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EXCEL - IDEA: XBRL DOCUMENT - First Guaranty Bancshares, Inc.Financial_Report.xls
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - First Guaranty Bancshares, Inc.exhibit31-1.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - First Guaranty Bancshares, Inc.exhibit32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - First Guaranty Bancshares, Inc.exhibit31-2.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - First Guaranty Bancshares, Inc.exhibit32-2.htm
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 June 30, 2014
Commission File Number 000-52748
 
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 office)
(Zip Code)
   
(985) 345-7685
(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 o Accelerated filer o Non-accelerated filer o Smaller 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 o No x

As of August 1, 2014 the registrant had 6,291,332 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.
24
     
Item 3.
37
     
Item 4.
38
     
Part II.
38
     
Item 1.
38
     
Item 1A.
38
     
Item 6.
38
   
Signatures
39
 
Item 1. Consolidated Financial Statements
 
CONSOLIDATED BALANCE SHEETS (unaudited)
   
(in thousands, except share data)
June 30, 2014
 
December 31, 2013
 
Assets
       
Cash and cash equivalents:
       
Cash and due from banks
$
22,241  
$
60,819
 
Federal funds sold
 
268
   
665
 
Cash and cash equivalents
 
22,509
   
61,484
 
             
Interest-earning time deposits with banks   7,997     747  
             
Investment securities:
           
Available for sale, at fair value
 
529,081
   
484,211
 
Held to maturity, at cost (estimated fair value of $141,689 and $141,642 respectively)
 
145,047
   
150,293
 
Investment securities
 
674,128
   
634,504
 
             
Federal Home Loan Bank stock, at cost
 
589
   
1,835
 
Loans held for sale   80     88  
             
Loans, net of unearned income
 
736,220
   
703,166
 
Less: allowance for loan losses
 
8,415
   
10,355
 
Net loans
 
727,805
   
692,811
 
             
Premises and equipment, net
 
20,324
   
19,612
 
Goodwill
 
1,999
   
1,999
 
Intangible assets, net
 
1,901
   
2,073
 
Other real estate, net
 
860
   
3,357
 
Accrued interest receivable
 
6,295
   
6,258
 
Other assets
 
6,803
   
11,673
 
Total Assets
$
1,471,290
 
$
1,436,441
 
             
Liabilities and Stockholders' Equity
           
Deposits:
           
Noninterest-bearing demand
$
201,930
 
$
204,291
 
Interest-bearing demand
 
391,507
   
391,350
 
Savings
 
69,052
   
65,445
 
Time
 
665,592
   
642,013
 
Total deposits
 
1,328,081
   
1,303,099
 
             
Short-term borrowings
 
1,800
   
5,788
 
Accrued interest payable
 
2,281
   
2,364
 
Long-term borrowings    1,755     500  
Other liabilities
 
2,147
   
1,285
 
Total Liabilities
 
1,336,064
   
1,313,036
 
             
Stockholders' Equity
           
Preferred stock:
           
Series C - $1,000 par value - authorized 39,435 shares; issued and outstanding 39,435   39,435     39,435  
Common stock:
           
$1 par value - authorized 100,600,000 shares; issued 6,294,227 shares
 
6,294
   
6,294
 
Surplus
 
39,387
   
39,387
 
Treasury stock, at cost, 2,895 shares    (54 )   (54 )
Retained earnings
 
50,722
   
47,477
 
Accumulated other comprehensive (loss) income
 
(558
 
(9,134
Total Stockholders' Equity
 
135,226
   
123,405
 
Total Liabilities and Stockholders' Equity
$
1,471,290
 
$
1,436,441
 
 
3

 
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
       
  Three Months Ended June 30,   Six Months Ended June 30,  
(in thousands, except share data) 2014  
2013
  2014   2013  
Interest Income:
                   
Loans (including fees)
$
9,977   $
9,189
  $
19,485
  $
18,285
 
Deposits with other banks
  49    
51
   
81
   
91
 
Securities (including FHLB stock)
  3,283    
3,236
   
6,624
   
6,604
 
Federal funds sold
  -    
-
   
-
   
1
 
Total Interest Income
  13,309    
12,476
   
26,190
   
24,981
 
                         
Interest Expense:
                       
Demand deposits
  332    
319
   
683
   
682
 
Savings deposits
  8    
11
     16    
25
 
Time deposits
  1,958    
2,485
   
3,925
   
4,991
 
Borrowings
  28    
38
   
58
   
75
 
Total Interest Expense
  2,326    
2,853
   
4,682
   
5,773
 
                         
Net Interest Income
  10,983    
9,623
   
21,508
   
19,208
 
Less: Provision for loan losses
  357    
800
   
657
   
1,704
 
Net Interest Income after Provision for Loan Losses
  10,626    
8,823
   
20,851
   
17,504
 
                         
Noninterest Income:
                       
Service charges, commissions and fees
  1,080    
1,171
   
2,152
   
2,322
 
Net gains on securities
  56    
767
   
209
   
1,544
 
Net gains on sale of loans
  (6 )  
(3
   (7 )  
2
 
Other
  355    
346
   
762
   
673
 
Total Noninterest Income
  1,485    
2,281
   
3,116
   
4,541
 
                         
Noninterest Expense:
                       
Salaries and employee benefits
  3,953    
3,616
   
7,784
   
7,173
 
Occupancy and equipment expense
  1,009    
1,005
   
2,002
   
1,985
 
Other
  3,139    
3,209
   
5,940
   
6,408
 
Total Noninterest Expense
  8,101    
7,830
     15,726    
15,566
 
                         
Income Before Income Taxes
  4,010    
3,274
   
8,241
   
6,479
 
Less: Provision for income taxes
  1,340    
1,142
   
2,786
   
2,258
 
Net Income
  2,670    
2,132
   
5,455
   
4,221
 
Preferred Stock Dividends
  (99 )  
(203
)
 
(197
)  
(486
)
Income Available to Common Shareholders
$
 2,571   $
1,929
  $
5,258
  $
3,735
 
                         
Per Common Share:
                       
Cash dividends paid
$
0.16   $
0.16
  $
0.32
  $
0.32
 
Earnings
$
0.41   $
0.31
  $
0.84
  $
0.59
 
                         
Weighted Average Common Shares Outstanding
  6,291,332    
6,291,332
   
6,291,332
   
6,291,332
 
             
See Notes to Consolidated Financial Statements
           
 
 
4

 
 
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
 
  Three Months Ended June 30,   Six Months Ended June 30,   
(in thousands) 2014   2013    2014    2013  
Net Income $ 2,670   $ 2,132   $ 5,455   $ 4,221  
Other comprehensive income:                        
Unrealized (losses) gains on securities:                        
Unrealized holding gains (losses) arising during the period    7,962     (15,820   13,203     (16,371
Reclassification adjustments for gains included in net income    (56   (767   (209   (1,544 )
Change in unrealized (losses) gains on securities    7,906     (16,587    12,994     (17,915
Tax impact        (2,688   5,640      (4,418   6,091  
Other comprehensive income (loss)    5,218     (10,947 )    8,576     (11,824
Comprehensive Income (Loss) $  7,888   $ (8,815  $  14,031    $ (7,603 )
 
See Notes to Consolidated Financial Statements
 
 
5

 
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' 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, 2012
$ 39,435   $ 6,294   $
39,387
  $ (54 $
43,071
  $
6,048
 
$
134,181
 
Net income
   -    
-
   
-
     -    
4,221
   
 
   
4,221
 
Other comprehensive income (loss)
   -    
-
   
-
     -    
-
   
(11,824
)   (11,824 
)
Cash dividends on common stock ($0.32 per share)
   -    
-
   
-
     -    
(2,013
)
 
 
   
(2,013
)
Preferred stock dividend
   -    
-
   
-
     -    
(486
)
 
 
   
(486
)
Balance June 30, 2013 (unaudited)
$  39,435   $
6,294
  $  39,387   $  (54
)
$
44,793
  $
(5,776
$
124,079
 
                                           
Balance December 31, 2013
$ 39,435   $
6,294
  $
39,387
  $  (54
)
$
47,477
  $
(9,134
$ 123,405   
Net income    -      -      -      -      5,455      -     5,455   
Other comprehensive income
   -    
-
   
-
     -    
-
   
8,576
 
 
8,576
 
Cash dividends on common stock ($0.32 per share)
   -    
-
   
-
     -    
(2,013
)
 
-
   
(2,013
)
Preferred stock dividend
   -    
-
   
-
     -    
(197)
 
 
-
   
(197
)
Balance June 30, 2014 (unaudited)
$  39,435   $
6,294
  $
39,387
  $  (54
)
$
50,722
  $
(558)
  $
135,226
 
 
See Notes to Consolidated Financial Statements
 
 
6

 
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
   
 
Six Months Ended June 30,
 
(in thousands)
2014
 
2013
 
Cash Flows From Operating Activities
       
Net income
$
5,455  
$
4,221
 
Adjustments to reconcile net income to net cash provided by operating activities:
           
Provision for loan losses
 
657
   
1,704
 
Depreciation and amortization
 
1,086
   
1,051
 
Amortization/Accretion of investments
 
983
   
1,027
 
Gain on calls and sales of securities    (209   (1,544 )
Gain on sale of assets    (10   (17
ORE write downs and loss on disposition
 
469
   
113
 
Net decrease in loans held for sale   8     557  
FHLB stock dividends   (2   (2 )
Change in other assets and liabilities, net
 
1,133
   
3,502
 
Net Cash Provided By Operating Activities
 
9,570
   
10,612
 
             
Cash Flows From Investing Activities
           
Funds invested in certificates of deposits    (7,250   (250
Proceeds from maturities and calls of HTM securities   5,141    
11,089
 
Proceeds from maturities, calls and sales of AFS securities   438,922     419,934  
Funds invested in HTM securities
   -     (107,616
Funds Invested in AFS securities   (471,466  
(326,597
Proceeds from sale/redemption of Federal Home Loan Bank stock
  1,248     720   
Funds invested in Federal Home Loan Bank stock
   -     (720
Net increase in loans
   (36,323   (60,496
Purchase of premises and equipment
   (1,608  
(1,111
Proceeds from sales of premises and equipment   52      
Proceeds from sales of other real estate owned
  2,700     413   
Net Cash Used In Investing Activities
 
(68,584
)
 
(64,634
)
             
Cash Flows From Financing Activities
           
Net increase in deposits
 
24,982
   
10,236
 
Net (decrease) in federal funds purchased and short-term borrowings
 
(3,988
 
14,639
 
Proceeds from long-term borrowings     1,555      -  
Repayment of long-term borrowings
 
(300
 
(300
)
Dividends paid
 
(2,210
)
 
(2,499
)
Net Cash Provided By Financing Activities
 
20,039
   
22,076
 
             
Net (Decrease) In Cash and Cash Equivalents
 
(38,975
 
(31,946
)
Cash and Cash Equivalents at the Beginning of the Period
 
61,484
   
86,233
 
Cash and Cash Equivalents at the End of the Period
$
22,509
 
$
54,287
 
             
Noncash Activities:
           
Loans transferred to foreclosed assets
$
672
 
$
2,270
 
             
Cash Paid During The Period:
           
Interest on deposits and borrowed funds
$
4,765
 
$
5,651
 
Income taxes
$
2,800
 
$
750
 
             
See Notes to the Consolidated Financial Statements.
 
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. (the “Company”) thereto should be read in conjunction with the audited financial statements and note disclosures for the Company previously filed with the Securities and Exchange Commission in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2013.
 
The consolidated financial statements include the accounts of First Guaranty Bancshares, Inc. and its wholly owned subsidiary First Guaranty 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 for the three and six month periods ended June 30, 2014 are not necessarily indicative of the results expected for the full year. 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
 
The FASB has issued Accounting Standards Update (ASU) No. 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.  The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized.
 
These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  Additional disclosures are required.
 
The amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014.  The adoption of this guidance is not expected to have a material impact upon the Company's financial statements.
 
 
 
8

Note 3. Securities
 
A summary comparison of securities by type at June 30, 2014 and December 31, 2013 is shown below.
 
 
June 30, 2014
 
December 31, 2013
 
(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 $
 24,000
  $  -   $  -   $  24,000   $ 36,000   $ -   $ -   $ 36,000  
U.S. Government Agencies
   333,176      12    
(6,261
)
 
326,927
   
302,816
   
-
   
(16,117
)
 
286,699
 
Corporate debt securities
   136,210    
5,528
   
(494
)
 
141,244
   
142,580
   
3,729
   
(1,828
)
 
144,481
 
Mutual funds or other equity securities
   564    
-
   
(1
 
563
   
564
   
-
   
(8
 
556
 
Municipal bonds
   35,977    
584
   
(214
 
36,347
   
16,091
   
384
   
-
 
 
16,475
 
Total available-for-sale securities
$
529,927
 
$
6,124
 
$
(6,970
)
$
529,081
 
$
498,051
 
$
4,113
 
$
(17,953
)
$
484,211
 
                                                 
Held to maturity:
                                               
U.S. Government Agencies
$
84,475
 
$
-
 
$
(2,650
)
$
81,825
 
$
86,927
 
$
-
 
$
(5,971
)
$
80,956
 
Mortgage-backed securities    60,572      -      (708    59,864     63,366     -     (2,680   60,686  
Total held to maturity securities
$
145,047
 
$
-
 
$
(3,358
)
$
141,689
 
$
150,293
 
$
-
 
$
(8,651
)
$
141,642
 
 
The scheduled maturities of securities at June 30, 2014 and December 31, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to call or prepayments.
 
 
June 30, 2014
   December 31, 2013  
(in thousands)
Amortized Cost
 
Fair Value
   Amortized Cost    Fair Value  
Available For Sale:
               
Due in one year or less
$
35,947
 
$
36,015
   $  45,610    $ 45,738  
Due after one year through five years
 
243,521
   
244,877
     190,239     189,238  
Due after five years through 10 years
 
190,531
   
189,515
     221,356      211,724  
Over 10 years
 
59,928
   
58,674
     40,846      37,511  
Total available for sale securities
$
529,927
 
$
529,081
  $  498,051    $  484,211  
                         
Held to Maturity:
                       
Due in one year or less
$
-
 
$
-
   $  -    $  -  
Due after one year through five years
 
5,000
   
4,913
     -      -  
Due after five years through 10 years
 
79,475
   
76,912
     86,927      80,956  
Over 10 years
 
-
   
-
     -      -  
Subtotal    84,475      81,825      86,927      80,956  
Mortgage-backed Securities    60,572      59,864      63,366      60,686  
Total held to maturity securities
$
145,047
 
$
141,689
   $  150,293    $  141,642  
 
At June 30, 2014 $509.7 million of the Company's securities were pledged to secure public fund deposits and borrowings. The pledged securities had a market value of $506.4 million as of June 30, 2014.
 
The following is a summary of the fair value of securities with gross unrealized losses and an aging of those gross unrealized losses at June 30, 2014.
 
      At June 30, 2014       
   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  -   $  -   $  -    -   $  -   $  -    -   $  -   $  -  
U.S. Government agencies
 -    
-
   
-
   72    
261,914
 
 
(6,261
 72    
261,914
   
(6,261
Corporate debt securities
 12    
11,654
   
(37
 51    
15,921
   
(457
 63    
27,575
   
(494
Mutual funds or other equity securities
 -    
-
   
-
   1    
499
   
(1
 1    
499
   
(1
)
Municipal bonds 18     20,022     (214 ) -      -      -    18      20,022      (214 )
Total available-for-sale securities
30  
$
31,676
 
$
(251
)  124  
$
278,334
 
$
(6,719
)  154  
$
310,010
 
$
(6,970
)
                                                 
Held to maturity:
                                               
U.S. Government agencies
 -    
-
 
 
-
   20  
 
81,825
 
 
(2,650
 20  
 
81,825
 
 
(2,650
Mortgage-backed securities 2     6,728      (4  24      53,136      (704  26      59,864      (708
Total held to maturity
 2  
$
6,728
 
$
(4
 44  
$
134,961
 
$
(3,354
)  46  
$
141,689
 
$
(3,358
)
 
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 December 31, 2013.
 
      At December 31, 2013      
   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 3   $ 26,000   $ -   -   $ -   $ -   3   $ 26,000   $ -  
U.S. Government agencies
65    
218,047
   
(11,110
) 21    
68,652
 
 
(5,007
86    
286,699
   
(16,117
)
Corporate debt securities
154    
39,555
   
(1,378
) 22    
5,173
   
(450
) 176    
44,728
   
(1,828
)
Mutual funds or other equity securities
1    
492
   
(8)
  -    
-
   
-
  1    
492
   
(8
Total available for sale
223  
$
284,094
 
$
(12,496
) 43  
$
73,825
 
$
(5,457
) 266  
$
357,919
 
$
(17,953
)
                                                 
Held to maturity:
                                               
U.S. Government agencies
14  
$
50,520
 
$
(3,743
) 7  
$
30,436
 
$
(2,228
21  
$
80,956
 
$
(5,971
)
Mortgage-backed securities 26     60,686     (2,680 -     -     -   26     60,686     (2,680
Total held to maturity
40  
$
111,206
 
$
(6,423
) 7  
$
30,436
 
$
(2,228
47  
$
141,642
 
$
(8,651
)
 
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 the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
 
The amount of investment securities issued by U.S. Government and Government sponsored agencies with unrealized losses and the amount of unrealized losses on those investment securities are the result of changes in market interest rates. The Company has the ability and intent to hold these securities in its current portfolio until recovery, which may be until maturity.
 
The corporate debt securities consist primarily of corporate bonds issued by financial, insurance, utility, manufacturing, industrial, consumer products and oil and gas organizations. The Company believes that each of the issuers will be able to fulfill the obligations of these securities based on evaluations described above. The Company has the ability and intent to hold these securities until they recover, which could be at their maturity dates.
 
The Company believes that the securities with unrealized losses reflect impairment that is temporary and there are currently no securities with other-than-temporary impairment.

At June 30, 2014, the Company's exposure to bond issuers that exceeded 10% of stockholders’ equity is below:
 
 
At June 30, 2014
 
(in thousands)
Amortized Cost
 
Fair Value
 
U.S Treasury
$
24,000
 
$
24,000
 
Federal Home Loan Bank (FHLB)
 
157,598
   
153,789
 
Federal Home Loan Mortgage Corporation (Freddie Mac-FHLMC)
 
62,852
   
61,706
 
Federal National Mortgage Association (Fannie Mae-FNMA)
 
116,859
   
114,473
 
Federal Farm Credit Bank (FFCB)
 
140,913
   
138,648
 
Total
$
502,222
 
$
492,616
 
 
10

Note 4. Loans
 
The following table summarizes the components of the Company's loan portfolio as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
 
December 31, 2013
 
(in thousands except for %)
Balance
 
As % of Category
 
Balance
 
As % of Category
 
Real Estate:
               
 Construction & land development
$
49,568
 
6.7
%
$
47,550
 
6.7
%
 Farmland
 
13,942
 
1.9
%
 
9,826
 
1.4
%
 1- 4 Family
 
109,961
 
14.9
%
 
103,764
 
14.7
%
 Multifamily
 
13,563
 
1.8
%
 
13,771
 
2.0
%
 Non-farm non-residential
 
338,633
 
45.9
%
 
336,071
 
47.7
%
Total Real Estate
 
525,667
 
71.2
%
 
510,982
 
72.5
%
Non-Real Estate:                    
 Agricultural
 
28,179
 
3.8
%
 
21,749
 
3.1
%
 Commercial and industrial
 
162,625
 
22.0
%
 
151,087
 
21.4
%
 Consumer and other
 
21,455
 
3.0
%
 
20,917
 
3.0
%
Total Non-Real Estate   212,259   28.8 %   193,753   27.5 %
Total loans before unearned income
 
737,926
 
100.0
%
 
704,735
 
100.0
%
Unearned income
 
(1,706
)
     
(1,569
)
   
Total loans net of unearned income
$
736,220
     
$
703,166
     
 
The following table summarizes fixed and floating rate loans by contractual maturity as of June 30, 2014 and December 31, 2013 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.
 
 
June 30, 2014
  December 31, 2013  
(in thousands)
Fixed
 
Floating
 
Total
  Fixed   Floating   Total  
One year or less
$
53,348
 
$
61,840
 
$
115,188
  $
60,642
  $
70,602
  $
131,244
 
One to five years
 
222,359
   
206,738
   
429,097
   
220,490
   
209,587
   
430,077
 
Five to 15 years
 
101,333
   
54,552
   
155,885
   
71,655
   
26,076
   
97,731
 
Over 15 years
 
14,137
   
9,417
   
23,554
   
8,503
   
22,695
   
31,198
 
Subtotal
$
391,177
  $
332,547
   
723,724
  $
361,290
  $
328,960
   
690,250
 
Nonaccrual loans
             
14,202
               
14,485
 
Total loans before unearned income
             
737,926
               
704,735
 
Unearned income
             
(1,706
)
              (1,569 )
Total loans net of unearned income             $  736,220               $ 703,166  
 
As of June 30, 2014 $193.4 million of floating rate loans were at their interest rate floor. At December 31, 2013 $209.5 million of floating rate loans were at the floor rate. Nonaccrual loans have been excluded from these totals.
 
The following tables present the age analysis of past due loans at June 30, 2014 and December 31, 2013:
 
 
As of June 30, 2014
 
(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
$
113
 
$
568  
$
681
 
$
48,887
 
$
49,568
 
$
-
 
 Farmland
 
109
   
154
   
263
   
13,679
   
13,942
   
-
 
 1 - 4 family
 
3,543
   
5,218
   
8,761
   
101,200
   
109,961
   
379
 
 Multifamily
 
-
   
-
   
-
   
13,563
   
13,563
   
-
 
 Non-farm non-residential
 
1,047
   
6,370
   
7,417
   
331,216
   
338,633
   
-
 
Total Real Estate
 
4,812
 
 
12,310
 
 
17,122
   
508,545
   
525,667
   
379
 
Non-Real Estate:
                                   
 Agricultural
 
344
   
392
   
736
   
27,443
   
28,179
   
-
 
 Commercial and industrial
 
826
   
1,874
   
2,700
    159,925    
162,625
   
-
 
 Consumer and other
   50    
5
   
55
   
21,400
    21,455    
-
 
Total Non-Real Estate
 
1,220
 
 
2,271
    3,491    
208,768
   
212,259
   
-
 
Total loans before unearned income
$
6,032
 
$
14,581
 
$
20,613
 
$
717,313
 
$
 737,926  
$
 379  
Unearned income
                           (1,706
)
     
Total loans net of unearned income
                       
$
736,220
       
 
 
11

 
The following tables present the age analysis of past due loans for the periods indicated:
 
 
As of December 31, 2013
 
(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
$
100
 
$
73
 
$
173
 
$
47,377
 
$
47,550
 
$
-
 
 Farmland
 
-
   
130
   
130
   
9,696
   
9,826
   
-
 
 1 - 4 family
 
3,534
   
4,662
   
8,196
   
95,568
   
103,764
   
414
 
 Multifamily
 
-
   
-
   
-
   
13,771
   
13,771
   
-
 
 Non-farm non-residential
 
154
   
7,539
   
7,693
   
328,378
   
336,071
   
-
 
Total Real Estate
 
3,788
   
12,404
   
16,192
   
494,790
   
510,982
   
414
 
Non-Real Estate:                                    
 Agricultural
 
-
   
526
   
526
   
21,223
   
21,749
   
-
 
 Commercial and industrial
 
63
   
1,946
   
2,009
   
149,078
   
151,087
   
-
 
 Consumer and other
 
123
   
23
   
146
   
20,771
   
20,917
   
-
 
Total Non-Real Estate   186     2,495     2,681     191,072     193,753     -  
Total loans before unearned income
$
3,974
 
$
14,899
 
$
18,873
 
$
685,862
 
$
704,735
 
$
414
 
Unearned income
                         
(1,569
)
     
Total loans net of unearned income
                       
$
703,166
     
 
The tables above include $14.2 million and $14.5 million of nonaccrual loans for June 30, 2014 and December 31, 2013, respectively. See the tables below for more detail on nonaccrual loans.
 
The following is a summary of nonaccrual loans by class for the periods indicated:
 
in thousands)
As of June 30, 2014
  As of December 31, 2013  
Real Estate:
           
 Construction & land development
$
 568   $
73
 
 Farmland
   154    
130
 
 1 - 4 family
 
4,839
   
4,248
 
 Multifamily
   -     -  
 Non-farm non-residential
 
6,370
   
7,539
 
Total Real Estate
   11,931    
11,990
 
Non-Real Estate:            
 Agricultural
   392    
526
 
 Commercial and industrial
 
1,874
   
1,946
 
 Consumer and other
   5    
23
 
Total Non-Real Estate    2,271     2,495  
Total Nonaccrual Loans
$
14,202
  $
14,485
 
 
 
12

 
The Company’s credit quality indicators are pass, special mention, substandard, and doubtful.
 
Loans included in the Pass category are performing loans with satisfactory debt coverage ratios, collateral, payment history, and meet documentation requirements.
 
Special mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Nonfinancial reasons include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices.
 
A substandard loan is inadequately protected by the paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. These loans require more intensive supervision. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigates. For some substandard loans, the likelihood of full collection of interest and principal may be in doubt and interest is no longer accrued. For consumer loans that are 90 days or more past due or that are nonaccrual are considered substandard.
 
Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values.

The following table identifies the credit exposure of the loan portfolio by specific credit ratings as of the dates indicated:
 
 
As of June 30, 2014
  As of December 31, 2013  
(in thousands)
Pass
 
Special
Mention
 
Substandard
  Doubtful  
Total
  Pass  
Special
Mention
  Substandard   Doubtful   Total  
Real Estate:
                                                           
 Construction & land development
$
43,861
 
$
1,298
 
$
4,409
  $  -  
$
49,568
  $
40,286
  $
1,330
  $
5,934
  $ -   $
47,550
 
 Farmland
 
13,773
   
100
    69      -    
13,942
   
9,631
    85    
110
    -    
9,826
 
 1 - 4 family
 
94,515
   
5,728
   
9,718
     -    
109,961
   
89,623
   
4,060
   
10,081
    -    
103,764
 
 Multifamily
   5,754      6,470    
1,339
     -    
13,563
   
5,884
   
5,936
   
1,951
    -    
13,771
 
 Non-farm non-residential
 
308,729
   
10,522
   
19,382
     -    
338,633
   
305,992
   
9,196
   
20,883
    -    
336,071
 
Total Real Estate
 
466,632
    24,118    
34,917
     -     525,667    
451,416
   
20,607
   
38,959
    -    
510,982
 
Non-Real Estate:                                                            
 Agricultural
 
27,923
   
9
   
247
     -    
28,179
   
21,486
   
11
   
252
    -    
21,749
 
 Commercial and industrial
 
153,062
   
8,979
   
584
     -      162,625    
149,930
   
592
   
565
    -    
151,087
 
 Consumer and other
 
21,267
   
140
    48      -    
21,455
   
20,720
   
117
   
80
    -    
20,917
 
Total Non-Real Estate   202,252     9,128     879      -     212,259     192,136     720     897     -     193,753  
Total loans before unearned income
$
668,884
 
$
33,246
 
$
35,796
  $  -  
$
 737,926   $
643,552
  $
21,327
  $
39,856
  $ -   $
704,735
 
Unearned income
                         
(1,706
)
                         
(1,569
)
Total loans net of unearned income
                       
$
736,220
                          $
703,166
 
 
 
13

Note 5. Allowance for Loan Losses
 
The allowance for loan losses is reviewed by on a monthly basis and additions thereto are recorded pursuant to the results of such reviews. In assessing the allowance, several internal and external factors that might impact the performance of individual loans are considered. These factors include, but are not limited to, economic conditions and their impact upon borrowers' ability to repay loans, respective industry trends, borrower estimates and independent appraisals. Periodic changes in these factors impact the assessment of each loan and its overall impact on the allowance for loan losses.
 
The monitoring of credit risk also extends to unfunded credit commitments, such as unused commercial credit lines and letters of credit. A reserve is established as needed for estimates of probable losses on such commitments.
 
A summary of changes in the allowance for loan losses, by portfolio type, for the six months ended June 30, 2014 and 2013 are as follows:
 
  As of June 30,  
 
2014
  2013  
(in thousands)
Beginning
Allowance (12/31/13)
 
Charge-offs
 
Recoveries
  Provision  
Ending
Allowance (6/30/14)
 
Beginning
Allowance (12/31/12)
 
Charge-offs
 
Recoveries
  Provision  
Ending Allowance(6/30/13)
 
Real Estate:
                                                           
 Construction & land development
$
1,530
 
$
(1,032
$
 2   $ (59 )
$
 441   $
1,098
  $
(233
) $
1
  $ 374   $
1,240
 
 Farmland
 
17
   
-
   
-
     3    
20
   
50
    -    
61
    (78 )  
33
 
 1 - 4 family
 
1,974
   
(182
   38      (254  
1,576
   
2,239
   
(161
)  
28
    35    
2,141
 
 Multifamily
 
376
   
-
   
28
     20    
424
   
284
   
-
   
-
    292    
576
 
 Non-farm non-residential
 
3,607
   
(1,264
 
8
     921    
3,272
   
3,666
   
(947
)  
2
    555    
3,276
 
Total real estate
 
7,504
   
(2,478
   76      631    
5,733
   
7,337
   
(1,341
)  
92
    1,178    
7,266
 
Non-Real Estate:                                                            
 Agricultural
   46    
(2
  1     (7  
38
   
64
   
(21
)  
3
    25    
71
 
 Commercial and industrial
 
2,176
   
(149
   10      (186  
1,851
   
2,488
   
(679
)  
57
    411    
2,277
 
 Consumer and other
 
208
   
(157
 
102
     35    
188
   
233
   
(124
)  
144
    (33  
220
 
 Unallocated    421    
-
     -      184     605     220     -     -     123     343  
Total Non-Real Estate    2,851    
(308
   113      26     2,682     3,005     (824 )   204     526     2,911  
Total
$
10,355
 
$
(2,786
$
189
  $ 657  
$
8,415
  $
10,342
  $
(2,165
) $
296
  $ 1,704   $
10,177
 
 
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.
 
 
14

A summary of the allowance and loans individually and collectively evaluated for impairment are as follows:
 
  As of June 30, 2014  
(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
$
90
  $  351  
$
 441   $  4,258   $ 45,310   $
49,568
 
 Farmland
   -      20    
20
   
-
     13,942    
13,942
 
 1 - 4 family
   42      1,534    
1,576
   
2,871
     107,090    
109,961
 
 Multifamily
 
299
     125      424      1,339     12,224    
13,563
 
 Non-farm non-residential
 
216
     3,056    
3,272
   
17,734
     320,899    
338,633
 
Total Real Estate
 
647
     5,086    
5,733
   
26,202
     499,465    
525,667
 
Non-Real Estate:                                    
 Agricultural
 
-
     38    
38
   
-
     28,179    
28,179
 
 Commercial and industrial
 
-
     1,851    
1,851
   
-
    162,625    
162,625
 
 Consumer and other
 
-
     188    
188
   
-
     21,455    
21,455
 
 Unallocated    -      605      605      -      -      -  
Total Non-Real Estate    -      2,682      2,682      -     212,259      212,259  
Total
$
647
  $  7,768  
$
 8,415   $
26,202
  $  711,724   $
737,926
 
Unearned Income                                  (1,706
Total loans net of unearned income                               $  736,220  
 
 
 
  As of December 31, 2013  
(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
$
1,166
  $ 364  
$
1,530
  $
5,777
  $ 41,773   $
47,550
 
 Farmland
 
-
    17    
17
   
-
    9,826    
9,826
 
 1 - 4 family
 
25
    1,949    
1,974
   
2,868
    100,896    
103,764
 
 Multifamily
 
304
    72    
376
   
1,951
    11,820    
13,771
 
 Non-farm non-residential
 
1,053
    2,554    
3,607
   
19,279
    316,792    
336,071
 
Total Real Estate
 
2,548
    4,956    
7,504
   
29,875
    481,107    
510,982
 
Non-Real Estate:                                    
 Agricultural
 
-
    46    
46
   
-
    21,749    
21,749
 
 Commercial and industrial
 
-
    2,176    
2,176
   
-
    151,087    
151,087
 
 Consumer and other
 
-
    208    
208
   
-
    20,917    
20,917
 
 Unallocated   -     421     421      -      -      -  
Total Non-Real Estate   -     2,851     2,851     -     193,753     193,753  
Total
$
2,548
  $ 7,807  
$
10,355
  $
29,875
  $ 674,860   $
704,735
 
Unearned Income                                 (1,569 )
Total loans net of unearned income                               $ 703,166  
 
A loan is considered impaired when, based on current information and events, it is probable that the Company 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.
 
The significance of payment delays and payment shortfalls are considered on a case-by-case basis; all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed are factors considered. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. This process is applied to impaired loan relationships in excess of $250,000.
 
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures, unless such loans are the subject of a restructuring agreement.
 
 
15

The following is a summary of impaired loans by class as of the date indicated:
 
 
As of June 30, 2014
 
(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
$
451
 
$
1,483
 
$
-
 
$
1,351
 
$
25
  $ 33  
 Farmland
 
-
   
-
   
-
   
-
   
-
     -  
 1 - 4 family
  809    
1,016
   
-
   
799
   
26
    27  
 Multifamily
 
-
   
-
   
-
   
602
   
23
    24  
 Non-farm non-residential
 
8,305
   
13,272
   
-
     8,720    
266
    160  
Total Real Estate
 
9,565
   
15,771
   
-
   
11,472
   
340
    244  
Non-Real Estate:                                    
 Agricultural
 
-
   
-
   
-
   
-
   
-
     -  
 Commercial and industrial
 
-
   
-
   
-
   
-
   
-
     -  
 Consumer and other
 
-
   
-
   
-
   
-
   
-
     -  
Total Non-Real Estate    -     -      -      -      -     -  
Total Impaired Loans with no related allowance   9,565     15,771      -     11,472     340     244  
                                     
Impaired Loans with an allowance recorded:
                                   
Real Estate:
                                   
 Construction & land development
 
3,807
   
3,807
   
90
   
3,937
    171     171  
 Farmland
  -    
-
   
-
   
-
   
-
     -  
 1 - 4 family
 
2,062
    2,073    
42
   
2,067
   
67
     73  
 Multifamily
 
1,339
   
1,339
   
299
   
1,341
   
40
    40  
 Non-farm non-residential
 
9,429
   
9,429
   
216
    9,444    
225
    230  
Total Real Estate
 
16,637
    16,648    
647
   
16,789
   
503
    514  
Non-Real Estate:                                    
 Agricultural
 
-
   
-
   
-
   
-
   
-
     -  
 Commercial and industrial
 
-
   
-
   
-
   
-
   
-
     -  
 Consumer and other
 
-
   
-
   
-
   
-
   
-
     -  
Total Non-Real Estate    -     -      -      -      -      -  
Total Impaired Loans with an allowance recorded   16,637     16,648     647     16,789     503     514  
                                     
Total Impaired Loans
$
26,202
 
$
32,419
 
$
647  
$
28,261
 
$
843
  $ 758  
 
 
16

The following is a summary of impaired loans by class as of the date indicated:
 
 
As of December 31, 2013
 
(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
$
-
 
$
-
 
$
-
 
$
599
 
$
35
  $ 36  
 Farmland
 
-
   
-
   
-
   
-
   
-
    -  
 1 - 4 family
 
441
   
441
   
-
   
472
   
28
    35  
 Multifamily
 
607
   
607
   
-
   
5,890
   
359
    382  
 Non-farm non-residential
 
4,722
   
5,456
   
-
   
7,579
   
425
    527  
Total Real Estate
 
5,770
   
6,504
   
-
   
14,540
   
847
    980  
Non-Real Estate:                                    
 Agricultural
 
-
   
-
   
-
   
-
   
-
    -  
 Commercial and industrial
 
-
   
-
   
-
   
1,472
   
134
    162  
 Consumer and other
 
-
   
-
   
-
   
-
   
-
    -  
Total Non-Real Estate   -     -     -     1,472     134     162  
Total Impaired Loans with no related allowance   5,770     6,504     -     16,012     981     1,142  
                                     
Impaired Loans with an allowance recorded:
                                   
Real Estate:
                                   
 Construction & land development
 
5,777
   
5,777
   
1,166
   
6,345
   
383
    360  
 Farmland
 
-
   
-
   
-
   
-
   
-
    -  
 1 - 4 family
 
2,427
   
2,620
   
25
   
1,643
   
121
    107  
 Multifamily
 
1,344
   
1,344
   
304
   
1,348
   
89
    96  
 Non-farm non-residential
 
14,557
   
17,469
   
1,053
   
14,868
   
775
    573  
Total Real Estate
 
24,105
   
27,210
   
2,548
   
24,204
   
1,368
    1,136  
Non-Real Estate:                                    
 Agricultural
 
-
   
-
   
-
   
-
   
-
    -  
 Commercial and industrial
 
-
   
-
   
-
   
-
   
-
    -  
 Consumer and other
 
-
   
-
   
-
   
-
   
-
    -  
Total Non-Real Estate   -     -     -     -     -     -  
Total Impaired Loans with an allowance recorded   24,105     27,210     2,548     24,204     1,368     1,136  
                                     
Total Impaired Loans
$
29,875
 
$
33,714
 
$
2,548
 
$
40,216
 
$
2,349
  $ 2,278  
 
 
17

Troubled Debt Restructurings
 
A Troubled Debt Restructuring ("TDR") is considered such if the creditor 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 the Company's TDRs were concessions on the interest rate charged. The effect of the modifications to the Company was a reduction in interest income. These loans have an allocated reserve in the Company's reserve for loan losses. The Company has not restructured any loans that are considered troubled debt restructurings in the prior twelve months.

The following table identifies the Troubled Debt Restructurings as of June 30, 2014 and December 31, 2013:
 
Troubled Debt Restructurings June 30, 2014   December 31, 2013  
  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 $  -   $  -   $  -   $  -   $ -   $ -   $ -   $ -  
 Farmland    -      -      -      -     -     -     -     -  
 1-4 Family    -      -      -      -     -     -     -     -  
 Multifamily    -      -      -      -     -     -     -     -  
 Non-farm non residential    3,006      -      230      3,236     3,006     -     230     3,236  
Total Real Estate    3,006      -     230      3,236     3,006     -     230     3,236  
Non-Real Estate:                                                
 Agricultural    -      -      -      -     -     -     -     -  
 Commercial and industrial    -      -      -      -     -     -     -     -  
 Consumer and other    -      -      -      -     -     -     -     -  
Total Non-Real Estate    -      -      -      -     -     -     -     -  
Total $  3,006   $  -   $ 230   $  3,236   $ 3,006   $ -   $ 230   $ 3,236  
 
The following table discloses TDR activity for the six months ended June 30, 2014.
 
 
Trouble Debt Restructured Loans Activity
Six Months Ended June 30, 2014
 
(in thousands)
Beginning balance  December 31, 2013
 
New TDRs
 
Charge-offs
post-
modification
 
Transferred to ORE
 
Paydowns
  Construction to permanent financing  
 Restructured
to market
terms
 
Ending balance
June 30, 2014
 
Real Estate:
                                               
 Construction & land development
$
-
 
$
-
 
$
-
 
$
-
 
$
-
  $  -   $  -   $  -  
 Farmland
 
-
   
-
   
-
   
-
   
-
     -      -      -  
 1 - 4 family
 
-
   
-
   
-
   
-
   
-
     -      -      -  
 Multifamily
 
-
   
-
   
-
   
-
   
-
     -      -      -  
 Non-farm non-residential
 
3,236
   
-
   
-
   
-
   
-
     -      -      3,236  
Total Real Estate
 
3,236
   
-
   
-
   
-
   
-
     -      -      3,236  
Non-Real Estate:                                                
 Agricultural
 
-
   
-
   
-
   
-
   
-
     -      -      -  
 Commercial and industrial
 
-
   
-
   
-
   
-
   
-
     -      -      -  
 Consumer and other
 
-
   
-
   
-
   
-
   
-
     -      -      -  
Total Non-Real Estate   -      -      -      -      -      -      -      -  
Total Impaired Loans with no related allowance $ 3,236   $  -   $  -   $  -   $  -   $  -   $  -   $  3,236  
 
There were no commitments to lend additional funds to debtors whose terms have been modified in a troubled debt restructuring at June 30, 2014.
 
 
18
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. The Company'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 June 30, 2014 and December 31, 2013. No impairment charges have been recognized on the Company's intangible assets. Mortgage servicing rights were relatively unchanged totaling $0.1 million at June 30, 2014 and December 31, 2013. Other intangible assets recorded include core deposit intangibles, which are subject to amortization. The weighted-average amortization period remaining for the Company's core deposit intangibles is 5.8 years. 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)
June 30, 2014   December 31, 2013  
Real Estate Owned Acquired by Foreclosure:            
Residential $ 450   $ 1,803  
Construction & land development    143     754  
Non-farm non-residential    267     800  
Total Other Real Estate Owned and Foreclosed Property $ 860   $ 3,357  
 
Loans secured by one to four family residential properties in the process of foreclosure totaled $0.6 million as of June 30, 2014.
 
Note 8. Commitments and Contingencies
 
Off-balance sheet commitments
 
The Company 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 June 30, 2014 and December 31, 2013:
 
Contract Amount
(in thousands)
June 30, 2014
 
December 31, 2013
 
Commitments to Extend Credit
$
 49,958  
$
30,516
 
Unfunded Commitments under lines of credit
$
 104,636  
$
115,311
 
Commercial and Standby letters of credit
$
 7,717  
$
7,695
 
 
Litigation
 
The nature of the Company’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 the Company determines it has defenses to the claims asserted, it defends itself. The Company will consider settlement of cases when it is in the best interests of both the Company and its shareholders.
 
While the final outcome of legal proceedings is inherently uncertain, based on information currently available, any incremental liability arising from the Company’s legal proceedings will not have a material adverse effect on the Company’s financial position.

 
19

Note 9. Accumulated Other Comprehensive Income
 
The following table details the changes in the single component of accumulated other comprehensive income for the six months ended June 30, 2014:
 
(in thousands)
Unrealized Gain (Loss) on Securities Available for Sale  
Accumulated Other Comprehensive (Loss) Income:      
Balance December 31, 2013
$ (9,134
Reclassification adjustments to net income:      
Realized gains on securities    (209
Provision for income taxes    71  
Unrealized gains arising during the period, net of tax    8,714  
Balance June 30, 2014 $ (558 )
 
The following table details the changes in the single component of accumulated other comprehensive income for the six months ended June 30, 2013:
 
(in thousands)
Unrealized Gain (Loss) on Securities Available for Sale  
Accumulated Other Comprehensive (Loss) Income:      
Balance December 31, 2012
$ 6,048  
Reclassification adjustments to net income:      
Realized gains on securities   (1,544 )
Provision for income taxes   538  
Unrealized losses arising during the period, net of tax   (10,818 )
Balance June 30, 2013 $ (5,776 )
 
 
 
 
20

Note 10. 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. The Company 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 the Company's portfolio as of June 30, 2014 include municipal bonds and one preferred 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 loan's obtainable market price, if available (Level 1), the fair value of the collateral if the loan is collateral dependent (Level 2), or the present value of expected future cash flows, discounted at the specific 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 on the properties or recent sales activity for similar assets in the property’s market, and thus OREO measured at fair value would be classified within Level 2 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 June 30, 2014 and December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
(in thousands)
June 30, 2014
 
December 31, 2013
 
Available for Sale Securities Fair Value Measurements Using:
           
Level 1: Quoted Prices in Active Markets For Identical Assets
$
72,548  
$
36,492  
Level 2: Significant Other Observable Inputs
 
451,174  
 
441,885  
Level 3: Significant Unobservable Inputs
 
5,359  
 
5,834  
Securities available for sale measured at fair value $ 529,081   $ 484,211  
 
The Company'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, 2013 was due principally to the purchase of agency bonds $43.5 million.
 
The following table measures financial assets and financial liabilities measured at fair value on a non-recurring basis as of June 30, 2014 and December 31, 2013, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
 
(in thousands)
At June 30, 2014
 
At December 31, 2013
 
Fair Value Measurements Using: Impaired Loans
           
Level 1: Quoted Prices in Active Markets For Identical Assets
$
 -  
$
-  
Level 2: Significant Other Observable Inputs
 
2,587  
 
9,282  
Level 3: Significant Unobservable Inputs
 
 14,050  
 
14,823  
Impaired loans measured at fair value $ 16,637   $ 24,105  
 
           
Fair Value Measurements Using: Other Real Estate Owned
           
Level 1: Quoted Prices in Active Markets For Identical Assets
$
 -  
$
-  
Level 2: Significant Other Observable Inputs
 
 860  
 
3,357  
Level 3: Significant Unobservable Inputs
 
 -  
 
-  
Other real estate owned measured at fair value $  860   $ 3,357  
 
ASC 825-10 provides the Company with an option to report selected financial assets and liabilities at fair value. The fair value option established by this statement permits the Company 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.
 
The Company 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.
 
21

Note 11. 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 the Company’s financial instruments, the Company 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 the Company.
 
 
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.
 
 
Accrued interest receivable.
 
 
The carrying amount of accrued interest receivable approximates its fair value.
 
 
Deposits.
 
 
Market values are actually 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. 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
 
 
22



Borrowings.
 
 
The carrying amount of federal funds purchased and other short-term borrowings approximate their fair values. The fair value of the Company’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 March 31, 2014 and December 31, 2013 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 June 30, 2014 and December 31, 2013 are presented in the following table:
 
     
 
June 30, 2014
 
December 31, 2013
 
(in thousands)
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
 
Assets
               
Cash and cash equivalents
$
 22,509  
$
22,509
 
$
61,484
 
$
61,484
 
Securities, available for sale
 
529,081
   
529,081
   
484,211
   
484,211
 
Securities, held to maturity
   145,047     141,689    
150,293
   
141,642
 
Federal Home Loan Bank stock
 
589
     589    
1,835
   
1,835
 
Loans, net
  736,220     
735,784
   
703,166
   
703,025
 
Accrued interest receivable
 
6,295
     6,295    
6,258
   
6,258
 
                         
Liabilities
                       
Deposits
$
1,328,081
 
$
1,298,877
 
$
1,303,099
 
$
1,265,898
 
Borrowings
 
3,555
     3,555    
6,288
   
6,288
 
Accrued interest payable
 
2,281
   
2,281
   
2,364
   
2,364
 
 
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.

 
23

 
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following management discussion and analysis is intended to highlight the significant factors affecting the Company'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 June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 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 the Company's financial position and results of operations for such periods.
 
First Guaranty Bancshares, Inc. is a bank holding company headquartered in Hammond, LA with one wholly owned subsidiary, First Guaranty Bank. First Guaranty Bank is a Louisiana chartered commercial bank with 21 banking facilities including one drive-up only facility, located throughout Southeast, Southwest and North Louisiana. The Company emphasizes personal relationships and localized decision making to ensure that products and services are matched to customer needs. The Company competes for business principally on the basis of personal service to customers, customer access to officers and directors and competitive interest rates and fees.
 
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.
 
 
24

Second Quarter and Six Months Ended 2014 Financial Overview
 
Financial highlights for the second quarter and six months ending June 30, 2014 and 2013 are as follows:
 
Net income for the second quarter of 2014 and 2013 was $2.7 million and $2.1 million, respectively.  Net income for the six months ended June 30, 2014 was $5.5 million compared to $4.2 million for the six months ended June 30, 2013. The increase in net income for 2014 was the result of higher loan interest income, lower interest expense, and lower loan provision expense compared to the same period in 2013.
   
Net income available to common shareholders after preferred stock dividends was $2.6 million and $1.9 million for the second quarter of 2014 and 2013, respectively. Net income available to common shareholders after preferred stock dividends was $5.3 million and $3.7 million for the six months ended June 30, 2014 and 2013, respectively. The dividends on preferred stock decreased $0.3 million to $0.2 million for the six months ended June 30, 2014 when compared to $0.5 million for the same period in 2013. This decrease is the result of the Company qualifying for a lower dividend rate due to the increase in qualified small business loans as a part of the U.S. Treasury’s Small Business Lending Fund (“SBLF”) program.
   
Earnings per common share were $0.41 and $0.31 for the second quarter of 2014 and 2013 and $0.84 and $0.59 for the six months ended June 30, 2014 and 2013, respectively.
   
Net interest income for the second quarter of 2014 was $11.0 million compared to $9.6 million for the same period in 2013.  Net interest income for the six months ended June 30, 2014 was $21.5 million compared to $19.2 million for the same period in 2013.
   
●   The provision for loan losses for the first six months of 2014 was $0.7 million compared to $1.7 million for the same period in 2013.
   
●    The Company charged off $2.8 million in loan balances for the first six months of 2014 compared to $2.2 million for the same period in 2013.  The amounts charged off in 2014 were partial charge offs concentrated in three loan relationships.  The charge offs were provided for in prior periods as specific reserves for these loans.
   
●    The net interest margin for the first six months of 2014 was 3.08% which was an increase of 25 basis points from the net interest margin of 2.83% for the first six months of 2013. The Company attributes the improvement in the net interest margin to the continual transition from securities to loans and the continued reduction in interest expense over the last year.
   
Total assets at June 30, 2014 increased $34.8 million or 2.4% to $1.47 billion when compared to $1.44 billion at December 31, 2013. The increase in assets was from an increase in loans and securities that was partially offset by a decrease in cash.
   
Investment securities totaled $674.1 million at June 30, 2014, an increase of $39.6 million when compared to $634.5 million at December 31, 2013. At June 30, 2014, available for sale securities, at fair value, totaled $529.1 million, an increase of $44.9 million when compared to $484.2 million at December 31, 2013. At June 30, 2014, held to maturity securities, at amortized cost, totaled $145.0 million, a decrease of $5.3 million when compared to $150.3 million at December 31, 2013.
   
●   The weighted average life of the securities portfolio at June 30, 2014 was 5.1 years a decline of 0.6 years when compared to the average life of 5.7 years at December 31, 2013.
   
The net loan portfolio at June 30, 2014 totaled $727.8 million, a net increase of $35.0 million from the December 31, 2013 net loan portfolio of $692.8 million. Net loans are reduced by the allowance for loan losses which totaled $8.4 million at June 30, 2014 and $10.4 million at December 31, 2013.  Total loans net of unearned income were $736.2 million at June 30, 2014 compared to $703.2 million at December 31, 2013.
   
Total impaired loans decreased $3.7 million at June 30, 2014 to $26.2 million compared to $29.9 million at December 31, 2013.
   
Loans classified as Troubled Debt Restructurings ("TDRs") stayed constant at $3.2 million for  June 30, 2014 and December 31, 2013.
   
 ●
Other real estate decreased $2.5 million to $0.9 million at June 30, 2014 from $3.4 million at December 31, 2013.
   
Return on average assets for the three months ended June 30, 2014 and June 30, 2013 was 0.75% and 0.61%, respectively.  Return on average assets for the six months ended June 30, 2014 and June 30, 2013 was 0.77% and 0.61%, respectively.  Return on average common equity for the three months ended June 30, 2014 and June 30, 2013 was 11.17% and 8.12%, respectively.  Return on average common shareholders’ equity for the six months ended June 30, 2014 and June 30, 2013 was 11.30% and 7.91%, respectively.  Return on average assets is calculated by dividing annualized net income before preferred dividends by average assets.  Return on average common shareholders’ equity is calculated by dividing net income available to common shareholders by average common shareholders’ equity.
   
Book value per common share was $15.23 as of June 30, 2014 compared to $13.45 as of June 30, 2013.  The increase in book value is 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.
   
The Company's Board of Directors declared cash dividends of $0.16 per common share in the second quarter of 2014 and 2013. Cash dividends declared for the six months ended June 30, 2014 and 2013 were $0.32 per common share.  The Company has paid 84 consecutive quarterly dividends as of June 30, 2014.
   
 
 
25

Financial Condition
 
Changes in Financial Condition from December 31, 2013 to June 30, 2014
 
General.
 
Total assets at June 30, 2014 increased $34.8 million or 2.4% to $1.47 billion when compared to $1.44 billion at December 31, 2013. The increase in assets was from an increase in loans and securities that was partially offset by a decrease in cash.

Investment Securities.
 
Investment securities at June 30, 2014 totaled $674.1 million, an increase of $39.6 million compared to $634.5 million at December 31, 2013. The increase is primarily attributed to the deployment of surplus cash into short term investment securities.  The investment portfolio consisted of available for sale securities at their fair market value total of $529.1 million and held to maturity securities at amortized cost total of $145.0 million.
 
The securities portfolio consisted principally of U.S. Government and Government agency securities, agency mortgage-backed securities, corporate debt securities and municipal bonds. The securities portfolio provides the Company 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. The Company 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. Government agency securities generally have maturities of 15 years or less.  Mortgage backed securities have stated final maturities of 15 to 20 years.
 
During the second quarter of 2013, the Company diversified its investment portfolio with agency mortgage backed securities as a strategy to increase cash flow and manage interest rate risk.  A total of $66 million in mortgage backed securities were purchased and placed into the held to maturity category.  These securities have a forecasted average life of 5 to 7 years and are used to collateralize public funds deposits.  Management believes that the Company has the intent and ability to hold these securities to maturity.  As of June 30, 2014, the balance of agency mortgage backed securities was $60.6 million.
 
At June 30, 2014, $35.9 million or 5.3% of the securities portfolio was scheduled to mature in less than one year. Securities, not including mortgage backed securities, with contractual maturity dates over 10 years totaled $59.9 million or 8.9% of the total portfolio. The weighted average contractual maturity of the securities portfolio was 5.1 years at June 30, 2014 compared to 5.7 years at December 31, 2013. The Company attributes the decrease in contractual maturity from December 31, 2013 to June 30, 2014 to its plan to continually shorten the maturity of the investment portfolio to reduce interest rate risk.  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 June 30, 2014, management believes that the securities portfolio has a forecasted weighted average life of approximately 4.8 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 5.4 years.
 
Average securities as a percentage of average interest-earning assets were 44.7% for the six month period ended June 30, 2014 and 46.8 % for the same period in 2013. At June 30, 2014, the U.S Government and Government agency securities and municipal bonds qualified as securities available to collateralize repurchase agreements and public funds. Securities pledged totaled $509.7 million at June 30, 2014 and $503.1 million at December 31, 2013. See Note 3 of the Notes to Consolidated Financial Statements for more information on investment securities.
  
Loans.
 
Average loans as a percentage of average interest-earning assets were 50.5% for the six month period ended June 30, 2014 and 47.6% for the same period in 2013. Net loans increased $35.0 million or 5.1% to $727.8 million from $692.8 million at December 31, 2013. As we have increased our loans to qualified small businesses, as a part of the SBLF program, our preferred dividend on our SBLF capital has decreased to $0.1 million for the second quarter of 2014 from $0.2 million for the second quarter in 2013. Year to date 2014 the Company has paid $0.2 million on the SBLF capital compared to $0.5 million for the same period in 2013.  The Company is at the contractual minimum dividend rate on the SBLF capital.  The Company expects to pay the contractual minimum dividend rate of 1.0% through December 31, 2015.  There are no significant concentrations of credit to any individual borrower. As of June 30, 2014, 71.2% of our loan portfolio was secured primarily or secondarily by real estate. The largest portion of our loan portfolio, at 45.9%, is non-farm non-residential loans secured by real estate.  Approximately 45% of the loan portfolio is based on a floating rate as of June 30, 2014.  74% of the loan portfolio is scheduled to mature within 5 years.
 
Net loans are reduced by the allowance for loan losses which totaled $8.4 million at June 30, 2014 and $10.4 million at December 31, 2013. Loan charge-offs totaled $2.8 million during the first six months of 2014 and $2.2 million during the same period in 2013. Recoveries totaled $0.2 million during the first six months of 2014 and $0.3 million during the first six months of 2013. 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.
 
 
26

Nonperforming Assets.
 
Nonperforming assets consist of loans on which interest is no longer accrued and real estate acquired through foreclosure (other real estate). The accrual of interest is discontinued on loans when management believes there is reasonable uncertainty about the full collection of principal and interest or when the loan is contractually past due 90 days or more and not fully secured. If the principal amount of the loan is adequately secured, then interest income on such loans is recognized only in periods in which actual payments are received.
 
The table below sets forth the amounts and categories of our nonperforming assets and restructured loans where the interest rate or other terms have been renegotiated at the dates indicated.
 
(in thousands)
June 30, 2014  
December 31, 2013
 
Nonaccrual loans:
       
Real Estate:
       
 Construction and land development
$
568
 
$
73
 
 Farmland
 
154
   
130
 
 1 - 4 family residential
 
4,839
   
4,248
 
 Multifamily
 
-
   
-
 
 Non-farm non-residential
 
6,370
   
7,539
 
Total Real Estate    11,931     11,990  
Non-Real Estate:
           
 Agricultural
 
392
   
526
 
 Commercial and industrial
 
1,874
   
1,946
 
 Consumer and other
   5    
23
 
Total Non-Real Estate    2,271     2,495  
Total nonaccrual loans
 
14,202
   
14,485
 
             
Loans 90 days and greater delinquent & accruing:
           
Real Estate:
           
 Construction and land development
 
-
   
-
 
 Farmland
 
-
   
-
 
 1 - 4 family residential
 
379
   
414
 
 Multifamily
 
-
   
-
 
 Non-farm non-residential
   -    
-
 
Total Real Estate    379     414  
Non-Real Estate:
           
 Agricultural
 
-
   
-
 
 Commercial and industrial
 
-
   
-
 
 Consumer and other
 
-
   
-
 
Total Non-Real Estate    -     -  
Total loans 90 days and greater delinquent & accruing
 
379
   
414
 
             
Total nonperforming loans
$
14,581
  $
14,899
 
             
Real Estate Owned:
           
Real Estate Loans:            
 Construction and land development
 
143
   
754
 
 Farmland
 
-
   
-
 
 1 - 4 family residential
 
450
   
1,803
 
 Multifamily
 
-
   
-
 
 Non-farm non-residential
 
267
   
800
 
Total Real Estate    860     3,357  
Non-Real Estate Loans:
           
 Agricultural
 
-
   
-
 
 Commercial and industrial
 
-
   
-
 
 Consumer and other
 
-
   
-
 
Total Non-Real Estate
 
-
   
-
 
Total Real Estate Owned    860     3,357  
             
Total nonperforming assets
$
15,441
 
$
18,256
 
             
Nonperforming assets to total loans    2.1 %   2.6 %
Nonperforming assets to total assets    1.05 %   1.27 %
 
 
27

 
(in thousands) June 30, 2014  
December 31, 2013
 
Restructured Loans:            
In Compliance with Modified Terms
$
3,006
 
$
3,006
 
Past Due 30 through 89 days and still accruing    -     -  
Past Due 90 days and greater and still accruing    -     -  
Nonaccrual    230     230  
Restructured Loans that subsequently defaulted    -     -  
Total Restructured Loans $  3,236   $ 3,236  
 
At June 30, 2014, nonperforming assets totaled $15.4 million compared to $18.3 million at December 31, 2013; a decrease of $2.8 million or 15.4%. Management has not identified additional information on any loans not already included in impaired loans or the nonperforming assets that indicates possible credit problems that could cause doubt as to the ability of borrowers to comply with the loan repayment terms in the future. Nonperforming assets consist of loans 90 days or greater delinquent and still accruing, nonaccrual loans, and other real estate.
 
At June 30, 2014 loans 90 days or greater delinquent and still accruing totaled $0.4 million; no material difference compared to the $0.4 million at December 31, 2013.
 
At June 30, 2014 nonaccrual loans totaled $14.2 million; a decrease of $0.3 million or 2.0% compared to nonaccrual loans of $14.5 million at December 31, 2013. Nonaccrual loans were concentrated in 4 credit relationships for a total of $6.3 million or 44.5% of nonaccrual loans at June 30, 2014.
 
Other real estate owned at June 30, 2014 totaled $0.9 million; a decrease of $2.5 million from $3.4 million at December 31, 2013.  The decrease in other real estate was concentrated in the sale of a large 1-4 family residential property and a commercial building.
 
 
28

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 anticipated loan losses as well as 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 nonperforming 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 its 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. The general component covers non-classified loans and special mention loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect the estimate of probable losses.
 
Provisions made pursuant to these processes totaled $0.7 million in the first six months of 2014 as compared to $1.7 million for the same period in 2013. The provisions made in the first six months of 2014 were taken to provide for current loan losses and to maintain the allowance proportionate to risks inherent in the loan portfolio. Total charge-offs were $2.8 million for first six months of 2014 as compared to $2.2 million for the same period in 2013.  Recoveries totaled $0.2 million during the first six months of 2014 and $0.3 million during the first six months of 2013. For more information, see Note 5 to Consolidated Financial Statements.

Comparing June 30, 2014 to June 30, 2013, the decline in allowance provision is attributed to improvement in the credit quality of the loan portfolio and to the fact that the impaired loan portfolio did not suffer additional declines in estimated fair value. The credit quality improvements were across most loan portfolio types with the largest improvement in non-farm non-residential loans, commercial and industrial loans, and construction and land development. 
 
The Company has charged off $2.8 million in loan balances during the first six months of 2014.  The charged-off loan balances were concentrated in 3 loan relationships which totaled $2.2 million or 78.6% of the total charged off amount. The charge offs were substantially provided for in prior periods as specific reserves for these loans.  The details of the charged off loans in excess of $0.4 million are as follows:
 
 
1.
The Company charged off $1.0 million for a business loan principally secured by land.  The loan had a balance of $1.4 million with a specific reserve of $1.0 million at December 31, 2013.  In the second quarter of 2014 a partial charge-off was recorded in the amount of the specific reserve to reduce the principal amount to the anticipated realizable amount from the liquidation of collateral.  The loan is in non-accrual with a current principal balance of $0.5 million at June 30, 2014.
2.
The Company charged off $0.6 million on a non-farm non-residential loan secured by a hotel.  The non-accrual loan had further deterioration in value which required the additional write down. The loan is in non-accrual with a current principal balance of $0.8 million at June 30, 2014.
3.
The Company charged off $0.6 million on a second non-farm non-residential loan secured by a hotel. The non-accrual loan had further deterioration in value which required the additional write down. The loan is in non-accrual with a current principal balance of $2.9 million at June 30, 2014.
 
The remaining $0.6 million of charge-offs for the first six months of 2014 were comprised of smaller loans and overdrawn deposit accounts.
 
 
29

 
All accrued but uncollected interest related to a loan is deducted from income in the period the loan is placed on nonaccrual. During the period a loan is in nonaccrual status, any cash receipts are first applied to the principal balance. Once the principal balance has been fully recovered, any residual amounts are applied to expenses resulting from the collection of the payment and to the recovery of any reversed interest income and interest income that would have been due had the loan not been nonaccrual. As of June 30, 2014 and December 31, 2013 the Company had nonaccrual loans totaling $14.2 million and $14.5 million, respectively. The allowance for loan losses at June 30, 2014 was $8.4 million or 1.1% of total loans and 57.7% of nonperforming loans. See Note 4 and 5 of the Notes to Consolidated Financial Statements for more information on loans and the allowance for loan losses.

Other information relating to loans, the allowance for loan losses and other pertinent statistics follows.
 
(in thousands)
June 30, 2014   June 30, 2013  
Loans:            
Average outstanding balance
$
 711,904  
$
648,344
 
Balance at end of period
$
736,220
 
$
685,857
 
             
Allowance for Loan Losses:
           
Balance at beginning of year
$
10,355
 
$
10,342
 
Charge-offs
 
(2,786
)
 
(2,165
)
Recoveries
 
189
   
296
 
Provision    657     1,704  
Balance at end of period
$
8,415
 
$
10,177
 
 
 
30

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. In this regard, we regularly assess our funding needs, deposit pricing and interest rate outlooks. From December 31, 2013 to June 30, 2014, total deposits increased $25.0 million, or 1.9%, to $1.3 billion at June 30, 2014. Noninterest-bearing demand deposits decreased $2.4 million from December 31, 2013 to June 30, 2014. Interest-bearing demand deposits stayed relatively constant when comparing June 30, 2014 to December 31, 2013. Time deposits increased $23.6 million, or 3.7% to $665.6 million at June 30, 2014, compared to $642.0 million at December 31, 2013.  The majority of the increase in time deposits was associated with a new public fund deposit.
 
At June 30, 2014, public fund deposits totaled $545.3 million compared to $503.5 million at December 31, 2013. The Company has developed a program for the development and management of public fund deposits. Since 2007, the Company has maintained public fund deposits in excess of $175.0 million. These deposits are from local government entities such as school districts, hospital districts, sheriff departments and other municipalities. Several of these accounts are under contracts with terms up to three years. Public funds deposit accounts are collateralized by FHLB letters of credit and by eligible Government and Government agency securities such as those issued by the FHLB, FFCB, FNMA, and FHLMC. Management believes that public funds provide a low cost and stable source of funding for the Company.
 
As of June 30, 2014, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $468.3 million. At June 30, 2014, approximately $243.9 million of the Company's certificates of deposit had a remaining term greater than one year.
 
As we seek to strengthen our net interest margin and improve our earnings, attracting core noninterest-bearing deposits will remain a primary emphasis. Management will continue to evaluate and update our product mix in its efforts to attract additional core customers. We currently offer a number of noninterest-bearing deposit products that are competitively priced and designed to attract and retain customers with primary emphasis on core deposits. We have also offered several different time deposit promotions in an effort to increase our core deposits and to increase liquidity.
 
The following table compares deposit categories for the periods indicated.
 
   Average Balance    Average Balance   Increase (Decrease)  
(in thousands except for %)
Six Months Ended June 30, 2014  
Twelve Months Ended December 31, 2013
  Amount  
Percent
 
Noninterest-bearing demand
$
193,886
 
$
196,589
 
$
(2,703
 -1.4
%
 
Interest-bearing demand
 
397,409
   
334,573
   
62,836
   18.8
%
 
Savings
 
68,109
   
64,639
   
3,470
   5.4
%
 
Time
 
642,832
   
650,540
   
(7,708
 -1.2
%
 
Total deposits
$
1,302,236
 
$
1,252,612
 
$
49,624
  4.0
%
 
 
The following table sets forth the distribution of our time deposit accounts.
 
(in thousands)
June 30, 2014  
Time deposits of less than $100,000 $ 197,276  
Time deposits of $100,000 through $250,000    159,710  
Time deposits of more than $250,000    308,606  
Total Time Deposits $  665,592  
 
The following table sets forth public funds as a percent of total deposits.
 
(in thousands except for %)
June 30, 2014   December 31, 2013   December 31, 2012   December 31, 2011   December 31, 2010  
Total Public Funds $  545,281     $ 503,495     $ 470,498     $ 431,905     $ 356,153    
Total Deposits $  1,328,081     $ 1,303,099     $ 1,252,612     $ 1,207,302     $ 1,007,383    
Total Public Funds as a percent of Total Deposits    41.1 %     38.6 %     37.6 %     35.8 %     35.4 %  
 
 
31

Borrowings.
 
The Company 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. At June 30, 2014, short-term borrowings totaled $1.8 million which is a decrease of $4.0 million from December 31, 2013. Short-term borrowings consisted of a line of credit totaling $1.8 million. The Company no longer maintained overnight repurchase agreements as of June 30, 2014.  The Company had long-term borrowings totaling $1.8 million as of June 30, 2014 and $0.5 million at December 31, 2013.  The Company increased long-term borrowings for investment purposes.
 
The average amount of total short-term borrowings as of June 30, 2014 totaled $8.0 million, compared to $15.2 million as of June 30, 2013. At June 30, 2014, the Company had $100.0 million in Federal Home Loan Bank letters of credit outstanding obtained solely for collateralizing public deposits.
 
Equity.
 
Stockholders’ equity provides a source of permanent funding, allows for future growth and the ability to absorb unforeseen adverse developments. Total equity increased to $135.2 million at June 30, 2014 from $123.4 million at December 31, 2013. The increase in stockholders' equity was principally the result of changes in the other comprehensive loss for the six month period ended June 30, 2014 of $8.6 million. The value of the Company's securities portfolio increased during the last six months and the unrealized loss on securities decreased from December 31, 2013 to  June 30, 2014.  Market interest rates declined during the first six months of 2014 which led to an increase in the value of the Company's fixed rate securities.  Net income for the first six months of 2014 was $5.5 million.  A total of $2.0 million in common dividends were paid.  Preferred dividends paid were $0.2 million.  Retained earnings increased by $3.2 million from December 31, 2013 to June 30, 2014.

Results of Operations for the Second Quarter and Six Months Ended June 30, 2014 and 2013
 
Net Income.

Net income for the quarter ending June 30, 2014 was $2.7 million, an increase of $0.6 million from $2.1 million for the quarter ending June 30, 2013.  Net income for the six months ended June 30, 2014 was $5.5 million, an increase of $1.2 million or 29.2% from $4.2 million for the six months ended June 30, 2013. For the quarter ending June 30, 2014, the Company had net income available to common shareholders of $2.6 million, an increase of $0.6 million from the same quarter in 2013 net income available to common shareholders of $1.9 million. Net income available to common shareholders for the six months ended June 30, 2014 was $5.3 million which is an increase of $1.5 million from $3.7 million for the same period in 2013. The increase in net income for 2014 was primarily the result of increased loan interest income, lower interest expense and lower provision expenses.  Net gains on securities for the second quarter of 2014 and 2013 were $0.1 million and $0.8 million, respectively. Net gains on securities for the first six months of 2014 and 2013 were $0.2 million and $1.5 million, respectively.  Earnings per common share for the second quarter ended June 30, 2014 was $0.41 per common share, an increase of 32.3% or $0.10 per common share from $0.31 per common share for the second quarter ended June 30, 2013. Earnings per common share for the six months ended June 30, 2014 was $0.84 per common share, an increase of 42.4% or $0.25 per common share from $0.59 per common share for the six months ended June 30, 2013.

Net Interest Income.
 
Net interest income is the largest component of our earnings, and is calculated by subtracting the cost of interest-bearing liabilities from the income earned on interest-earning assets. This represents the earnings from our primary business of gathering deposits, and making loans and investments. Our long-term objective is to manage this income to generate optimal income that balances interest rate risk, credit risk, and liquidity risks.
 
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, which are generally impacted by inflation 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 varying interest rate environment in recent years and our interest sensitivity position is discussed below.
 
Net interest income in the second quarter of 2014 was $11.0 million compared to $9.6 million for the second quarter of 2013. Net interest income for the first six months of 2014 and 2013 was $21.5 million and $19.2 million, respectively.  Interest from loans represents the largest portion of interest income from the Company's interest-earning assets, and 45.0% of our total loans are floating rate loans which are primarily tied to the prime lending rate or the London Inter-Bank Offered Rate (LIBOR). Of the $332.5 million of loans that have floating rates, $209.5 million are currently at their floor rate.  Interest income on loans for the six months ending June 30, 2014 was $19.5 million, an increase of $1.2 million compared to the six months ending June 30, 2013 total of $18.3 million.  The reason for this increase in loan interest income was primarily due to an increase in the average balance of loans.  The average balance of loans for the six months ending June 30, 2014 was $711.9 million compared to $648.3 million for the six months ending June 30, 2013.   Interest income on loans for the three months ending June 30, 2014 was $10.0 million, an increase of $0.8 million compared to the three months ending June 30, 2013 total loan interest income of $9.2 million.  The average loan balance for the three month period ending June 30, 2014 was $720.0 million compared to the three month period ending June 30, 2013 average balance of $666.5 million. 
 
The increase in net interest income for the three and six months ended June 30, 2014 was primarily due to the increase in the average yield of our total interest-earning assets and a decrease in the average yield of our total interest bearing liabilities.  For the six months ending June 30, 2014, the average balance of total interest-earning assets increased by $47.5 million to $1.41 billion compared to $1.36 billion as of June 30, 2013, while the average yield on our total interest-earning assets increased by 7 basis points to 3.75% compared to 3.68% as of June 30, 2013.  Although the average balance of total interest-bearing liabilities increased to $1.12 billion as of June 30, 2014 compared to $1.06 billion as of June 30, 2013, the average yield of our total interest-bearing liabilities decreased by 24 basis points to 0.85% as of June 30, 2014 compared to 1.09% as of June 30, 2013.  As a result, our net interest rate spread increased 31 basis points to 2.90% for the six months ending June 30, 2014 from 2.59% for the six months ending June 30, 2013, and our net interest margin increased 25 basis points to 3.08% for the six months ending June 30, 2014 from 2.83% for the six months ending June 30, 2013.  For the three months ending June 30, 2014, the average balance of total interest-earning assets increased by $50.0 million to $1.41 billion compared to $1.36 billion as of June 30, 2013, while the average yield on our total interest-earning assets increased by 11 basis points to 3.79% compared to 3.68% as of June 30, 2013. Although the average balance of total interest-bearing liabilities increased to $1.11 billion as of June 30, 2014 compared to $1.05 billion as of June 30, 2013, the average yield of our total interest-bearing liabilities decreased by 25 basis points to 0.84% as of June 30, 2014 compared to 1.09% as of June 30, 2013. As a result, our net interest rate spread increased 35 basis points to 2.95% for the three months ending June 30, 2014 from 2.60% for the three months ending June 30, 2013, and our net interest margin increased 29 basis points to 3.13% for the three months ending June 30, 2014 from 2.84% for the three months ending June 30, 2013.  The lower cost of our interest-bearing liabilities reflects a lower cost of funds from the Company repricing deposits.
 
 
32

 
The Company attributes the improvement in the net interest margin to the continued transition from securities into loans and the continued reduction in the Company's cost of funds.
 
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.
 
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.
 
  Three Months Ended June 30, 2014   Three Months Ended June 30, 2013  
(in thousands except for %)
Average Balance   Interest   Yield/Rate   Average Balance   Interest   Yield/Rate  
Assets
                                   
Interest-earning assets:
                                   
Interest-earning deposits with banks
$
72,556  
$
49
  0.27
%
 
$
67,782
 
$
51
  0.30
%
 
Securities (including FHLB stock)
  615,903     3,283   2.14
%
   
622,668
   
3,236
  2.08
%
 
Federal funds sold
  282    
-
  0.00
%
   
1,699
   
-
  0.00
%
 
Loans, net of unearned income
  719,992     9,977   5.56
%
   
666,544
   
9,189
 
5.53
%
 
Total interest-earning assets
 
1,408,733  
$
13,309   3.79
%
 
 
1,358,693
 
$
12,476
  3.68
%
 
                                     
Noninterest-earning assets:
                                   
Cash and due from banks
 
9,325              
 
9,037
             
Premises and equipment, net
  19,535                
19,549
             
Other assets
  4,531                
7,628
             
Total Assets
$
1,442,124              
$
1,394,908
             
                                     
Liabilities and Stockholders' Equity
                                   
Interest-bearing liabilities:
                                   
Demand deposits
$
389,446  
$
332   0.34
%
 
$
321,839
 
$
319
  0.40
%
 
Savings deposits
  68,102    
8
  0.05
%
   
64,339
   
11
  0.07
%
 
Time deposits
  647,457     1,958   1.21
%
   
650,221
   
2,485
  1.53
%
 
Borrowings
  4,547     28   2.47
%
   
16,513
   
38
  0.92
%
 
Total interest-bearing liabilities
 
1,109,552  
$
2,326   0.84
%
 
 
1,052,912
 
$
2,853
  1.09
%
 
                                     
Noninterest-bearing liabilities:
                                   
Demand deposits
 
197,169              
 
201,310
             
Other
  2,041                
5,959
             
Total Liabilities
 
1,308,762              
 
1,260,181
             
                                     
Stockholders' equity
  133,362                
134,727
             
Total Liabilities and Stockholders' Equity
$
1,442,124              
$
1,394,908
             
Net interest income
     
$
10,983              
$
9,623
       
                                     
Net interest rate spread (1)
            2.95
%
              2.60
%
 
Net interest-earning assets (2)
$
299,181              
$
305,781
             
Net interest margin (3)
            3.13
%
              2.84
%
 
                                     
Average interest-earning assets to interest-bearing liabilities
            126.96
%
              129.04
%
 
                                     
(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.
 
 
33

 
  Six Months Ended June 30, 2014   Six Months Ended June 30, 2013  
(in thousands except for %)
Average Balance   Interest   Yield/Rate   Average Balance   Interest   Yield/Rate  
Assets
                                   
Interest-earning assets:
                                   
Interest-earning deposits with banks
$
 67,283  
$
81
   0.24
%
 
$
73,166
 
$
91
  0.25
%
 
Securities (including FHLB stock)
   629,592      6,624    2.12
%
   
637,824
   
6,604
  2.08
%
 
Federal funds sold
   334    
-
   0.00
%
   
2,311
   
1
  0.09
%
 
Loans, net of unearned income
   711,904      19,485    5.52
%
   
648,344
   
18,285
 
5.66
%
 
Total interest-earning assets
 
 1,409,113  
$
 26,190    3.75
%
 
 
1,361,645
 
$
24,981
  3.68
%
 
                                     
Noninterest-earning assets:
                                   
Cash and due from banks
 
 9,471              
 
9,451
             
Premises and equipment, net
   19,542                
19,543
             
Other assets
   4,530                
7,273
             
Total Assets
$
 1,442,657              
$
1,397,912
             
                                     
Liabilities and Stockholders' Equity
                                   
Interest-bearing liabilities:
                                   
Demand deposits
$
 397,409  
$
 683    0.35
%
 
$
331,453
 
$
682
  0.41
%
 
Savings deposits
   68,109    
16
   0.05
%
   
64,119
   
25
  0.08
%
 
Time deposits
   642,832      3,925    1.23
%
   
650,389
   
4,991
  1.54
%
 
Borrowings
   8,767      58    1.33
%
   
16,152
   
75
  0.93
%
 
Total interest-bearing liabilities
 
 1,117,117  
$
 4,682    0.85
%
 
 
1,062,113
 
$
5,773
  1.09
%
 
                                     
Noninterest-bearing liabilities:
                                   
Demand deposits
 
 193,886              
 
195,603
             
Other
   838                
5,530
             
Total Liabilities
 
 1,311,841              
 
1,263,246
             
                                     
Stockholders' equity
   130,816                
134,666
             
Total Liabilities and Stockholders' Equity
$
 1,442,657              
$
1,397,912
             
Net interest income
     
$
 21,508              
$
19,208
       
                                     
Net interest rate spread (1)
             2.90
%
              2.59
%
 
Net interest-earning assets (2)
$
 291,996              
$
299,532
             
Net interest margin (3)
             3.08
%
              2.83
%
 
                                     
Average interest-earning assets to interest-bearing liabilities
             126.14
%
              128.20
%
 
                                     
(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.
 
 
34

Provision for Loan Losses.
 
The provision for loan losses was $0.4 million and $0.8 million for the second quarter of 2014 and 2013, respectively. For the six months ending June 30, 2014, the provision for loan loss was $0.7 million, a decrease from $1.7 million for the first six months of 2013. The allowance for loan losses at June 30, 2014 was $8.4 million, compared to $10.3 million at December 31, 2013, and was 1.1% and 1.5% of total loans, respectively. We believe that the allowance is adequate to cover losses in the loan portfolio given the current economic conditions, expected net charge-offs and nonperforming asset levels.
 
Noninterest Income.
 
For the three months ended June 30, 2014 and 2013, noninterest income totaled $1.5 million and $2.3 million, respectively.  Service charges, commissions and fees totaled $1.1 for the three months ended June 30, 2014 and $1.2 million for the same period in 2013.  Net securities gains were $0.1 million for the three months ended June 30, 2014 and $0.8 million for the same period in 2013.  Other noninterest income was $0.4 million for the three months ended June 30, 2014 and $0.3 million for the same period in 2013.  Noninterest income totaled $3.1 million for the six months ended June 30, 2014; a decrease of $1.4 when compared to $4.5 for the six months ended June 30, 2013.  The majority of the decrease was due to fewer gains on securities.  Service charges, commissions and fees totaled $2.2 million for the six months ended June 30, 2014 and $2.3 million for the same period in 2013.  Net securities gains were $0.2 million for the first six months of 2014 and $1.5 million for the same period in 2013.  Other noninterest income increased by $0.1 million to $0.8 million in the first six months of 2014 compared to $0.7 million for the same period in 2013.
 

Noninterest Expense.
 
Noninterest expense includes salaries and employee benefits, occupancy and equipment expense and other types of expenses.  Noninterest expense totaled $8.1 million in the second quarter of 2014 and $7.8 million in 2013. Noninterest expense increased from $15.5 million for the first six months of 2013 to $15.7 million for the first six months of 2014. Salaries and benefits totaled $3.9 million for the second quarter of 2014 compared to $3.6 million for the second quarter of 2013. For the first six months of 2014 and 2013, salaries and benefits totaled $7.8 million and $7.2 million, respectively. Occupancy and equipment expense totaled $1.0 million for the second quarter of 2014 and $1.0 million for the second quarter of 2013. Occupancy and equipment expense totaled $2.0 million for the first six months of 2014 and $2.0 million for the same period in 2013. Other noninterest expense totaled $3.1 million in the second quarter of 2014, compared to $3.2 million the second quarter of 2013.  Other noninterest expense decreased by $0.5 million to $5.9 million for the six months ended June 30, 2014 from $6.4 million for the six months ended June 30, 2013.
  
The following is a summary of the significant components of other noninterest expense:
 
  Three Months Ended June 30,   Six Months Ended June 30,  
(in thousands)
2014
 
2013
  2014   2013  
Other noninterest expense:
                   
Legal and professional fees
$
289
 
$
565
  $ 745   $ 1,087  
Data processing
   274    
319
     548     651  
Marketing and public relations
 
240
   
233
     491     477  
Taxes - sales, capital, and franchise
   174    
177
     346     324  
Operating supplies
 
91
   
128
     192     287  
Travel and lodging
   163    
151
     297     296  
Net costs from other real estate and repossessions
  701     163     885     431  
Regulatory assessment    251     483      612     959  
Other
 
956
   
990
    1,824     1,896  
Total other expense
$
3,139
 
$
3,209
  $  5,940   $ 6,408  
 
Income Taxes.
 
The provision for income taxes was $1.3 million and $1.1 million for the quarters ended June 30, 2014 and 2013.  The provision for the six months ended June 30, 2014 and 2013 was $2.8 million and $2.3 million, respectively. The Company's statutory tax rate was 34.0% which was unchanged from the second quarter of 2013.
 
 
35

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 the Company 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 June 30, 2014 totaled $115.2 million. At June 30, 2014, time deposits maturing within one year or less totaled $420.9 million. The Company’s held to maturity ("HTM") portfolio at June 30, 2014 was $145.0 million or 21.5% of the investment portfolio compared to $150.3 million or 23.6% at December 31, 2013. The securities in the held to maturity 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 June 30, 2014. The HTM portfolio had a forecasted weighted average life of approximately 5.4 years based on current interest rates. Management regularly monitors the size and composition of the HTM portfolio to evaluate its effect on the Company’s liquidity. The Company’s available for sale portfolio was $529.8 million or 78.5% of the investment portfolio as of June 30, 2014. The majority of the AFS portfolio was comprised of U.S. Treasuries, U.S. Government Agencies, municipal bonds and investment grade corporate bonds. Management believes these securities are readily marketable and enhance the Company’s liquidity.
 
The Company maintained a net borrowing capacity at the Federal Home Loan Bank totaling $198.4 million and $109.6 million at June 30, 2014 and December 31, 2013, respectively. The Company 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 $0.7 million as of June 30, 2014. Management believes there is sufficient liquidity to satisfy current operating needs.
 
Capital Resources.
 
The Company's capital position is reflected in stockholders’ 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.
 
Stockholders’ equity provides a source of permanent funding, allows for future growth and the ability to absorb unforeseen adverse developments. Total equity increased to $135.2 million at June 30, 2014 from $123.4 million at December 31, 2013. The increase in stockholders' equity was the result of the increase in other comprehensive income totaling $8.6 million. The earnings are reduced by common dividends of $2.0 million and preferred dividends of $0.2 million for a total addition to the Company's retained earnings of $3.2 million.

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. 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. All bank holding companies and 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.
 
At June 30, 2014, we satisfied the minimum regulatory capital requirements and were well capitalized within the meaning of federal regulatory requirements.
 
 
 
"Well Capitalized Minimums"
 
As of June 30, 2014
  As of December 31, 2013  
Tier 1 Leverage Ratio
                 
Consolidated
5.00
%
 
9.14
%
  9.14 %  
Bank
5.00
%
 
9.14
%
  9.17 %  
                   
Tier 1 Risk-based Capital Ratio
                 
Consolidated
6.00
%
  13.48
%
  13.61 %  
Bank
6.00
%
  13.51
%
  13.66 %  
                   
Total Risk-based Capital Ratio
                 
Consolidated
10.00
%
 
14.34
%
  14.71 %  
Bank
10.00
%
 
14.37
%
  14.76 %  
 
 
At June 30, 2014, we satisfied the minimum regulatory capital requirements and were well capitalized within the meaning of federal regulatory requirements.
 
 
36

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
 
Asset/Liability Management and Market Risk
 
 
Asset/Liability Management.

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. 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. Our Board of Directors 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 members of Management and meets as needed to review our asset liability policies and interest rate risk position. The Board Investment Committee is comprised of board members and meets monthly. Senior Management makes a monthly report to the Board Investment Committee.
 
 
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.
 
 
The need for interest sensitivity gap management is most critical in times of rapid changes in overall interest rates. Because of the significant impact on net interest margin from mismatches in repricing opportunities, the asset-liability mix is monitored periodically depending upon Management’s assessment of current business conditions and the interest rate outlook. Exposure to interest rate fluctuations is maintained within prudent levels by the use of varying investment strategies.
 
 
 
 
 
June 30, 2014
 
 
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) $
362,165
 
$
35,338
 
$
397,503
 
$
338,797
 
$
736,300  
Securities (including FHLB stock)
 
26,548
   
10,056
   
36,604
   
638,113
   
674,717
 
Federal Funds Sold
  268    
-
   
268
   
-
   
268
 
Other earning assets
 
20,522
   
-
   
20,522
   
-
   
20,522
 
Total earning assets
$
409,503
 
$
45,394
 
$
454,897
 
$
976,910
 
$
1,431,807
 
                               
Source of Funds:
                             
Interest-bearing accounts:
                             
Demand deposits
$
391,507
 
$
-
 
$
391,507
 
$
-
 
$
391,507
 
Savings deposits
 
69,052
   
-
   
69,052
   
-
   
69,052
 
Time deposits
 
162,429
   
258,477
   
420,906
   
244,686
   
665,592
 
Short-term borrowings
 
1,800
   
-
   
1,800
   
-
   
1,800
 
Long-term borrowings
 
1,755
   
-
   
1,755
   
-
   
1,755
 
Noninterest-bearing, net
 
-
   
-
   
-
   
302,101
   
302,101
 
Total source of funds
$
626,543
 
$
258,477
 
$
885,020
 
$
547,482
 
$
1,431,807
 
                               
Period gap
$
(217,040
)
$
(213,083
)
$
(430,123
)
$
429,428
       
Cumulative gap
$
(217,040
)
$
(430,123
)
$
(430,123
)
$
-
       
                               
Cumulative gap as a percent of earning assets   -15.2 %   -30.0 %   -30.0 %            
 
 
37

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. The Company 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 the Company'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, the Company's internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The Company is subject to various other legal proceedings in the normal course of business and otherwise. It is our belief that the ultimate resolution of such other claims will not have a material adverse effect on the Company's financial position or results of operations.
 
Item 1A. Risk Factors
 
There have been no material changes in the risk factors disclosed by the Company in its Annual Report on Form 10-K with the Securities and Exchange Commission.
 
Item 6. Exhibits
 
The following exhibits are either field 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.
   
 
38

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FIRST GUARANTY BANCSHARES, INC.
     
     
Date: August 14, 2014
 
By: /s/ Alton B. Lewis
   
Alton B. Lewis
   
Principal Executive Officer
     
     
Date: August 14, 2014
 
By: /s/ Eric J. Dosch
   
Eric J. Dosch
   
Principal Financial Officer
   
Secretary and Treasurer
 
39