the three months ended September 30, 2016 as compared to the prior year period.
 
Interest income on securities decreased $0.3 million, or 9.5%, to $3.0 million for the three months ended September 30, 2016 primarily as a result of a decrease in the average balance of securities. The average balance of securities decreased $83.4 million to $488.8 million for the three months ended September 30, 2016 from $572.1 million for the three months ended September 30, 2015 due to a decrease in the average balance of our agency securities. The average yield on securities increased by fourteen basis points to 2.44% for the three months ended September 30, 2016 from 2.30% for the three months ended September 30, 2015. 
 
Interest income on loans increased $1.1 million, or 10.3%, to $11.6 million for the three months ended September 30, 2016 as a result of an increase in the average balance of loans. The average balance of loans increased by $84.9 million to $910.3 million for the three months ended September 30, 2016 from $825.4 million for the three months ended September 30, 2015 as a result of new loan originations, the majority of which were one-to-four family residential loans, the origination of commercial leases, commercial real estate loans and commercial and industrial loans. The average yield on loans increased by two basis points to 5.09% for the three months ended September 30, 2016 from 5.07% for the three months ended September 30, 2015.
 
Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. Interest income increased $1.8 million, or 4.3%, to $43.8 million for the nine months ended September 30, 2016.   First Guaranty continues to transition assets from lower yielding securities to higher yielding loans in order to increase interest income.  The increase in interest income resulted primarily from an increase in the average yield of interest-earning assets by twenty-nine basis points to 4.10% for the nine months ended September 30, 2016 compared to 3.81% for the nine months ended September 30, 2015. This increase was partially offset by a $46.2 million decrease in the average balance of our interest-earnings assets to $1.4 billion for the nine months ended September 30, 2016 as compared to the prior year period.
 
Interest income on securities decreased $0.2 million, or 2.4%, to $10.0 million for the nine months ended September 30, 2016 primarily as a result of a decrease in the average balance of securities. The average balance of securities decreased $99.6 million to $538.7 million for the nine months ended September 30, 2016 from $638.3 million for the nine months ended September 30, 2015 due to a decrease in the average balance of our agency securities. The average yield on securities increased by thirty-three basis points to 2.48% for the nine months ended September 30, 2016 from 2.15% for the nine months ended September 30, 2015.   
 
Interest income on loans increased $2.1 million, or 6.5%, to $33.7 million for the nine months ended September 30, 2016 as a result of an increase in the average balance of loans. The average balance of loans increased by $63.4 million to $869.3 million for the nine months ended September 30, 2016 from $805.9 million for the nine months ended September 30, 2015 as a result of new loan originations, the majority of which were one-to-four family residential loans, commercial leases, commercial real estate loans and commercial and industrial loans. The average yield on loans decreased by seven basis points to 5.19% for the nine months ended September 30, 2016 from 5.26% for the nine months ended September 30, 2015.
 
Interest Expense
 
Three months ended September 30, 2016 compared to the three months ended September 30, 2015. Interest expense increased $0.4 million, or 18.9%, to $2.5 million for the three months ended September 30, 2016 from $2.1 million for the three months ended September 30, 2015 due to increases in the average rate on deposits partially offset by the decrease of the average balance of deposits. Interest expense also increased due to the origination of a senior secured loan and the junior subordinated debt used to redeem the SBLF preferred stock at the end of 2015. The approximate increase in interest expense due to these borrowings was $0.3 million for the third quarter of 2016.  The average rate of time deposits decreased by two basis points during the three months ended September 30, 2016 to 1.06%, reflecting downward repricing of our time deposits in the continued low interest rate environment. The decrease was offset by an increase in the average rate of interest-bearing demand deposits of twenty-eight basis points during the three months ended September 30, 2016 to 0.65%. The average balance of interest-bearing deposits decreased by $42.4 million during the three months ended September 30, 2016 to $1.0 billion as a result of a $85.7 million decrease in the average balance of time deposits that was partially offset by a $43.3 million increase in the average balance of savings deposits and interest-bearing demand deposits .
 
Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. Interest expense increased $1.1 million, or 16.4%, to $7.6 million for the nine months ended September 30, 2016 from $6.6 million for the nine months ended September 30, 2015 due to increases in the average rate on deposits offset by the decrease of the average balance of deposits. Interest expense also increased due to the origination of a senior secured loan and the junior subordinated debt used to redeem the SBLF preferred stock at the end of 2015. The approximate increase in interest expense due to these borrowings was $1.0 million for the first nine months of 2016. The average rate of time deposits decreased by four basis points during the nine months ended September 30, 2016 to 1.06%, reflecting downward repricing of our time deposits in the continued low interest rate environment. The decrease was offset by an increase in the average rate of interest-bearing demand deposits of twenty-seven basis points during the nine months ended September 30, 2016 to 0.61%. The average balance of interest-bearing deposits decreased by $68.1 million during the nine months ended September 30, 2016 to $1.1 billion as a result of a $81.4 million decrease in the average balance of time deposits that was partially offset by a $13.3 million increase in the average balance of interest-bearing demand deposits and savings deposits.
39

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. Loans, net of unearned income, include loans held for sale. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
 
The net interest income yield shown below in the average balance sheet is calculated by dividing net interest income by average interest-earning assets and is a measure of the efficiency of the earnings from balance sheet activities. It is affected by changes in the difference between interest on interest-earning assets and interest-bearing liabilities and the percentage of interest-earning assets funded by interest-bearing liabilities. 
 
 
 
Three Months Ended September 30, 2016       
   
Three Months Ended September 30, 2015
 
(in thousands except for %)
  Average Balance     Interest     Yield/Rate (5)     Average Balance     Interest     Yield/Rate (5)  
Assets
                                   
Interest-earning assets:
                                   
Interest-earning deposits with banks
  $ 14,365     $ 11       0.30
%
  $ 25,591    
$
14
      0.22
%
Securities (including FHLB stock)
    488,769       2,998       2.44
%
   
572,143
      3,312       2.30
%
Federal funds sold
    279      
-
      -
%
    334      
-
      -
%
Loans held for sale      -       -       - %     -       -       - %
Loans, net of unearned income
    910,341       11,642       5.09
%
    825,393      
10,551
     
5.07
%
Total interest-earning assets
    1,413,754     $ 14,651       4.12
%
   
1,423,461
   
$
13,877
      3.87
%
                                                 
Noninterest-earning assets:
                                               
Cash and due from banks
    8,230                      
7,435
                 
Premises and equipment, net
    22,257                      
20,528
                 
Other assets
    3,298                      
7,364
                 
Total Assets
  $ 1,447,539                    
$
1,458,788
                 
                                                 
Liabilities and Shareholders' Equity
                                               
Interest-bearing liabilities:
                                               
Demand deposits
  $ 405,196     $ 662       0.65
%
 
$
373,901
   
$
348
      0.37
%
Savings deposits
    90,160       19       0.08
%
   
78,138
      9       0.05
%
Time deposits
    550,736       1,470       1.06
%
   
636,481
     
1,727
      1.08
%
Borrowings
    48,478       369       3.03
%
   
7,464
     
35
      1.86
%
Total interest-bearing liabilities
    1,094,570     $ 2,520       0.92
%
    1,095,984    
$
2,119
      0.77
%
                                                 
Noninterest-bearing liabilities:
                                               
Demand deposits
    218,187                      
210,568
                 
Other
    5,384                      
4,547
                 
Total Liabilities
    1,318,141                      
1,311,099
                 
                                                 
Shareholders' equity
    129,398                      
147,689
                 
Total Liabilities and Shareholders' Equity
  $ 1,447,539                    
$
1,458,788
                 
Net interest income
          $ 12,131                    
$
11,758
         
                                                 
Net interest rate spread (1)
                    3.20
%
                    3.10
%
Net interest-earning assets (2)
  $ 319,184                    
$
327,477
                 
Net interest margin (3), (4)
                    3.41
%
                    3.28
%
                                                 
Average interest-earning assets to interest-bearing liabilities
                    129.16
%
                    129.88
%
                                                 
(1) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
(4) The tax adjusted net interest margin was 3.43% and 3.31% for the above periods ended September 30, 2016 and 2015 respectively. A 35% tax rate was used to calculate the effect on securities income from tax exempt securities.
(5)  Annualized.
 
40

 
 
Nine Months Ended September 30, 2016       
   
Nine Months Ended September 30, 2015
 
(in thousands except for %)
  Average Balance     Interest     Yield/Rate (5)     Average Balance     Interest     Yield/Rate (5)  
Assets
                                   
Interest-earning assets:
                                   
Interest-earning deposits with banks
  $ 20,926     $ 55       0.35
%
  $ 30,841    
$
56
      0.24
%
Securities (including FHLB stock)
    538,748       10,013       2.48
%
   
638,320
      10,256       2.15
%
Federal funds sold
    257      
-
      -
%
    312      
-
      -
%
Loans held for sale      -       -       - %     -       -       - %
Loans, net of unearned income
    869,325       33,749       5.19
%
    805,947      
31,680
     
5.26
%
Total interest-earning assets
    1,429,256     $ 43,817       4.10
%
   
1,475,420
   
$
41,992
      3.81
%
                                                 
Noninterest-earning assets:
                                               
Cash and due from banks
    7,988                      
7,025
                 
Premises and equipment, net
    22,099                      
19,896
                 
Other assets
    3,855                      
6,299
                 
Total Assets
  $ 1,463,198                    
$
1,508,640
                 
                                                 
Liabilities and Shareholders' Equity
                                               
Interest-bearing liabilities:
                                               
Demand deposits
  $ 414,633     $ 1,902       0.61
%
 
$
412,053
   
$
1,052
      0.34
%
Savings deposits
    87,344       54       0.08
%
   
76,591
      26       0.05
%
Time deposits
    570,615       4,541       1.06
%
   
652,050
     
5,369
      1.10
%
Borrowings
    43,485       1,126       3.46
%
   
5,909
     
104
      2.36
%
Total interest-bearing liabilities
    1,116,077     $ 7,623       0.91
%
    1,146,603    
$
6,551
      0.76
%
                                                 
Noninterest-bearing liabilities:
                                               
Demand deposits
    217,474                      
210,598
                 
Other
    4,384                      
5,245
                 
Total Liabilities
    1,337,935                      
1,362,446
                 
                                                 
Shareholders' equity
    125,263                      
146,194
                 
Total Liabilities and Shareholders' Equity
  $ 1,463,198                    
$
1,508,640
                 
Net interest income
          $ 36,194                    
$
35,441
         
                                                 
Net interest rate spread (1)
                    3.19
%
                    3.05
%
Net interest-earning assets (2)
  $
313,179
                   
$
328,817
                 
Net interest margin (3), (4)
                    3.38
%
                    3.21
%
                                                 
Average interest-earning assets to interest-bearing liabilities
                    128.06
%
                    128.68
%
                                                 
(1) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
(4) The tax adjusted net interest margin was 3.41% and 3.24% for the above periods ended September 30, 2016 and 2015 respectively. A 35% tax rate was used to calculate the effect on securities income from tax exempt securities.
(5)  Annualized.
 
41

Provision for Loan Losses.
 
A provision for loan losses is a charge to income in an amount that management believes is necessary to maintain an adequate allowance for loan losses. The provision is based on management’s regular evaluation of current economic conditions in our specific markets as well as regionally and nationally, changes in the character and size of the loan portfolio, underlying collateral values securing loans, and other factors which deserve recognition in estimating loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.
 
For the three months ended September 30, 2016, the provision for loan losses was $1.2 million compared to $1.9 million for the same period in 2015. The allowance for loan losses at September 30, 2016 was $10.2 million and was 1.13% of total loans. The decrease in the provision was attributed to the improvement in credit quality of the loan portfolio.
 
We recorded a $3.0 million provision for loan losses for the nine months ended September 30, 2016 compared to $2.9 million for the same period in 2015. The increase in the provision was principally due to growth in loans.
 
We believe that the allowance is adequate to cover potential losses in the loan portfolio given the current economic conditions, and current expected net charge-offs and non-performing asset levels.
 
Noninterest Income.
 
Our primary sources of recurring noninterest income are customer service fees, ATM and debit card fees, loan fees, gains on the sales of loans and available-for-sale securities and other service fees. Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method.
 
Noninterest income totaled $2.6 million for the three months ended September 30, 2016, a decrease of $1.2 million from $3.7 million for the three months ended September 30, 2015.  The decrease was primarily due to lower gains on securities sales.  Net securities gains were $1.2 million for the three months ended September 30, 2016 as compared to $2.2 million for the same period in 2015. First Guaranty also liquidated its shares in a preferred security that converted to common stock in the third quarter of 2015 at a gain of $2.7 million. The gains on securities sales occurred as First Guaranty sold investment securities in order to fund loan growth. We also continued to have gains from bonds that were called and paid off before their contractual maturity. Service charges, commissions and fees totaled $0.6 million for the three months ended September 30, 2016 and $0.7 million for the same period in 2015.  ATM and debit card fees totaled $0.5 million for the three months ended September 30, 2016 as compared to $0.4 million for the same period in 2015. Other noninterest income totaled $0.4 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively.
 
Noninterest income totaled $8.0 million for the nine months ended September 30, 2016, an increase of $0.5 million from $7.6 million for the nine months ended September 30, 2015.  The increase was primarily due to higher gains on securities sales.  Net securities gains were $3.8 million for the nine months ended September 30, 2016 as compared to $3.2 million for the same period in 2015. The gains on securities sales occurred as First Guaranty sold investment securities in order to fund loan growth.  We also continued to have gains from bonds that were called and paid off before their contractual maturity. Service charges, commissions and fees totaled $1.8 million for the nine months ended September 30, 2016 as compared to $2.0 million for the same period in 2015.  ATM and debit card fees totaled $1.4 million for the nine months ended September 30, 2016 and $1.3 million for the same period in 2015. Other noninterest income totaled $1.1 million and $1.0 million for the nine months ended September 30, 2016 and 2015, respectively.
42

Noninterest Expense.
  
Noninterest expense includes salaries and employee benefits, occupancy and equipment expense and other types of expenses.  Noninterest expense totaled $8.3 million for the three months ended September 30, 2016 and $7.8 million for the three months ended September 30, 2015. Salaries and benefits expense totaled $4.2 million for the three months ended September 30, 2016 and $3.8 million for the three months ended September 30, 2015. Occupancy and equipment expense totaled $1.1 million for the three months ended September 30, 2016 and $1.0 million for the three months ended September 30, 2015. Other noninterest expense totaled $3.0 million for the three months ended September 30, 2016 and 2015. The largest increase in other noninterest expense occurred due to increased data processing fees.  Included in non-interest expense were flood related expenses of approximately $0.1 million that occurred during the third quarter of 2016. 
 
Noninterest expense totaled $24.7 million for the nine months ended September 30, 2016 and $23.4 million for the nine months ended September 30, 2015. Salaries and benefits expense totaled $12.4 million for the nine months ended September 30, 2016 and $11.7 million for the nine months ended September 30, 2015. Occupancy and equipment expense totaled $3.1 million for the nine months ended September 30, 2016 and $2.9 million for the nine months ended September 30, 2015. Other noninterest expense totaled $9.2 million for the nine months ended September 30, 2016, an increase of $0.5 million when compared to $8.7 million for the same period in 2015. The largest increase in other noninterest expense occurred due to increased legal and professional fees.
 
The following table presents, for the periods indicated, the major categories of other noninterest expense:

    Three Months Ended September 30,         Nine Months Ended September 30,  
(in thousands)   2016     2015      2016      2015  
Other noninterest expense:
                       
Legal and professional fees
  $ 530     $ 560     $ 1,605     $ 1,351  
Data processing
    311       250       959       866  
ATM fees     240       259       763       788  
Marketing and public relations
    223       242       705       611  
Taxes - sales, capital, and franchise
    176       177       610       542  
Operating supplies
    113       117       347       319  
Software expense and amortization     204       160       627       439  
Travel and lodging
    162       247       518       657  
Telephone     43       43       139       138  
Amortization of core deposits     80       80       240      
240
 
Donations      88       88       283       258  
Net costs from other real estate and repossessions
    132       117       331       407  
Regulatory assessment     300       288       857       828  
Other
    401       348       1,223       1,272  
Total other noninterest expense
  $ 3,003     $ 2,976     $ 9,207     8,716  
 
Income Taxes.
 
The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other non-deductible expenses. The provision for income taxes for the three months ended September 30, 2016 and 2015 was $1.8 million and $2.0 million, respectively.  The provision for income taxes decreased due to the decrease in income before taxes. First Guaranty’s statutory tax rate was 35.0% for the three months ended September 30, 2016, which was unchanged from the third quarter of 2015.
 
The provision for income taxes for the nine months ended September 30, 2016 and 2015 was $5.6 million. Our statutory tax rate was 35.0% for the nine months ended September 30, 2016 and September 30, 2015.
43

 
Liquidity and Capital Resources
 
Liquidity.
 
Liquidity refers to the ability or flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows us to have sufficient funds available to meet customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. Liquid assets include cash and due from banks, interest-earning demand deposits with banks, federal funds sold and available for sale investment securities.

Loans maturing within one year or less at September 30, 2016 totaled $160.8 million. At September 30, 2016, time deposits maturing within one year or less totaled $364.3 million. First Guaranty’s held-to-maturity ("HTM") portfolio at September 30, 2016 was $92.4 million or 19.4% of the investment portfolio compared to $169.8 million or 31.1% at December 31, 2015. The securities in the HTM portfolio are used to collateralize public funds deposits and may also be used to secure borrowings with the Federal Home Loan Bank or Federal Reserve Bank. The agency securities in the HTM portfolio have maturities of 10 years or less. The mortgage backed securities have stated final maturities of 15 to 20 years at September 30, 2016. The HTM portfolio had a forecasted weighted average life of approximately 4.45 years based on current interest rates. Management regularly monitors the size and composition of the HTM portfolio to evaluate its effect on First Guaranty’s liquidity. First Guaranty’s available-for-sale ("AFS") portfolio was $382.7 million or 80.6% of the investment portfolio as of September 30, 2016. The majority of the AFS portfolio was comprised of  U.S. Government Agencies, municipal bonds and investment grade corporate bonds. Management believes these securities are readily marketable and enhance First Guaranty’s liquidity.
 
First Guaranty maintained a net borrowing capacity at the Federal Home Loan Bank totaling $41.0 million and $116.7 million at September 30, 2016 and December 31, 2015, respectively. The change in borrowing availability with the Federal Home Loan Bank was due to changes in the value that First Guaranty receives on pledged collateral and due to First Guaranty's usage of the line. First Guaranty also has a discount window line with the Federal Reserve Bank. We also maintain federal funds lines of credit at various correspondent banks with borrowing capacity of $70.5 million and a revolving line of credit for $2.5 million with an availability of $2.5 million as of September 30, 2016. Management believes there is sufficient liquidity to satisfy current operating needs.
 
Capital Resources.
 
First Guaranty's capital position is reflected in shareholders’ equity, subject to certain adjustments for regulatory purposes. Further, our capital base allows us to take advantage of business opportunities while maintaining the level of resources we deem appropriate to address business risks inherent in daily operations.
 
Total shareholders’ equity increased to $129.1 million at September 30, 2016 from $118.2 million at December 31, 2015. The increase in total shareholders’ equity was principally the result of an increase in retained earnings of $7.3 million and a $3.7 million increase in the balance of accumulated other comprehensive income from a $0.9 million loss at December 31, 2015 to a $2.7 million gain at September 30, 2016.  The $7.3 million increase in retained earnings was due to net income of $10.9 million during the nine month period ended September 30, 2016, partially offset by $3.7 million in cash dividends paid on our common stock.
 
44

Regulatory Capital.
 
Risk-based capital regulations adopted by the FDIC require banks to achieve and maintain specified ratios of capital to risk-weighted assets. Similar capital regulations apply to bank holding companies over $1.0 billion in assets. The risk-based capital rules are designed to measure “Tier 1” capital (consisting of common equity, retained earnings and a limited amount of qualifying perpetual preferred stock and trust preferred securities, net of goodwill and other intangible assets and accumulated other comprehensive income) and total capital in relation to the credit risk of both on- and off- balance sheet items. Under the guidelines, one of its risk weights is applied to the different on balance sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk weighting. Applicable bank holding companies and all banks must maintain a minimum total capital to total risk weighted assets ratio of 8.00%, at least half of which must be in the form of core or Tier 1 capital. These guidelines also specify that bank holding companies that are experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels. 
 
In order to avoid limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers, an institution must hold a capital conservation buffer above its minimum risk-based capital requirements.  As of September 30, 2016, the Bank's capital conservation buffer was 5.68% exceeding the minimum of 0.625% for 2016.  As of September 30, 2016, the Company's capital conservation buffer was 5.11% exceeding the minimum of 0.625% for 2016.
 
At September 30, 2016, we satisfied the minimum regulatory capital requirements and were well capitalized within the meaning of federal regulatory requirements.
 
 
 
"Well Capitalized Minimums"
 
As of September 30, 2016
  As of December 31, 2015  
Tier 1 Leverage Ratio
                 
Consolidated
5.00
%
  8.58
%
  8.17 %  
Bank
5.00
%
  9.86
%
  9.74 %  
                   
Tier 1 Risk-based Capital Ratio
                 
Consolidated
8.00
%
  11.11
%
  10.85 %  
Bank
8.00
%
  12.76
%
  12.98 %  
                   
Total Risk-based Capital Ratio
                 
Consolidated
10.00
%
  13.38
%
  13.13 %  
Bank
10.00
%
  13.68
%
  13.86 %  
                   
Common Equity Tier One Capital Ratio                  
Consolidated 
6.50
%   11.11 %   10.85 %  
Bank  6.50 %   12.76 %   12.98 %  
 
 
45

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
Asset/Liability Management and Market Risk
 
Our asset/liability management (ALM) process consists of quantifying, analyzing and controlling interest rate risk (IRR) to maintain reasonably stable net interest income levels under various interest rate environments. The principal objective of ALM is to maximize net interest income while operating within acceptable limits established for interest rate risk and to maintain adequate levels of liquidity.
 
The majority of our assets and liabilities are monetary in nature. Consequently, one of our most significant forms of market risk is interest rate risk, which is inherent in our lending and deposit-taking activities. Our assets, consisting primarily of loans secured by real estate and fixed rate securities in our investment portfolio, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. The board of directors of First Guaranty Bank has established two committees, the management asset liability committee and the board investment committee, to oversee the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. The management asset liability committee is comprised of senior officers of the Bank and meets as needed to review our asset liability policies and interest rate risk position. The board ALCO investment committee is comprised of certain members of the board of directors of the Bank and meets monthly. The management asset liability committee provides a monthly report to the board ALCO investment committee.
 
The need for interest sensitivity gap management is most critical in times of rapid changes in overall interest rates. We generally seek to limit our exposure to interest rate fluctuations by maintaining a relatively balanced mix of rate sensitive assets and liabilities on a one-year time horizon and greater than one-year time horizon. Because of the significant impact on net interest margin from mismatches in repricing opportunities, we monitor the asset-liability mix periodically depending upon the management asset liability committee’s assessment of current business conditions and the interest rate outlook. We maintain exposure to interest rate fluctuations within prudent levels using varying investment strategies. These strategies include, but are not limited to, frequent internal modeling of asset and liability values and behavior due to changes in interest rates. We monitor cash flow forecasts closely and evaluate the impact of both prepayments and extension risk.
 
The following interest sensitivity analysis is one measurement of interest rate risk. This analysis reflects the contractual maturity characteristics of assets and liabilities over various time periods. This analysis does not factor in prepayments or interest rate floors on loans which may significantly change the report. This table includes nonaccrual loans in their respective maturity periods. The gap indicates whether more assets or liabilities are subject to repricing over a given time period. The interest sensitivity analysis at September 30, 2016 illustrated below reflects a liability-sensitive position with a negative cumulative gap on a one-year basis.
 
The interest spread and liability funding discussed below are directly related to changes in asset and liability mixes, volumes, maturities and repricing opportunities for interest-earning assets and interest-bearing liabilities. Interest-sensitive assets and liabilities are those which are subject to repricing in the near term, including both floating or adjustable rate instruments and instruments approaching maturity. The interest sensitivity gap is the difference between total interest-sensitive assets and total interest-sensitive liabilities. Interest rates on our various asset and liability categories do not respond uniformly to changing market conditions. Interest rate risk is the degree to which interest rate fluctuations in the marketplace can affect net interest income.
 
46

 
September 30, 2016
 
 
Interest Sensitivity Within
 
(in thousands except for %)
3 Months Or Less
 
Over 3 Months thru 12
Months
 
Total One Year
 
Over One Year
  Total  
Earning Assets:
                   
Loans (including loans held for sale) $ 379,234  
$
59,601  
$
438,835  
$
471,910
 
$
910,745  
Securities (including FHLB stock)
  37,012    
7,831
    44,843    
431,873
    476,716  
Federal Funds Sold
  285    
-
    285    
-
    285  
Other earning assets
  15,277    
-
    15,277    
-
    15,277  
Total earning assets
$
431,808
 
$
67,432
 
$
499,240  
$
903,783  
$
1,403,023  
                               
Source of Funds:
                             
Interest-bearing accounts:
                             
Demand deposits
$
398,296
 
$
-
 
$
398,296
 
$
-
 
$
398,296  
Savings deposits
 
93,749
   
-
   
93,749
   
-
    93,749  
Time deposits
 
187,767
   
176,499
   
364,266
   
169,450
   
533,716
 
Short-term borrowings   9,500      -      9,500     -     9,500  
Senior long-term debt
 
23,099
   
405
   
23,504
   
-
    23,504  
Junior subordinated debt   -     -     -     14,622     14,622  
Noninterest-bearing, net
 
-
   
-
   
-
    329,636     329,636  
Total source of funds
$
712,411
 
$
176,904
 
$
889,315
 
$
513,708  
$
1,403,023
 
                               
Period gap
$
(280,603
)
$
(109,472
)
$
(390,075
)
$
390,075        
Cumulative gap
$
(280,603
)
$
(390,075
)
$
(390,075
)
$
-
       
                               
Cumulative gap as a percent of earning assets  
-20.0
%   -27.8 %   -27.8 %            
 
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Net interest income at risk measures the risk of a decline in earnings due to changes in interest rates. The first table below presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from an instantaneous and sustained parallel shift in the yield curve over a 12-month horizon at September 30, 2016. Shifts are measured in 100 basis point increments (+400 through -100 basis points) from base case. We don’t present shifts less than 100 basis points because of the current low interest rate environment. The base case scenario encompasses key assumptions for asset/liability mix, loan and deposit growth, pricing, prepayment speeds, deposit decay rates, securities portfolio cash flows and reinvestment strategy and the market value of certain assets under the various interest rate scenarios. The base case scenario assumes that the current interest rate environment is held constant throughout the forecast period for a static balance sheet and the instantaneous shocks are performed against that yield curve. The second table presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from a gradual shift in the yield curve over a 12 month horizon.
 
                          Instantaneous Changes in Interest Rates (In Basis Points)      
 Percent Change In Net Interest Income
 +400 (19.28%)
 +300 (10.93%)
 +200
(6.00%)
 +100 (2.15%)
 Base -% 
 -100 (2.07%)
 
 
Gradual Change in Interest Rates (In Basis Points) Percent Change In Net Interest Income
+400  (7.44%)
 +300 
(4.81%)
+200
(2.73%)
+100 (1.05%)
Base  -%
-100 (0.09%)

These scenarios above are both instantaneous shocks and gradual interest rate ramps that assume balance sheet management will mirror the base case. Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as anticipated. Additionally, a change in the U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the U.S. Treasury yield curve would cause significantly different changes to net interest income than indicated above. Strategic management of our balance sheet would be adjusted to accommodate these movements. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Also, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring exposure to interest rate risk.
 
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Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As defined by the Securities and Exchange Commission in Exchange Act Rules 13a-15(e) and 15d-15(e), a Company's “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within time periods specified in the Commission’s rules and forms. First Guaranty maintains such controls designed to ensure this material information is communicated to Management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decision regarding required disclosure.
 
Management, with the participation of the CEO and CFO, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, the CEO and CFO have concluded that the disclosure controls and procedures as of the end of the period covered by this quarterly report are effective. There were no changes in First Guaranty's internal control over financial reporting during the last fiscal quarter in the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, First Guaranty's internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
At September 30, 2016, First Guaranty is subject to various legal proceedings in the normal course of business and otherwise. It is our belief that the ultimate resolution of such claims will not have a material adverse effect on First Guaranty's financial position or results of operations.
 
Item 1A. Risk Factors
 
There have been no material changes to our risk factors as disclosed in First Guaranty's Annual Report on Form 10-K.
 
49


Item 6. Exhibits
 
The following exhibits are either filed as part of this report or are incorporated herein by reference.
 
Exhibit
 
Number
Exhibit
   
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.SCH
XBRL Taxonomy Extension Schema.
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.
   
101.LAB
XBRL Taxonomy Extension Label Linkbase.
   
101.INS
XBRL Instance Document.
   
 
50

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, First Guaranty has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FIRST GUARANTY BANCSHARES, INC.
     
     
Date: November 14, 2016
 
By: /s/ Alton B. Lewis
   
Alton B. Lewis
   
Principal Executive Officer
     
     
Date: November 14, 2016
 
By: /s/ Eric J. Dosch
   
Eric J. Dosch
   
Principal Financial Officer
   
Secretary and Treasurer
 
 
51