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First Guaranty Bancshares, Inc. - Quarter Report: 2012 September (Form 10-Q)

form10q93012.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 September 30, 2012
 
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 November 9, 2012 the registrant had 6,291,332 shares of $1 par value common stock outstanding.
 
 

 
Table of Contents
 
 
   
Page
Part I.
Financial Information
 
     
Item 1.
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
23
     
Item 3.
34
     
Item 4.
36
     
Part II.
Other Information
36
     
Item 1.
36
     
Item 1A.
36
     
Item 2.
36
   
Signatures
37
 
 
2

PART I.   FINANCIAL INFORMATION
 
Item 1.   Consolidated Financial
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS (unaudited)
 
   
(in thousands, except share data)
September 30, 2012
 
December 31, 2011
 
Assets
       
Cash and cash equivalents:
       
  Cash and due from banks
$
71,942  
$
43,810  
  Interest-earning demand deposits with banks
 
20
    2  
  Federal funds sold
  4,931     68,630  
Cash and cash equivalents
  76,893     112,442  
   
 
       
Interest-earning time deposits with banks   754     -  
             
Investment securities:
           
  Available for sale, at fair value
  619,762     520,497  
  Held to maturity, at cost (estimated fair value of $25,222 and $113,197, respectively)
  24,976     112,666  
Investment securities
  644,738     633,163  
             
Federal Home Loan Bank stock, at cost
  1,143     643  
Loans held for sale
  80     -  
             
Loans, net of unearned income
  606,162     573,100  
Less: allowance for loan losses
  9,507     8,879  
Net loans
  596,655     564,221  
             
Premises and equipment, net
  19,664     19,921  
Goodwill
 
1,999
   
1,999
 
Intangible assets, net
  2,511     2,811  
Other real estate, net
  4,435     5,709  
Accrued interest receivable
  6,895     8,128  
Other assets
  5,467     4,829  
Total Assets
$
1,361,234  
$
1,353,866  
             
Liabilities and Stockholders' Equity
           
Deposits:
           
  Noninterest-bearing demand
 
192,282     167,925  
  Interest-bearing demand
  297,579     289,408  
  Savings
  60,135     57,452  
  Time
  656,174     692,517  
Total deposits
  1,206,170     1,207,302  
             
Short-term borrowings
  11,774     12,223  
Accrued interest payable
  3,135     3,509  
Long-term borrowing   1,250     3,200  
Other liabilities
  4,449     1,030  
Total Liabilities
  1,226,778     1,227,264  
             
Stockholders' Equity
           
Preferred stock:
           
  Series C - $1,000 par value - authorized 39,435 shares; issued and outstanding 39,435 shares   39,435     39,435  
Common stock:
           
  $1 par value - authorized 100,600,000 shares; issued 6,294,227[*]
  6,294     6,294  
Surplus
  39,387     39,387  
Treasury stock, at cost, 2,895 and 0 shares, respectively   (54 )    -  
Retained earnings
  41,560     37,019  
Accumulated other comprehensive income (loss)
  7,834
 
  4,467  
Total Stockholders' Equity
  134,456     126,602  
Total Liabilities and Stockholders' Equity
$
1,361,234  
$
1,353,866  
See Notes to the Consolidated Financial Statements.
[*] 2011 common share amounts have been retroactively adjusted to reflect the ten percent stock dividend paid February 24, 2012 to stockholders of record as of February 17, 2012
 
 
3

 
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
 
   
  Nine Months Ended September 30,   Three Months Ended September 30,  
(in thousands, except share data) 2012  
2011
  2012  
2011
 
Interest Income:
       
  Loans (including fees)
$
26,537   $
25,930
 
$
8,903   $
9,230
 
  Loans held for sale
  1    
8
    -    
2
 
  Deposits with other banks
  56    
35
    20    
13
 
  Securities (including FHLB stock)
  15,110    
14,504
    4,172    
4,707
 
  Federal funds sold
  10    
14
    2    
5
 
Total Interest Income
  41,714    
40,491
    13,097    
13,957
 
                         
Interest Expense:
                       
  Demand deposits
  1,050    
644
    349    
239
 
  Savings deposits
  40    
37
    14    
15
 
  Time deposits
  8,905    
10,637
    2,782    
3,607
 
  Borrowings
  98    
50
    25    
36
 
Total Interest Expense
  10,093    
11,368
    3,170    
3,897
 
                         
Net Interest Income
  31,621    
29,123
    9,927    
10,060
 
Less: Provision for loan losses
  3,014    
6,855
    909    
3,504
 
Net Interest Income after Provision for Loan Losses
  28,607    
22,268
    9,018    
6,556
 
                         
Noninterest Income:
                       
  Service charges, commissions and fees
  3,565    
3,352
    1,180    
1,235
 
  Net gains on securities
  3,230    
3,102
    1,747    
885
 
  Loss on securities impairment
  -    
(97
)
  -    
-
 
  Net gains (losses) on sale of loans
  (47 )  
106
    (20  
10
 
  Gain on acquisition   -     1,391     -     1,391  
  Other
  1,234    
1,081
    424    
443
 
Total Noninterest Income
  7,982    
8,935
    3,331    
3,964
 
                         
Noninterest Expense:
                       
  Salaries and employee benefits
  10,125    
9,363
    3,394    
3,380
 
  Occupancy and equipment expense
  2,818    
2,552
    963    
942
 
  Other
  9,995    
9,263
    3,454    
3,533
 
Total Noninterest Expense
  22,938    
21,178
    7,811    
7,855
 
                         
Income Before Income Taxes
  13,651    
10,025
    4,538    
2,665
 
Less: Provision for income taxes
  4,603    
3,071
    1,505    
500
 
Net Income
  9,048    
6,954
    3,033    
2,165
 
Preferred Stock Dividends
  (1,479 )  
(1,433
  (493 )  
(768
)
Income Available to Common Shareholders
$
7,569   $
5,521
 
$
2,540   $
1,397
 
                         
Per Common Share:[*]
                       
Earnings
$
1.20   $ 0.89  
$
0.40   $ 0.22  
Cash dividends paid
$
0.48   $ 0.44  
$
0.16   $ 0.15  
                         
Weighted Average Common Shares Outstanding[*]
  6,293,367     6,175,802     6,292,479     6,294,227  
 See Notes to Consolidated Financial Statements
[*] 2011 common share amounts have been retroactively adjusted to reflect the ten percent stock dividend paid February 24, 2012 to stockholders of record as of February 17, 2012
 
 
 
4

 
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY  
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)  
   
  Series A   Series B   Series C                   Accumulated      
  Preferred   Preferred   Preferred   Common               Other      
  Stock   Stock   Stock   Stock       Treasury   Retained   Comprehensive      
(in thousands, except per share data) $1,000 Par   $1,000 Par   $1,000 Par   $1 Par[*]   Surplus   Stock   Earnings   Income/(Loss)   Total  
Balance December 31, 2010
$
19,859
 
$
1,116
  $ -   $
6,116
 
$
36,240   $
-
 
$
34,866
 
$
(259
)
$
97,938
 
Net income
 
-
   
-
    -    
-
         
-
   
6,954
   
-
   
6,954
 
Change in unrealized loss on AFS securities, net of reclassification adjustments and taxes
 
-
   
-
    -    
-
         
-
   
-
   
4,091
   
4,091
 
   Total Comprehensive Income
 
-
   
-
         
-
         
-
   
-
   
-
   
11,045
 
Common stock issued in acquisition, with retrospective stock dividend adjustment, 178,619 shares[*]   -     -     -     178     3,147     -     (295 )   -     3,030  
Preferred stock issued, Series C   -     -     39,435     -     -     -     -     -     39,435  
Cash dividends on common stock ($0.44 per share) 
 
-
   
-
    -    
-
         
-
   
(2,695
)
 
-
   
(2,695
)
Preferred stock repurchase, Series A & B   (20,030 )   (1,098
)
  -     -     -     -     -     -     (21,128
)
Preferred stock dividends, amortization and accretion
 
171
   
(18
)
  -    
-
    -    
-
   
(1,433
)
 
-
   
(1,280
)
Balance September 30, 2011 (unaudited)
$
-
 
$
-
 
$ 39,435   $
6,294
 
$
39,387   $
-
 
$
37,397
 
$
3,832
 
$
126,345
 
                                                       
Balance December 31, 2011
$
-
 
$
-
 
$ 39,435   $
6,294
 
$
39,387
  $
-
 
$
37,019
 
$
4,467
 
 $
126,602
 
Net Income   -     -     -     -     -     -     9,048     -     9,048  
Change in unrealized gain on AFS securities, net of reclassification adjustments and taxes
 
-
   
-
    -    
-
    -    
-
   
-
   
3,367
 
 
3,367
 
   Total Comprehensive Income
 
-
   
-
    -    
-
    -    
-
   
-
   
-
   
12,415
 
Treasury shares purchased, at cost, 2,895 shares   -     -     -     -     -     (54
)
  -     -     (54
)
Cash dividends on common stock ($0.48 per share)
 
-
   
-
    -    
-
    -    
-
   
  (3,028
)
 
-
   
(3,028
)
Preferred stock dividends
 
-
   
-
    -    
-
    -    
-
   
  (1,479
)
 
-
   
(1,479
)
Balance September 30, 2012 (unaudited)
$
-
 
$
-
 
$ 39,435   $
6,294
 
$
39,387
  $
(54
)
$
41,560
 
$
7,834
 
 $
134,456
 
See Notes to Consolidated Financial Statements
[*] 2011 common share amounts have been retroactively adjusted to reflect the ten percent stock dividend paid February 24, 2012 to stockholders of record as of February 17, 2012
 
 
 
5

 
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
 
Nine Months Ended September 30,
 
(in thousands)
2012
 
2011
 
Cash Flows From Operating Activities
       
Net income
$
9,048
 
$
6,954
 
Adjustments to reconcile net income to net cash provided by operating activities:
           
Provision for loan losses
 
3,014
   
6,855
 
Depreciation and amortization
 
1,561
   
1,240
 
Amortization/(accretion) of investments
 
1,419
   
703
 
Gain on acquisition   -     (1,391
)
Net gains on securities
 
(3,230
 
(3,102
)
Net losses (gains) on sale of assets
 
138
 
 
(112
)
Other than temporary impairment charge on securities
 
-
   
97
 
ORE writedowns and losses on disposition
 
937
   
287
 
FHLB stock dividends
 
 (1
 
 (3
)
Net increase in loans held for sale
 
(80
)
 
(156
)
Change in other assets and liabilities, net
 
1,809
   
3,518
 
Net Cash Provided By Operating Activities
 
14,615
   
14,890
 
             
Cash Flows From Investing Activities
           
Funds invested in certificates of deposit   (747   -  
Proceeds from maturities and calls of HTM securities
 
128,640
   
151,474
 
Proceeds from maturities, calls and sales of AFS securities
 
621,340
   
369,196
 
Funds invested in HTM securities
 
(40,901
 
(165,268
)
Funds invested in AFS securities
 
(713,748
)
 
(442,166
)
Proceeds from sale/redemption of Federal Home Loan Bank stock
 
3,441
   
1,796
 
Funds invested in Federal Home Loan Bank stock
 
(3,940
)
 
(1,440
)
Net (increase) decrease in loans
 
(39,666
 
19,875
 
Purchase of premises and equipment
 
(1,214
 
(1,812
)
Proceeds from sales of premises and equipment   168     -  
Proceeds from sales of other real estate owned
 
4,555
   
445
 
Cash received in excess of cash paid in acquisition   -     4,992  
Net Cash Used In Investing Activities
 
(42,072
 
(62,908
)
             
Cash Flows From Financing Activities
           
Net (decrease) increase in deposits
 
(1,132
 
86,682
 
Net decrease in federal funds purchased and short-term borrowings
 
(449
)  
(8,387
)
Proceeds from long-term borrowings   -     3,500  
Repayment of long-term borrowings
 
(1,950
)  
(3,650
)
Repurchase of preferred stock   -     (21,128
)
Proceeds from issuance of preferred stock   -     39,435  
Purchase of treasury stock   (54
  -  
Dividends paid
 
 (4,507
 
 (4,257
)
Net Cash (Used In) Provided By Financing Activities
 
(8,092
 
92,195
 
             
Net (Decrease) Increase In Cash and Cash Equivalents
 
(35,549
 
44,177
 
Cash and Cash Equivalents at the Beginning of the Period
 
112,442
   
44,837
 
Cash and Cash Equivalents at the End of the Period
$
76,893
 
$
89,014
 
             
Noncash Activities:
           
Loans transferred to foreclosed assets
$
4,218
 
$
4,797
 
Common stock issued in acquisition $ -   $ 3,030  
             
Cash Paid During The Period:
           
Interest on deposits and borrowed funds
$
10,467
 
$
11,235
 
Income taxes
$
4,900
 
$
2,850
 
See Notes to the Consolidated Financial Statements.
 
6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
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 10 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, 2011. 
 
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 nine month periods ended September 30, 2012 and 2011 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
 
In July 2012, the Financial Accounting Standards Board (“FASB”) issued ASU No 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, which permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with the FASB Accounting Standards Codification (“ASC”) Subtopic 350-30. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The Company adopted this standard in the fourth quarter of 2011. Adoption of this guidance did not have a material impact on the Company’s statements of income and financial condition.
 
7

Note 3. Securities
 
A summary comparison of securities by type at September 30, 2012 and December 31, 2011 is shown below.
 
 
September 30, 2012
 
December 31, 2011
 
(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. Treasury Bills   $ 12,000    $ -    $ -    $  12,000    $ -    $ -    $ -    $ -  
U.S. Government Agencies
  402,125     1,571     (57 )    403,639    
319,113
 
 
1,422
   
(328
)
 
320,207
 
Corporate debt securities
   172,661      9,485     (285 )    181,861    
171,927
   
6,250
   
(1,222
)
 
176,955
 
Mutual funds or other equity securities
   2,564      47      -      2,611    
2,773
   
38
   
-
 
 
2,811
 
Municipal bonds
   18,548      1,103      -      19,651    
19,916
   
609
   
(1
)
 
20,524
 
Total available for sale securities
 $  607,898    $  12,206    $  (342 )  $  619,762  
$
513,729
 
$
8,319
 
$
(1,551
)
$
520,497
 
                                                 
Held to maturity:
                                               
U.S. Government Agencies
 $  24,976     $ 246     $ -     $  25,222  
$
112,666
 
$
535
 
$
(4
)
$
113,197
 
Total held to maturity securities
 $  24,976    $ 246    $ -    $ 25,222  
$
112,666
 
$
535
 
$
(4
)
$
113,197
 
 
The scheduled maturities of securities at September 30, 2012 and December 31, 2011, by contractual maturity, are shown below. As evidenced by the following table, the Company has substantially decreased the contractual maturity of its securities investment portfolio in 2012.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
September 30, 2012
  December 31, 2011  
(in thousands)
Amortized Cost
 
Fair Value
  Amortized Cost  
Fair Value
 
Available For Sale:
                   
Due in one year or less
$
30,543  
$
30,863   $ 13,267   $ 13,505  
Due after one year through five years
  132,852     135,765     59,897     61,320  
Due after five years through 10 years
  332,965     339,828     214,467     218,280  
Over 10 years
  111,538     113,306     226,098     227,392  
Total available for sale securities
$
607,898  
$
619,762   $ 513,729   $ 520,497  
                         
Held to Maturity:
                       
Due in one year or less
$
-  
$
-   $ -   $ -  
Due after one year through five years
  4,004     4,010     10,015     10,157  
Due after five years through 10 years
  20,972     21,212     50,535     50,828  
Over 10 years
  -     -     52,116     52,212  
Total held to maturity securities
$
24,976  
$
25,222   $ 112,666   $ 113,197  
 
At September 30, 2012 approximately $440.8 million in securities were pledged to secure public funds deposits, and for other purposes required or permitted by law.
 
The following is a summary of the fair value of securities with gross unrealized losses and an aging of those gross unrealized losses at September 30, 2012.
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
(in thousands)
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Available for sale:
                       
U.S. Government Agencies
 $
38,083  
 $
(57 )
 $
-
 
 $
-
 
 $
38,083  
 $
(57
Corporate debt securities
  6,201     (78 )   2,487     (207 )   8,688    
(285
Mutual funds or other equity securities
  -     -     -     -     -    
-
 
Municipals
 
-
   
-
    -    
-
   
-
   
-
 
Total available for sale securities
$
44,284  
$
(135 )
$
2,487  
$
(207 )
$
46,771  
$
(342 )
                                     
Held to maturity:
                                   
U.S. Government Agencies
$
-  
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
Total held to maturity securities
$
-  
$
-  
$
-  
$
-
 
$
-  
$
-
 
 
8

At September 30, 2012, 52 debt securities have gross unrealized losses of $0.3 million or 0.7% of amortized cost. All securities with unrealized losses were classified as available for sale at September 30, 2012. The Company believes that it will collect all amounts contractually due and has the intent and the ability to hold these securities until the fair value is at least equal to the carrying value. The Company had 13 U.S. Government agency securities and 30 corporate debt securities that had gross unrealized losses for less than 12 months. The Company had 8 corporate debt securities which have been in a continuous unrealized loss position for 12 months or longer. Securities with unrealized losses greater than 12 months had a total amortized cost of $2.7 million. Securities with unrealized losses less than 12 months had a total amortized cost of $44.4 million.
 
If an equity security has an impairment that is other than temporary, then an impairment loss shall be recognized in earnings equal to the entire difference between the investment's cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value of the investment would then become the new amortized cost basis of the investment and is not adjusted for subsequent recoveries in fair value. For debt securities, other than temporary impairment loss is recognized in earnings if the Company is required to sell or is more likely than not to sell the security before recovery of its amortized cost. If the Company is not required to sell the security or does intend to sell the security, the other-than-temporary impairment is separated into the amount representing credit loss and the amount related to all other factors. The amount related to credit loss is recognized in earnings and the amount related to all other factors is recognized in other comprehensive income. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings shall become the new amortized cost basis of the investment. Management evaluates securities 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. In analyzing an issuer’s financial condition, Management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and industry reports.
 
The number of investment securities issued by U.S. government and government agencies with unrealized losses and the amount of unrealized losses on those investment securities are primarily the result of market interest rates. At September 30, 2012 the Company had 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 the following types of organizations: financial, insurance, utilities, manufacturing, industrial, consumer products and oil and gas. Also included in corporate debt securities are trust preferred capital securities, many issued by national and global financial services firms. The Company believes that the each of the issuers will be able to fulfill the obligations of these securities. At September 30, 2012 the Company had the ability and intent to hold these securities until they recover, which could be at their maturity dates.
 
The held to maturity portfolio is comprised of government sponsored enterprise securities such as FHLB, FNMA, FHLMC, and FFCB. The securities have maturities of 15 years or less and the securities are used to collateralize public funds. As of September 30, 2012 public funds deposits totaled $433.2 million. The Company has maintained public funds in excess of $175.0 million since December 2007. Management believes that public funds will continue to be a significant part of the Company's deposit base and will need to be collateralized by securities in the investment portfolio.
 
Securities with unrealized losses are currently performing according to their contractual terms. Management has the intent and ability to hold these securities for the foreseeable future. The fair value is expected to recover as the securities approach their maturity or repricing date or if market yields for such investments decline. As a result of uncertainties in the market affecting companies in the financial services industry, it is at least reasonably possible that a change in the estimate will occur in the near term.
 
The Company did not record an impairment write-down on its securities for the first nine months of 2012. During the first quarter of 2011, the Company recorded an impairment write-down on securities from one issuer of $0.1 million. This write-down was partially offset by a subsequent gain on sale of the securities of $45,000 in the third quarter of 2011.
 
At September 30, 2012, the Company's exposure to investment securities issuers that exceeded 10% of stockholders’ equity as follows:
 
 
At September 30, 2012
(in thousands)
Amortized Cost
 
Fair Value
Federal Home Loan Bank (FHLB)
$
108,002  
$
108,247
Federal Home Loan Mortgage Corporation (Freddie Mac-FHLMC)
  86,849     87,488
Federal National Mortgage Association (Fannie Mae-FNMA)
  118,323     118,600
Federal Farm Credit Bank (FFCB)
  113,926     114,525
Total
$
427,100  
$
428,860
 
9

Note 4. Loans
 
The following table summarizes the components of the Company's loan portfolio as of September 30, 2012 and December 31, 2011:
 
 
September 30, 2012
 
December 31, 2011
 
(in thousands)
Balance
 
As % of Category
 
Balance
 
As % of Category
 
Real Estate:
               
  Construction & land development
$
55,380
 
9.1
%
$
78,614
 
13.7
%
  Farmland
 
10,643
 
1.8
%
 
11,577
 
2.0
%
  1- 4 Family
 
88,771
 
14.6
%
 
89,202
 
15.6
%
  Multifamily
 
15,495
 
2.6
%
 
16,914
 
2.9
%
  Non-farm non-residential
 
298,469
 
49.1
%
 
268,618
 
46.8
%
    Total Real Estate
 
468,758
 
77.2
%
 
464,925
 
81.0
%
 Non-real Estate:
                   
  Agricultural
 
26,281
 
4.3
%
 
17,338
 
3.0
%
  Commercial and industrial
 
87,758
 
14.5
%
 
68,025
 
11.9
%
  Consumer and other
 
24,445
 
4.0
%
 
23,455
 
4.1
%
    Total Non-real Estate
 
138,484
 
22.8
%
 
108,818
 
19.0
%
Total loans before unearned income
 
607,242
 
100.0
%
 
573,743
 
100.0
%
Less: Unearned income
 
(1,080
)
     
(643
)
   
Total loans net of unearned income
$
606,162
     
$
573,100
     
 
The following table summarizes fixed and floating rate loans by contractual maturity as of September 30, 2012 and December 31, 2011 unadjusted for scheduled principal payments, prepayments, or repricing opportunities. The average life of the loan portfolio may be substantially less than the contractual terms when these adjustments are considered.
 
 
September 30, 2012
 
December 31, 2011
 
(in thousands)
Fixed
 
Floating
 
Total
 
Fixed
 
Floating
 
Total
 
One year or less
$
29,544
 
$
143,729
 
$
173,273
 
$
108,276
 
$
124,052
 
$
232,328
 
One to five years
 
208,689
   
121,511
   
330,200
   
160,191
   
98,972
   
259,163
 
Five to 15 years
 
22,422
   
44,409
   
66,831
   
8,393
   
36,891
   
45,284
 
Over 15 years
 
7,273
   
6,077
   
13,350
   
8,464
   
6,054
   
14,518
 
  Total (excluding nonaccrual loans)
$
267,928
 
$
315,726
 
 
583,654
 
$
285,324
 
$
265,969
 
 
551,293
 
Nonaccrual loans
             
23,588
               
22,450
 
Total loans before unearned income
           
 
607,242
             
 
573,743
 
Less: Unearned income
             
(1,080
)
             
 (643
)
Total loans net of unearned income
           
$
606,162
             
$
573,100
 
 
The majority of floating rate loans have interest rate floors. Of the floating rate loans, $225.5 million were at the floor rate as of September 30, 2012. Nonaccrual loans have been excluded.
 
The following tables present the age analysis of past due loans at September 30, 2012 and December 31, 2011:
 
 
September 30, 2012
 
(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
$
141
 
$
1,735
 
$
1,876
 
$
53,504
 
$
55,380
 
$
-
 
  Farmland
 
120
   
781
   
901
   
9,742
   
10,643
   
-
 
  1 - 4 family
 
2,837
   
5,439
   
8,276
   
80,495
   
88,771
   
376
 
  Multifamily
 
742
   
-
   
742
   
14,753
   
15,495
   
-
 
  Non-farm non-residential
 
2,023
   
12,641
   
14,664
   
283,805
   
298,469
   
678
 
    Total Real Estate
 
5,863
 
 
20,596
 
 
26,459
 
 
442,299
 
 
468,758
 
 
1,054
 
Non-Real Estate:
                                   
  Agricultural
 
-
 
 
785
 
 
785
 
 
25,496
 
 
26,281
 
 
-
 
  Commercial and industrial
 
279
   
3,239
   
3,518
   
84,240
   
87,758
   
-
 
  Consumer and other
 
117
   
22
   
139
   
24,306
   
24,445
   
-
 
    Total Non-Real Estate
 
396
 
 
4,046
 
 
4,442
 
 
134,042
 
 
138,484
 
 
-
 
Total loans before unearned income
$
6,259
 
$
24,642
 
$
30,901
 
$
576,341
 
 
607,242
 
$
1,054
 
Less: unearned income
                         
(1,080
     
Total loans net of unearned income
                       
$
606,162
       
 
10

 
 
December 31, 2011
 
(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
$
240
 
$
1,520
 
$
1,760
 
$
76,854
 
$
78,614
 
$
-
 
  Farmland
 
45
   
562
   
607
   
10,970
   
11,577
   
-
 
  1 - 4 family
 
2,812
   
5,957
   
8,769
   
80,433
   
89,202
   
309
 
  Multifamily
 
617
   
-
   
617
   
16,297
   
16,914
   
-
 
  Non-farm non-residential
 
878
   
12,818
   
13,696
   
254,922
   
268,618
   
419
 
    Total Real Estate
 
4,592
 
 
20,857
 
 
25,449
 
 
439,476
 
 
464,925
 
 
728
 
Non-Real Estate:
                                   
  Agricultural
 
90
 
 
315
 
 
405
   
16,933
 
 
17,338
 
 
-
 
  Commercial and industrial
 
147
   
1,986
   
2,133
   
65,892
   
68,025
   
-
 
  Consumer and other
 
389
   
28
   
417
   
23,038
   
23,455
   
8
 
    Total Non-Real Estate
 
626
 
 
2,329
 
 
2,955
 
 
105,863
 
 
108,818
 
 
8
 
Total loans before unearned income
$
5,218
 
$
23,186
 
$
28,404
 
$
545,339
 
 
573,743
 
$
736
 
Less: unearned income
                         
(643
     
Total loans net of unearned income
                       
$
573,100
       
 
The Company's management monitors the credit quality of its loans on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan.
 
For all loan classes, past due loans are reviewed on a monthly basis to identify loans for nonaccrual status. Generally, when collection in full of the principal and interest is jeopardized, the loan is placed on nonaccrual. The accrual of interest income on commercial and most consumer loans generally is discontinued when a loan becomes 90 to 120 days past due as to principal or interest.  When interest accruals are discontinued, unpaid interest recognized in income is reversed.  The Company's method of income recognition for loans that are classified as nonaccrual is to recognize interest income on a cash basis or apply the cash receipt to principal when the ultimate collectability of principal is in doubt.  Nonaccrual loans will not normally be returned to accrual status unless all past due principal and interest has been paid.
 
The following is a summary of nonaccrual loans by class at September 30, 2012 and December 31, 2011:
 
(in thousands)
September 30, 2012
 
 December 31, 2011
 
Real Estate:
           
  Construction & land development
$
1,735
 
$
1,520
 
  Farmland
 
781
   
562
 
  1 - 4 family 
 
5,063
   
5,647
 
  Multifamily
 
-
   
-
 
  Non-farm non-residential
 
11,963
   
12,400
 
    Total Real Estate
 
19,542
 
 
20,129
 
Non-real Estate:
           
  Agricultural
 
785
 
 
315
 
  Commercial and industrial
 
3,239
   
1,986
 
  Consumer and other
 
22
   
20
 
    Total Non-Real Estate
 
4,046
 
 
2,321
 
Total Nonaccrual Loans
$
23,588
 
$
22,450
 
 
11

The Company assigns credit quality indicators of pass, special mention, substandard, and doubtful to its loans. For the Company's loans with a commercial and consumer credit exposure, the Company internally assigns a grade based on the creditworthiness of the borrower. For loans with a consumer credit exposure, the Bank internally assigns a grade based upon an individual loan’s delinquency status. Loans included in the Pass category are performing loans with satisfactory debt coverage ratios, collateral, payment history, and documentation.
 
Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or in the Company's credit position at some future date. 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 for rating a credit exposure special mention 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 with a commercial and consumer credit exposure is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt by the borrower. 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 by management. 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 thus, placed on nonaccrual. For loans with a consumer credit exposure, loans that are 90 days or more past due or that have been placed on 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 Company periodically reassesses its credit quality indicators and has revised its methodology in 2012 contributing to the increase in special mention credits over the previous periods. As of September 30, 2012, $29.4 million of the loans in the special mention category had a current status, $3.9 million were between 30 and 89 days past due, and $0.1 million were 90 days or greater past due.
 
The following table identifies the commercial and consumer credit exposure of the loan portfolio by specific credit ratings at September 30, 2012 and December 31, 2011:
 
 
September 30, 2012
 
December 31, 2011
 
(in thousands)
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
 
Real Estate:
                                                           
  Construction & land development
$
40,169
 
$
4,757
 
$
10,454
 
$
-
 
$
55,380
 
$
67,602
 
$
82
 
$
10,930
 
$
-
 
$
78,614
 
  Farmland
 
10,099
   
75
   
469
   
-
   
10,643
   
11,485
   
-
   
92
   
-
   
11,577
 
  1 - 4 family
 
72,510
   
8,425
   
7,836
   
-
   
88,771
   
80,053
   
1,770
   
7,379
   
-
   
89,202
 
  Multifamily
 
8,173
   
-
   
7,322
   
-
   
15,495
   
9,545
   
-
   
7,369
   
-
   
16,914
 
  Non-farm non-residential
 
253,285
   
16,712
   
28,472
   
-
   
298,469
   
235,448
   
372
   
32,798
   
-
   
268,618
 
    Total real estate
 
384,236
 
 
29,969
 
 
54,553
 
 
-
 
 
468,758
 
 
404,133
   
2,224
 
 
58,568
 
 
-
 
 
464,925
 
Non-Real Estate:
                                                           
  Agricultural
 
25,800
 
 
56
 
 
425
 
 
-
 
 
26,281
 
 
17,304
 
 
-
 
 
34
 
 
-
 
 
17,338
 
  Commercial and industrial
 
79,238
   
3,273
   
5,247
   
-
   
87,758
   
65,553
   
93
   
2,379
   
-
   
68,025
 
  Consumer and other
 
24,275
   
104
   
66
   
-
   
24,445
   
23,345
   
43
   
67
   
-
   
23,455
 
    Total Non-Real Estate
 
129,313
 
 
3,433
 
 
5,738
 
 
-
 
 
138,484
 
 
106,202
 
 
136
 
 
2,480
 
 
-
 
 
108,818
 
Total loans before unearned income
$
513,549
 
$
33,402
 
$
60,291
 
$
-
 
 
607,242
 
$
510,335
 
$
2,360
 
$
61,048
 
$
-
 
 
573,743
 
Less: unearned income
                         
 (1,080
)
                         
 (643
)
Total loans net of unearned income
                       
$
606,162
                         
$
573,100
 
 
12

ASC 310-30 Loans
 
The Company has loans that were acquired in the acquisition of  Greensburg Bancshares, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that all contractually required payments would not be collected. These loans are subject to ASC Topic 310-30. The carrying amount of those loans is included in the balance sheet amounts of loans receivable at September 30, 2012. The amounts of loans subject to ASC Topic 310-30 at September 30, 2012 and December 31, 2011 are as follows:
 
 
September 30, 2012
  December 31, 2011  
(in thousands)
Contractual Amount
 
Carrying Value
 
Contractual Amount
 
Carrying Value
 
Real Estate:
                       
  Construction & land development
$
-
 
$
-
  $ 536   $ 301  
  Farmland
 
-
   
-
    -     -  
  1 - 4 family
 
190
   
190
    704     573  
  Multifamily
 
-
    -     -     -  
  Non-farm non-residential
 
130
   
130
    352     352  
    Total real estate
 
320
 
$
320
    1,592     1,226  
Non-real Estate:
                       
  Agricultural
 
-
 
 
 -
    -     -  
  Commercial and industrial
 
-
   
-
    -     -  
  Consumer and other
 
-
   
-
    -     -  
    Total Non-Real Estate
 
-
 
 
-
    -     -  
Total
$
320
 
$
320
  $ 1,592   $ 1,226  
 
There have been no additional provisions made to the allowance for loan losses subsequent to acquisition of these loans. The loans acquired in the acquisition of Greensburg Bancshares, that are within the scope of Topic ASC 310-30, are not accounted for using the income recognition model of the Topic because the Company cannot reasonably estimate cash flows expected to be collected.
 
 
13

Note 5. Allowance for Loan Losses
 
The allowance for loan losses is reviewed by the Company's management 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 nine months ended September 30, 2012 and 2011 is as follows:
 
 
As of September 30, 2012
 
 
Real Estate Loans:
  Non-Real Estate Loans:      
 
(in thousands)
Construction and Land Development   Farmland   1-4 Family   Multi-family   Non-farm non-residential   Agricultural   Commercial and Industrial   Consumer and other   Unallocated   Total  
Allowance for Credit Losses:
                                                           
Beginning balance (12/31/11)
$
1,002
  $
65
  $
1,917
  $
780
  $
2,980
  $
125
   $
1,407
  $
314
  $
289
 
$
8,879
 
  Charge-offs
 
(58
 
-
   
(1,409
 
(187
)  
(459
 
(27
)  
(455
 
(356
 
-
   
(2,951
)
  Recoveries
 
13
   
1
   
27
   
-
   
106
   
1
   
212
   
205
   
-
   
565
 
  Provision
 
228
 
 
15
 
 
1,547
   
(162
)
 
818
 
 
(40
)  
508
   
137
 
 
(37
)
 
3,014
 
Ending Balance
$
1,185
 
$
81
 
$
2,082
 
$
431
 
$
3,445
 
$
59
 
$
1,672
 
$
300
 
$
252
 
$
9,507
 
 
 
 
As of September 30, 2011
 
 
Real Estate Loans:
  Non-Real Estate Loans:      
 
(in thousands)
Construction and Land Development   Farmland   1-4 Family   Multi-family   Non-farm non-residential   Agricultural   Commercial and Industrial   Consumer and other   Unallocated   Total  
Allowance for Credit Losses:
                                                           
Beginning balance (12/31/10)
$
977
  $
46
  $
1,891
  $
487
  $
3,423
  $
80
   $
510
  $
390
  $
513
 
$
8,317
 
  Charge-offs
 
(935
 
-
   
(1,233
 
-
   
(3,790
 
(20
)  
(1,596
 
(486
 
-
   
(8,060
)
  Recoveries
 
1
   
-
   
95
   
-
   
12
   
3
   
319
   
145
   
17
   
592
 
  Provision
 
410
 
 
15
 
 
815
   
47
 
 
2,833
 
 
126
   
2,790
   
220
 
 
(401
)
 
6,855
 
Ending Balance
$
453
 
$
61
 
$
1,568
 
$
534
 
$
2,478
 
$
189
 
$
2,023
 
$
269
 
$
129
 
$
7,704
 
 
 
 
 
 
14

The following is a breakdown of loans individually and collectively evaluated for impairment and the corresponding allowance by loan category at September 30, 2012 and December 31, 2011.
 
 
September 30, 2012
 
 
Real Estate Loans:
 
Non-Real Estate Loans:
     
 
(in thousands)
Construction and Land Development
 
Farmland
 
1-4 Family
 
Multi-family
 
Non-farm non-residential
 
Agricultural
 
Commercial and Industrial
 
Consumer and other
 
Unallocated
 
Total
 
Allowance individually evaluated for impairment
$
512
 
$
-
 
$
279
 
$
426
 
$
1,182
 
$
-
 
$
20
 
$
-
 
$
-
 
$
2,419
 
Allowance collectively evaluated for impairment
 
673
   
81
   
1,803
   
5
   
2,263
   
59
   
1,652
   
300
   
252
   
7,088
 
Allowance at September 30, 2012
$
1,185
 
$
81
 
$
2,082
 
$
431
 
$
3,445
 
$
59
 
$
1,672
 
$
300
 
$
252
 
$
9,507
 
                                                             
Loans individually evaluated for impairment
$
7,396
 
$
-
 
$
2,149
 
$
7,322
 
$
25,416
 
$
-
 
$
4,431
 
$
-
 
$
-
 
$
46,714
 
Loans collectively evaluated for impairment
 
47,984
   
10,643
   
86,622
   
8,173
   
273,053
   
26,281
   
83,327
   
24,445
   
-
   
560,528
 
Loans at September 30, 2012 (before unearned income)
$
55,380
 
$
10,643
 
$
88,771
 
$
15,495
 
$
298,469
 
$
26,281
 
$
87,758
 
$
24,445
 
$
-
 
$
607,242
 
Unearned income
                                                       
(1,080
)
Total loans net of unearned income
                                                     
$
606,162
 
 
 
 
December 31, 2011
 
 
Real Estate Loans:
 
Non-Real Estate Loans:
     
 
(in thousands)
Construction and Land Development
 
Farmland
 
1-4 Family
 
Multi-family
 
Non-farm non-residential
 
Agricultural
 
Commercial and Industrial
 
Consumer and other
 
Unallocated
 
Total
 
Allowance individually evaluated for impairment
$
139
 
$
-
 
$
392
 
$
701
 
$
1,224
 
$
-
 
$
-
 
$
-
 
$
-
 
$
2,456
 
Allowance collectively evaluated for impairment
 
863
   
65
   
1,525
   
79
   
1,756
   
125
   
1,407
   
314
   
289
   
6,423
 
Allowance at December 31, 2011
$
1,002
 
$
65
 
$
1,917
 
$
780
 
$
2,980
 
$
125
 
$
1,407
 
$
314
 
$
289
 
$
8,879
 
                                                             
Loans individually evaluated for impairment
$
7,998
 
$
-
 
$
3,591
 
$
7,369
 
$
31,397
 
$
-
 
$
738
 
$
-
 
$
-
 
$
51,093
 
Loans collectively evaluated for impairment
 
70,616
   
11,577
   
85,611
   
9,545
   
237,221
   
17,338
   
67,287
   
23,455
   
-
   
522,650
 
Loans at December 31, 2011 (before unearned income)
$
78,614
 
$
11,577
 
$
89,202
 
$
16,914
 
$
268,618
 
$
17,338
 
$
68,025
 
$
23,455
 
$
-
 
$
573,743
 
Unearned income
                                                       
(643
)
Total loans net of unearned income
                                                     
$
573,100
 
 
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. Factors considered by Management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration 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. 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. As an administrative matter, this process is only applied to impaired loans or 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 at September 30, 2012:
 
 
At September 30, 2012
 
(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   
$
900
 
$
949
 
$
-
 
$
923
 
$
50
 
$
26
 
  Farmland
 
-
   
-
   
-
   
-
   
-
   
-
 
  1 - 4 family
 
1,074
   
1,734
   
-
   
1,905
   
124
   
48
 
  Multifamily
 
-
   
-
   
-
   
-
   
-
   
-
 
  Non-farm non-residential
 
7,228
   
7,426
   
-
   
9,643
   
1,395
   
1,335
 
    Total Real Estate
 
9,202
 
 
10,109
 
 
-
 
 
12,471
 
 
1,569
   
1,409
 
Non-Real Estate:
                                   
  Agricultural
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
  Commercial and industrial
 
3,935
   
3,935
   
-
   
165
   
31
   
23
 
  Consumer and other
 
-
   
-
   
-
   
-
   
-
   
-
 
    Total Non-Real Estate
 
3,935
 
 
3,935
   
-
   
165
 
 
31
 
 
23
 
Total Impaired Loans with no related allowance
$
13,137
 
$
14,044
 
$
-
 
$
12,636
 
$
1,600
 
$
1,432
 
                                     
Impaired Loans with an allowance recorded:
                                   
Real estate:
                                   
  Construction & land development
$
6,496
 
$
6,496
 
$
512
 
$
6,601
 
$
604
 
$
609
 
  Farmland
 
-
   
-
   
-
   
-
   
-
   
-
 
  1 - 4 family
 
1,075
   
1,234
   
279
   
1,161
   
80
   
77
 
  Multifamily
 
7,322
   
7,322
   
426
   
7,367
   
618
   
627
 
  Non-farm non-residential
 
18,188
   
20,902
   
1,182
   
20,866
   
1,232
   
1,363
 
    Total real estate
 
33,081
 
 
35,954
 
 
2,399
 
 
35,995
 
 
2,534
 
 
2,676
 
Non-Real Estate:
                                   
  Agricultural
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
  Commercial and industrial
 
496
   
496
   
20
   
743
   
19
   
-
 
  Consumer and other
 
-
   
-
   
-
   
-
   
-
   
-
 
    Total Non-Real Estate
 
496
 
 
496
 
 
20
 
 
743
 
 
19
 
 
-
 
Total Impaired Loans with an allowance recorded
$
33,577
 
$
36,450
 
$
2,419
 
$
36,738
 
$
2,553
 
$
2,676
 
                                     
Total Impaired Loans
$
46,714
 
$
50,494
 
$
2,419
 
$
49,374
 
$
4,153
 
$
4,108
 
 
 
16

The following is a summary of impaired loans by class at December 31, 2011:
 
 
At December 31, 2011
 
(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   
$
937
 
$
960
 
$
-
 
$
634
 
$
91
 
$
64
 
  Farmland
 
-
   
-
   
-
   
-
   
-
   
-
 
  1 - 4 family
 
858
   
1,192
   
-
   
2,388
   
218
   
32
 
  Multifamily
 
-
   
-
   
-
   
-
   
-
   
-
 
  Non-farm non-residential
 
8,710
   
10,708
   
-
   
11,549
   
824
   
409
 
    Total Real Estate
 
10,505
 
 
12,860
 
 
-
 
 
14,571
 
 
1,133
 
 
505
 
Non-Real Estate:
                                   
  Agricultural
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
  Commercial and industrial
 
738
   
1,737
   
-
   
2,986
   
238
   
102
 
  Consumer and other
 
-
   
-
   
-
   
-
   
-
   
-
 
    Total Non-Real Estate
 
738
 
 
1,737
 
 
-
 
 
2,986
 
 
238
   
102
 
Total Impaired Loans with no related allowance
$
11,243
 
$
14,597
 
$
-
 
$
17,557
 
$
1,371
 
$
607
 
                                     
Impaired Loans with an allowance recorded:
                                   
Real estate:
                                   
  Construction & land development
$
7,061
 
$
7,061
 
$
139
 
$
7,243
 
$
477
 
$
376
 
  Farmland
 
-
   
-
   
-
   
-
   
-
   
-
 
  1 - 4 family
 
2,733
   
2,870
   
392
   
1,127
   
57
   
56
 
  Multifamily
 
7,369
   
7,369
   
701
   
6,347
   
288
   
333
 
  Non-farm non-residential
 
22,687
   
23,637
   
1,224
   
21,180
   
1,261
   
815
 
    Total real estate
 
39,850
 
 
40,937
 
 
2,456
 
 
35,897
   
2,083
 
 
1,580
 
Non-Real Estate:
                                   
  Agricultural
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
  Commercial and industrial
 
-
   
-
   
-
   
-
   
-
   
-
 
  Consumer and other
 
-
   
-
   
-
   
-
   
-
   
-
 
    Total Non-Real Estate
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
Total Impaired Loans with an allowance recorded
$
39,850
 
$
40,937
 
$
2,456
 
$
35,897
 
$
2,083
 
$
1,580
 
                                     
Total Impaired Loans
$
51,093
 
$
55,534
 
$
2,456
 
$
53,454
 
$
3,454
 
$
2,187
 
 
 
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. For the first nine months of 2012, there were no loans restructured in a troubled debt restructuring.

The following table identifies the Troubled Debt Restructurings as of September 30, 2012 and September 30, 2011:
 
Troubled Debt Restructurings September 30, 2012   September 30, 2011  
  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 $ 2,601   $ -   $ -   $ 2,601   $ 2,602   $ 235   $ -   $ 2,837  
  Farmland   -     -     -     -     -     -     -     -  
  1-4 Family   -     -     1,323     1,323     1,693     -     -     1,693  
  Multifamily   5,965     -     -     5,965     6,018     -     -     6,018  
  Non-farm non residential   6,106     679     -     6,785     6,939     -     -     6,939  
    Total Real Estate   14,672     679     1,323     16,674     17,252     235     -     17,487  
Non-Real Estate:                                                
  Agricultural   -     -     -     -     -     -     -     -  
  Commercial and industrial   -     -     -     -     -     -     -     -  
  Consumer and other   -     -     -     -      -     -     -     -  
    Total Non-Real Estate   -     -     -     -     -     -     -     -  
Total $ 14,672   $ 679   $ 1,323   $ 16,674   $  17,252   $ 235   $  -   $  17,487  
 
 
 
18

The Company did not restructure any loans considered to be a troubled debt restructuring in the first nine months of 2012. Information about the Company's TDRs occurring in the nine month period ended September 30, 2011 is presented in the following table.
 
Troubled Debt Restructurings
September 30, 2012
 
 September 30, 2011
 
 
(in thousands)
Number of Contracts
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
Number of Contracts
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
Real Estate:
                               
  Construction & land development
-
 
$
-
 
$
-
 
5
 
$
2,837
 
$
2,837
 
  Farmland
-
   
-
   
-
 
-
   
-
   
-
 
  1-4 Family
-
   
-
   
-
 
1
   
1,693
   
1,693
 
  Multifamily
-
   
-
   
-
 
1
   
6,018
   
6,018
 
  Non-farm non residential
-
   
-
   
-
 
4
   
6,939
   
6,939
 
    Total real estate
-
 
 
-
   
-
 
11
   
17,487
   
17,487
 
Non-Real Estate:
                               
  Agricultural
-
 
 
 -
   
-
 
-
   
-
   
-
 
  Commercial and industrial
-
   
 -
   
-
 
-
   
-
   
-
 
  Consumer and other
-
   
 -
   
-
 
-
   
-
   
-
 
    Total Non-Real Estate
-
 
 
-
   
-
 
-
   
-
   
-
 
Total
-
 
$
-
 
$
-
 
11
 
$
17,487
 
$
17,487
 
 
The following is a summary of the TDRs that subsequently defaulted after restructuring during the previous twelve months.
 
Troubled Debt Restructurings that subsequently defaulted
(in thousands)
Number of Contracts
 
Recorded Investment
 
Real Estate:
         
  Construction & land development
-
 
$
-
 
  Farmland
-
   
-
 
  1-4 Family
3
   
1,322
 
  Multifamily
-
   
-
 
  Non-farm non residential
-
   
-
 
    Total real estate
3
 
 
1,322
 
Non-Real Estate:
         
  Agricultural
-
 
 
 -
 
  Commercial and industrial
-
   
 -
 
  Consumer and other
-
   
 -
 
    Total Non-Real Estate
-
 
 
-
 
Total
3
 
$
1,322
 
 
The following table discloses TDR activity for the nine months ended September 30, 2012.
 
 
Real Estate Loans:
  Non-Real Estate Loans:      
(in thousands)
Construction and Land Development   Farmland   1-4 family    Multi-family   Non-farm non-residential   Agricultural   Commercial and Industrial   Consumer and other   Total  
Beginning balance of TDRs (12/31/2011)
$
2,840
  $ -   $
1,694
  $ 6,015   $ 6,998   $ -    $ -   $ -  
$
17,547  
New TDRs  
-
 
 
 -  
 
-
    -     -  
 
 -     -  
 
 -     -  
Charge-offs post-modification   -     -     (619   -     -     -     -     -     (619
Paydowns   -     -     -     (50   (380   -     -     -     (430
Construction to permanent financing   (239 )   -     239     -     -     -     -     -     -  
Other[1]
 
-
 
 
 -    
 9
    -  
 
167  
 
 -     -     -
 
  176  
Ending balance of TDRs (9/30/2012)
$
2,601
 
$
-  
$
1,323
  $ 5,965  
$
6,785  
$
-  
 $
-  
$
-  
$
16,674  
(1)Other includes additions to the balances of TDRs to account for the expenses incurred by the Company for items such as insurance and taxes in protecting the Company's interest.
 
 
19

Note 6. Goodwill and Other Intangible Assets
 
Goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. Other intangible assets continue to be amortized over their useful lives. Goodwill at September 30, 2012 was $2.0 million and resulted from the Homestead Bancorp acquisition in 2007.  No impairment charges have been recognized since the acquisition. Mortgage servicing rights were relatively unchanged since December 31, 2011, totaling $0.2 million at September 30, 2012. Other intangible assets recorded include core deposit intangibles, which are subject to amortization. The core deposits reflect the value of deposit relationships, including the beneficial rates, which arose from the purchase of other financial institutions and the purchase of various banking center locations from other financial institutions. At September 30, 2012 and December 31, 2011, core deposit intangibles totaled $2.3 million and $2.6 million, respectively. 
 
Note 7. Borrowings
 
The Company's senior long-term debt totaled $1.3 million at September 30, 2012. Long-term debt at December 31, 2011 totaled $3.2 million. The Company pays $50,000 principal plus interest on a monthly basis. In addition to its monthly principal payments, the Company has made additional principal payments totaling $1.5 million. At September 30, 2012 the Company's long-term debt was priced at Wall Street Journal Prime plus 75 basis points (4.00%) and has a contractual maturity of April 2017. It is secured by a pledge of 13.2% (735,745 shares) of First Guaranty Bank, a wholly owned subsidiary of the Company, under a Commercial Pledge Agreement dated June 22, 2011. 
 
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 on-balance sheet instruments. Unless otherwise noted, collateral or other security is not required to support financial instruments with credit risk.
 
Set forth below is a summary of the notional amounts of the financial instruments with off-balance sheet risk at September 30, 2012 and December 31, 2011:
 
Contract Amount
(in thousands)
September 30, 2012
 
December 31, 2011
 
Commitments to Extend Credit
$
22,634
 
$
13,264
 
Unfunded Commitments under lines of credit 
$
76,554
 
$
69,522
 
Commercial and Standby letters of credit
$
6,462
 
$
6,745
 
 
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’s management and counsel determine it has defenses to the claims asserted, it defends itself. The Company will consider settlement of cases when, in Management’s and counsel’s judgment, 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, advice of counsel, and available insurance coverage, Management believes that any incremental liability arising from the Company’s legal proceedings will not have a material adverse effect on the Company’s financial position.
 
 
20

 
Note 9. Fair Value
 
The fair value of a financial instrument is the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Valuation techniques use certain inputs to arrive at fair value. Inputs to valuation techniques are the assumptions that market participants would use in pricing the asset or liability. They may be observable or unobservable. 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 Level 3 in the Company's portfolio as of September 30, 2012 includes 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 loans 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 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") at September 30, 2012 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 September 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
(in thousands)
September 30, 2012
 
December 31, 2011
 
Securities available for sale measured at fair value
$
619,762
 
$
520,497
 
Fair Value Measurements Using:
           
  Quoted Prices in Active Markets For Identical Assets (Level 1)
$
12,000
 
$
3,203
 
  Significant Other Observable Inputs (Level 2)
$
599,119
 
$
509,778
 
  Significant Unobservable Inputs (Level 3)
$
8,643
 
$
7,516
 
 
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 management believes 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 3 securities available for sale from December 31, 2011 was the addition of a $2.0 million preferred security that was transferred from level 2 to level 3. This addition was partially offset by $0.9 million in municipal bond principal repayments.
 
 
21

 
Gains and losses on securities (realized and unrealized) included in earnings (or changes in net assets) for the first nine months of 2012 measured at fair value on a recurring basis are reported in noninterest income or other comprehensive income as follows:
 
(in thousands)
Noninterest Income
 
Other Comprehensive Income
 
Total gains included in earnings (or changes in net assets)
$
3,230
 
$
-
 
Impairment loss
$
-
 
$
-
 
Changes in unrealized gains (losses) relating to assets still held at September 30, 2012
$
-
 
$
3,367
 
 
The following table measures financial assets and financial liabilities measured at fair value on a non-recurring basis as of September 30, 2012 and December 31, 2011, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
 
(in thousands)
At September 30, 2012
 
At December 31, 2011
 
Impaired loans measured at fair value
$
33,577
 
$
39,850
 
Fair Value Measurements Using:
           
  Quoted Prices in Active Markets For Identical Assets (Level 1)
$
-
 
$
-
 
  Significant Other Observable Inputs (Level 2)
$
6,795
 
$
8,113
 
  Significant Unoberservable Inputs (Level 3)
$
26,782
 
$
31,737
 
             
Other real estate owned measured at fair value
$
4,435
 
$
5,709
 
Fair Value Measurements Using:
           
  Quoted Prices in Active Markets For Identical Assets (Level 1)
$
-
 
$
-
 
  Significant Other Observable Inputs (Level 2)
 $
4,435
 
$
5,709
 
  Significant Unoberservable Inputs (Level 3)
$
-
 
$
-
 
 
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, and as such has not included any gains or losses in earnings for the nine months ended September 30, 2012 or 2011.
 
22

 
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 September 30, 2012 and for the three and nine months that ended September 30, 2012 and 2011 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 state 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. 

 
23

Three and Nine months Financial Overview 2012
 
Financial highlights for the three and nine months of 2012 and 2011 are as follows:
 
First Guaranty Bancshares issued a ten percent stock dividend on February 24, 2012 to stockholders of record as of February 17, 2012.
   
Net income for the third quarter of 2012 and 2011 was $3.0 million and $2.2 million, respectively. Net income for the nine months ending September 30, 2012 was $9.0 million compared to $7.0 million for the nine months ended September 30, 2011.
   
Net income to common shareholders after preferred stock dividends was $2.5 million and $1.4 million for the third quarter of 2012 and 2011. Net income to common shareholders after preferred stock dividends was $7.6 million and $5.5 million for the nine months ending 2012 and 2011. The increase in net income for 2012 was the result of several factors including a higher volume of investments, decreases in incremental and absolute interest expense, and a decrease in provisions for loan losses.
   
The Company's cost of time deposits for the first nine months of 2012 decreased 0.3% to 1.8% from 2.1% for the same period in 2011.
   
Earnings per common share for the three months ended September 30, 2012 and 2011 were $0.40 and $0.22, respectively. For the nine months ended September 30, 2012 and 2011 earnings per common share were $1.20 and $0.89, respectively.
   
The net loan portfolio at September 30, 2012 totaled $596.7 million, a net increase of $32.4 million from the December 31, 2011 net loan portfolio of $564.2 million. Net loans are reduced by the allowance for loan losses which totaled $9.5 million for September 30, 2012 and $8.9 million for December 31, 2011. Total loans net of unearned income were $606.2 million for September 30, 2012 compared to $573.1 million for December 31, 2011.
   
During the first nine months of 2012 the Company's management shortened the contractual maturity of the Company's securities portfolio to reduce interest rate risk.
   
Return on average assets for the three months ending September 30, 2012 and September 30, 2011 was 0.89% and 0.67%, respectively. Return on average assets for the nine months ended September 30, 2012 and September 30, 2011 was 0.89% and 0.77%, respectively. Return on average assets is calculated by dividing annualized net income before preferred dividends by average assets.
   
 
Return on average common equity for the three months ending September 30, 2012 and September 30, 2011 was 10.72% and 6.40%, respectively. Return on average common shareholders’ equity for the nine months ended September 30, 2012 and September 30, 2011 was 11.07% and 9.16% respectively. Return on common shareholders’ equity is calculated by dividing net earnings applicable to common shareholders by average common shareholders’ equity.
   
Book value per common share was $15.10 as of September 30, 2012 compared to $13.81 as of September 30, 2011. Book value per share was $13.85 as of December 31, 2011. [2]
   
The Company's Board of Directors declared cash dividends of $0.16 per common share in the third quarter of 2012 and $0.15 per common share for the third quarter of 2011. Declared cash dividends for the nine months ended September 30, 2012 and 2011 were $0.48 and $0.44 per common share, respectively. [2]
   
On September 22, 2011, the Company received $39.4 million in funds under the U.S. Treasury's Small Business Lending Fund ("SBLF") program. A portion of the funds from the SBLF were used to redeem the Company's Series A Preferred Stock issued to the Treasury under the CPP. The dividend rate on the shares of the preferred stock issued in connection with the SBLF will be dependent on the Company's volume of qualified small business loans.
   
  [2] 2011 common share amounts have been retroactively adjusted to reflect the ten percent stock dividend paid February 24, 2012 to stockholders of record as of February 17, 2012
 
 
24

Financial Condition
 
Changes in Financial Condition from December 31, 2011 to September 30, 2012
 
The Company completed the acquisition of Greensburg Bancshares and its wholly owned subsidiary Bank of Greensburg on July 1, 2011. This acquisition added 4 branches, $78.0 million in deposits, and $63.0 million in loans. The results of operations since the date of acquisition reflect the impact of the transaction.

General.
 
Total assets increased $7.4 million to $1.4 billion at September 30, 2012 and was relatively unchanged from December 31, 2011.
 
Investment Securities.  
 
Investment securities at September 30, 2012 totaled $644.7 million, an increase of $11.6 million compared to $633.2 million at December 31, 2011.  The investment portfolio consisted of available for sale securities at their fair market value total of $619.8 million and held to maturity securities at an amortized cost total of $25.0 million.  At December 31, 2011 held to maturity securities, at their amortized cost, total $112.7 million. The decrease from December 31, 2011 to September 30, 2012 in the Company’s held to maturity portfolio was mainly attributable to decreases in market interest rates that prompted bond issuers to redeem the bonds prior to maturity. The Company also had bonds that were classified as held to maturity that matured in the first nine months of 2012.
 
The securities portfolio consisted principally of U.S. Government agency securities, corporate debt securities and municipal bonds. The securities portfolio provides the Company with a relatively stable source of income and provides 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.  Government agency securities generally have maturities of 15 years or less. Corporate securities held at fair value totaled $181.9 million at September 30, 2012.  U.S. Government Agency securities that were held at fair value totaled $403.6 million at September 30, 2012. Agency securities that were held for maturity and carried at amortized cost totaled $25.0 million at September 30, 2012. The fair value of held to maturity agency securities was $25.2 million at September 30, 2012.
 
At September 30, 2012, $30.5 million or 4.7% of the securities portfolio was scheduled to mature in less than one year. Securities with contractual maturity dates over 10 years totaled $111.5 million or 17.3% of the total portfolio. The weighted average contractual maturity of the securities portfolio was 7.7 years.  The average maturity of the securities portfolio is affected by issuer call options which are influenced by market interest rates.
 
During 2012 the Company has substantially shortened the contractual maturity of its securities portfolio mainly through redeployment of funds from securities called during the course of 2012 into shorter term securities. This is an effort by management to reduce the inherent interest rate risk in the portfolio. The Company's securities contractually maturing in greater than ten years at December 31, 2011 totaled $279.5 million. At September 30, 2012, securities maturing in greater than ten years totaled $113.3 million, a decrease of $162.2 million from December 31, 2011. In this same time period the Company's securities contractually maturing in five through ten years increased $92.0 million, maturing in one through five years increased $68.4 million, and securities contractually maturing in less than one year increased $17.4 million while the total securities portfolio increased $11.6 million.
 
As of September 30, 2012, certain investment securities totaling $2.5 million, all of which were corporate debt securities, had continuous unrealized loss positions for more than 12 months with unrealized losses totaling $0.2 million. At September 30, 2012, 20 securities from 13 issuers were graded below investment grade with a total book value of $4.8 million.  Non-investment grade securities represent approximately 0.7% of the Company's total investment portfolio.  All of the Company’s non-investment grade securities referenced above were initially investment grade and have been downgraded since purchase. The non-investment grade securities are monitored by management.
 
Year to date 2012 and 2011 average securities as a percentage of average interest-earning assets were 50.7% and 46.2%, respectively. At September 30, 2012, the U.S. Government agency securities and municipal bonds qualified as securities pledge-able to collateralize repurchase agreements and public funds. Securities pledged totaled $440.8 million at September 30, 2012 and $428.6 million at December 31, 2011.  See Note 3 of the Notes to Consolidated Financial Statements for more information on investment securities.
 

 
 
25

 
Loans.
 
Net loans accounted for 43.8% of total assets at September 30, 2012, compared to 41.7% at December 31, 2011. As of September 30, 2012, 77.2% of our loan portfolio was secured primarily or secondarily by real estate. The largest portion of our loan portfolio, at 49.1%, is non-farm, non-residential loans secured by real estate.
 
The net loan portfolio at September 30, 2012 totaled $596.7 million, a net increase of $32.4 million from the December 31, 2011 net loan portfolio of $564.2 million.  Net loans are reduced by the allowance for loan losses which totaled $9.5 million for September 30, 2012 and $8.9 million for December 31, 2011. Total loans include $39.5 million in syndicated loans. Purchased syndicated loans must meet the same underwriting criteria used when originating loans. 
 
Loan charge-offs totaled $3.0 million during the first nine months of 2012, compared to $8.1 million during the same period of 2011.  Recoveries totaled $0.6 million during the first nine months of 2012 and $0.6 million for the same period in 2011.  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.
 
The high level of charge-offs in 2011 is attributable in part to Management's decision to aggressively address non-performing assets by partial charge-offs to conservative estimates of realizable amounts. The lower level of 2012 charge-offs is indicative of the lack of further deterioration in anticipated realizable values.
 
The Company revised and enhanced its credit risk rating system during 2012.  The changes included increased weighting to cash flow analysis and less weighting to collateral valuation.  The methodology changes along with the identification of potential weaknesses in several credits resulted in an overall increase in special mention credits from December 31, 2011 to September 30, 2012.  The Company believes this enhanced methodology will contribute to earlier detection of problem credits and better monitoring of the loan portfolio.
 
Nonperforming Assets.
 
Nonperforming assets consist of loans on which interest is no longer accrued, certain restructured loans where the interest rate or other terms have been renegotiated 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.
 
 
 
 
 
26

The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
 
(in thousands)
September 30, 2012  
December 31, 2011
 
Non-accrual loans:
       
Real Estate:
       
  Construction and land development
$
1,735
 
$
1,520
 
  Farmland
 
781
   
562
 
  1 - 4 family residential
 
5,063
   
5,647
 
  Multifamily
 
-
   
-
 
  Non-farm non-residential
 
11,963
   
12,400
 
    Total Real Estate $ 19,542   $ 20,129  
Non-Real Estate:
           
  Agricultural
$
785
  $
315
 
  Commercial and industrial
 
3,239
   
1,986
 
  Consumer and other
 
22
   
20
 
    Total Non-Real Estate $ 4,046   $ 2,321  
Total non-accrual loans
$
23,588
  $
22,450
 
             
Loans 90 days and greater delinquent & accruing:
           
Real Estate:
           
  Construction and land development
$
-
  $
-
 
  Farmland
 
-
   
-
 
  1 - 4 family residential
 
376
   
309
 
  Multifamily
 
-
   
-
 
  Non-farm non-residential
 
678
   
419
 
    Total Real Estate $ 1,054   $ 728  
 Non-Real Estate:
           
  Agricultural
$
-
  $
-
 
  Commercial and industrial
 
-
   
-
 
  Consumer and other
 
-
   
8
 
    Total Non-Real Estate $ -   $ 8  
Total loans 90 days and greater delinquent & accruing
$
1,054
  $
736
 
             
Total non-performing loans
$
24,642
  $
23,186
 
             
Real Estate Owned:
           
Real Estate Loans:            
  Construction and land development
$
800
  $
1,161
 
  Farmland
 
-
   
-
 
  1 - 4 family residential
 
1,414
   
1,342
 
  Multifamily
 
-
   
-
 
  Non-farm non-residential
 
2,221
   
3,206
 
    Total Real Estate $ 4,435   $ 5,709  
Non-Real Estate Loans:
           
  Agricultural
$
-
  $
-
 
  Commercial and industrial
 
-
   
-
 
  Consumer and other
 
-
   
-
 
    Total Non-Real Estate
$
-
  $
-
 
Total Real Estate Owned $ 4,435   $ 5,709  
             
Total non-performing assets
$
29,077
 
$
28,895
 
          -  
Restructured Loans:            
In compliance with modified terms $ 14,672   $ 17,547  
Past due 30 through 89 days and still accruing   679     -  
Subsequently defaulted   1,323     -  
Total restructured loans
$
16,674
 
$
17,547
 
 
27

Nonperforming assets totaled $29.1 million or 2.1% of total assets at September 30, 2012, an increase of $0.2 million from December 31, 2011. Management has not identified additional information on any loans not already included in impaired loans or the nonperforming asset total 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.
 
Nonaccrual loans totaled $23.6 million as of September 30, 2012. The nonaccrual loans are concentrated in six credit relationships that total approximately $13.8 million or 58.4% of the nonaccrual balance. The nonaccrual loan total includes approximately $3.7 million in a participation loan secured by a hotel, $3.8 million secured by two motels, $1.1 million secured by a personal residence, $1.9 million secured by equipment, $2.5 million secured by real estate, equipment, and accounts receivable, and $0.9 million secured by real estate.
 
Nonaccrual loans increased in aggregate $1.1 million from December 31, 2011 to September 30, 2012. The increase represents $10.2 million in loans placed on nonaccrual status during the first nine months of 2012. This was partially offset by nonaccrual loans that were charged-off, foreclosed upon and the collateral was transferred to other real estate, was returned to performing status, or principal repayed totaling $9.0 million.
 
Other Real Estate Owned (OREO) totaled $4.4 million as of September 30, 2012 compared to $5.7 million at December 31, 2011. OREO is composed of several 1-4 family residential properties totaling $1.4 million, construction and land development lots of approximately $0.8 million, and commercial properties totaling $2.2 million. The decrease in OREO from December 31, 2011 was due to the sale of $4.2 million of other real estate in the first nine months of 2012. In addition the Company had write-downs of $1.3 million. The decreases in other real estate were partially offset by additions of $4.2 million during 2012.
 
Impaired loans totaled $46.7 million as of September 30, 2012.  Impaired loans with a valuation allowance totaled $33.6 million and impaired loans without a valuation allowance totaled $13.1 million.  Included in the impaired loan total were $14.7 million in restructured loans that are performing under their new terms.  For more information, see Note 5 to Consolidated Financial Statements.
 
Allowance for Loan Losses. 
 
The allowance for loan losses is maintained at a level considered sufficient to absorb potential losses embedded 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 the necessary charge to current expense to provide for current loan losses and to maintain the allowance at a level 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.
 
 
28

The data collected from all sources in determining the allowance for loan losses is evaluated on a regular basis by Management with regard to current national and local economic trends, prior loss history, underlying collateral values, credit concentrations and industry risks. An estimate of potential loss on specific loans is developed in conjunction with an overall risk evaluation of the total loan portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.
 
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. 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. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect Management's estimate of probable losses.
 
Provisions made pursuant to these processes totaled $3.0 million in the first nine months of 2012 compared to $6.9 million for the same period in 2011. Total charge-offs were $3.0 million for first nine months of 2012 as compared to $8.1 million for the same period in 2011.  Recoveries totaled $0.6 million during the first nine months of 2012 and $0.6 million during the first nine months of 2011.
 
All accrued but uncollected interest related to a loan is deducted from income in the period the loan is assigned a nonaccrual status. 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 placed on nonaccrual status. As of September 30, 2012 and December 31, 2011 the Company had loans totaling $23.6 million and $22.5 million, respectively, on which the accrual of interest had been discontinued. The allowance for loan losses at September 30, 2012 was $9.5 million or 40.3% of nonperforming loans.  At September 30, 2012 loans classified as TDRs totaled $16.7 million. The portion of the allowance for loan losses associated with TDRs was $0.7 million or 7.7% of total reserve. 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)
September 30, 2012   September 30, 2011  
Loans:            
Average outstanding balance
$
583,046
 
$
580,478
 
Balance at end of period
$
606,162
 
$
606,501
 
             
Allowance for Loan Losses:
           
Balance at beginning of year
$
8,879
 
$
8,317
 
  Provision charged to expense
 
3,014
   
6,855
 
  Loans charged-off
 
(2,951
)
 
(8,060
  Recoveries
 
565
   
592
 
Balance at end of period
$
9,507
 
$
7,704
 
 
29

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, management regularly assesses our funding needs, deposit pricing and interest rate outlooks. From December 31, 2011 to September 30, 2012, total deposits decreased by $1.1 million to $1.2 billion at September 30, 2012.  Noninterest-bearing demand deposits increased $24.4 million from December 31, 2011 to September 30, 2012. Interest-bearing demand deposits increased by $8.2 million when comparing September 30, 2012 to December 31, 2011. Time deposits decreased $36.3 million, or 5.2% to $656.2 million at September 30, 2012, compared to $692.5 million at December 31, 2011.
 
At September 30, 2012, public fund deposits totaled $433.2 million.  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 with 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, U.S. Government securities, and by eligible U.S. 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 September 30, 2012, the aggregate amount of outstanding time deposits in amounts greater than or equal to $100,000 was approximately $429.8 million.  At September 30, 2012, $280.0 million or 42.7% of the Company's time deposits had a remaining term greater than one year.
 
As we seek to maintain a strong net interest margin and improve our earnings, attracting core noninterest-bearing deposits will remain a key element of the Company’s strategy. 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 emphasis on core deposits.
 
The following table sets forth the distribution of our total deposit accounts, by account type, for the periods indicated.
 
          Increase/(Decrease)  
(in thousands except for %)
September 30, 2012  
December 31, 2011
  Amount  
Percent
 
Noninterest-bearing demand
$
192,282
 
$
167,925
 
$
24,357
  14.5
%
 
Interest-bearing demand
 
297,579
   
289,408
   
8,171
  2.8
%
 
Savings
 
60,135
   
57,452
   
2,683
  4.7
%
 
Time
 
656,174
   
692,517
   
(36,343
) -5.2
%
 
Total deposits
$
1,206,170
 
$
1,207,302
 
$
(1,132
) -0.1
%
 
 
The following table sets forth the distribution of our time deposit accounts.
 
(in thousands)
September 30, 2012  
Time deposits of less than $100,000 $ 226,348  
Time deposits of $100,000 through $250,000   158,445  
Time deposits of more than $250,000   271,381  
Total Time Deposits $ 656,174  
 
The following table sets forth public funds as a percent of total deposits.
 
(in thousands except for %)
September 30, 2012   December 31, 2011   December 31, 2010   December 31, 2009   December 31, 2008  
Total Public Funds $ 433,167     $ 431,905     $ 356,153     $ 268,474     $ 225,766    
Total Deposits $ 1,206,170     $ 1,207,302     $ 1,007,383     $ 799,746     $ 780,382    
Total Public Funds as a percent of Total Deposits   35.9 %     35.8 %     35.4 %     33.6 %     28.9 %  
 
 
30

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 September 30, 2012, short-term borrowings totaled $11.8 million compared to $12.2 million at December 31, 2011, and consisted of repurchase agreements and federal funds purchased. Overnight repurchase agreement balances are monitored daily for sufficient collateralization. The Company had long-term borrowings totaling $1.3 million as of September 30, 2012 and $3.2 million at December 31, 2011. The Company pays $50,000 principal per month on its long-term debt that is priced at WSJ prime plus 75 basis points (4.0%). In addition to the $0.5 million in monthly principal payments for the first nine months of 2012, the Company also made principal reductions totaling $1.5 million. The accelerated repayment of the Company’s long-term debt is a strategy by Management to reduce interest costs while yields on securities remain low.  
 
The average amount of total short-term borrowings for the first nine months of 2012 and 2011 totaled $15.1 million. At September 30, 2012, the Company had $50.0 million in Federal Home Loan Bank letters of credit outstanding obtained solely for collateralizing public deposits.
 
The Company also maintains a $2.5 million revolving line of credit.  There was no balance on this credit facility at September 30, 2012 or December 31, 2011.  This credit facility and the $1.3 million in long-term debt are secured by a portion of the Company's ownership in its subsidiary First Guaranty Bank.
  
Equity.  
 
Stockholders’ equity provides a source of permanent funding, allows for future growth and the ability to absorb unforeseen adverse developments. Of total stockholders' equity, $39.4 million is in the form of preferred stock Series C. The Company is a participant in the United States Treasury's Small Business Lending Fund and the preferred stock series C was issued pursuant to participation. Total equity increased to $134.5 million as of September 30, 2012 from $126.6 million at December 31, 2011. The increase in stockholders' equity was the result of the increase in retained earnings totaling $4.5 million and an increase in accumulated other comprehensive income totaling $3.4 million. The increase in retained earnings was attributable to year to date earnings of $9.0 million which was partially offset by dividends paid to common shareholders totaling $3.0 million and dividends paid on preferred stock totaling $1.5 million. The increase in accumulated other comprehensive income was solely from increases in unrealized gains on available for sale securities. Stockholders’ equity was slightly decreased by the purchase of 2,895 shares of the Company’s common stock totaling $54,000.
 
Results of Operations for the Three Months and Nine Months Ended September 30, 2012 and 2011
 
Net Income.

Net income for the quarter ended September 30, 2012 was $3.0 million, an increase of $0.9 million from $2.2 million for the quarter ended September 30, 2011. Net income for the nine months ended September 30, 2012 was $9.0 million, an increase of $2.1 million or 30.1% from $7.0 million for the nine months ended September 30, 2011. For the quarter ended September 30, 2012, the Company had net income available to common shareholders of $2.5 million, an increase of $1.1 million from $1.4 million for the same quarter in 2011. Net income available to common shareholders for the nine months ended September 30, 2012 was $7.6 million, an increase of $2.0 million from $5.5 million for the same period in 2011. The increase in income can be attributed to decreased provisions to the allowance for loan losses when compared year over year as well as decreased interest expense. Net gains on securities for the third quarter of 2012 and 2011 were $1.7 million and $0.9 million, respectively. Net gains on securities for the first nine months of 2012 and 2011 were $3.2 million and $3.1 million. Earnings per common share for the third quarter ended September 30, 2012 was $0.40 per common share, an increase of 81.8% or $0.18 per common share from $0.22 per common share for the third quarter ended September 30, 2011. Earnings per common share for the nine months ended September 30, 2012 was $1.20 per common share, an increase of 34.8% or $0.31 per common share from $0.89 per common share for the nine months ended September 30, 2011.
 
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 net interest income to provide the largest possible amount of income, while balancing interest rate risk, credit risk, and liquidity risk.
 
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 institutions 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 will be discussed below.
 
Net interest income in the third quarter of 2012 was $9.9 million, when compared to the same period in 2011 of $10.1 million. Net interest income for the first nine months of 2012 and 2011 was $31.6 million and $29.1 million, respectively. Loans represent the largest portion of the Company's interest-earning assets, and at September 30, 2012, 52.1% of our total loans were floating rate loans which are primarily tied to the prime lending rate. After the prime rate dropped 400 basis points in 2008, management began adding interest rate floors to floating rate loans. The interest rate floors helped stabilize the Company's net interest income. The Company has also improved it net interest income in 2012 by increasing its investment portfolio. The cost of our interest-bearing liabilities reflects a lower cost of funds paid on interest-bearing liabilities. As of September 30, 2012, time deposits represented 54.4% of total deposits, which is a decrease from 57.4% of total deposits at December 31, 2011.
 
 
 
31

The average yield on interest-earning assets decreased from 4.64% for the nine months ended September 30, 2011 to 4.26%  for the nine months ended September 30, 2012. The interest-bearing liabilities average yield decreased to 1.28% for the nine months ended September 30, 2012, compared to 1.60% for the same period in 2011. The net yield on interest-earning assets was 2.98% for the nine months ended September 30, 2012, compared to 3.04% for the same period in 2011.
 
The net interest income yield shown below in the average balance sheet is calculated by dividing net interest income by average interest-earning assets outstanding for 2012 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. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
 
  September 30, 2012   September 30, 2011  
(in thousands)
Average Balance   Interest   Yield/Rate   Average Balance   Interest   Yield/Rate  
Assets
                                   
Interest-earning assets:
                                   
  Interest-earning deposits with banks [3]
$
29,887  
$
56
  0.25
%
 
$
28,563
 
$
35
  0.16
%
 
  Securities (including FHLB stock)
  666,707    
15,110
  3.02
%
   
539,272
   
14,504
  3.60
%
 
  Federal funds sold
  25,263    
10
  0.05
%
   
18,235
   
14
  0.10
%
 
  Loans, net of unearned income
  583,046    
26,538
  6.06
%
   
580,478
   
25,938
  5.97
%
 
    Total interest-earning assets
  1,304,903  
 
41,714
  4.26
%
 
 
1,166,548
 
 
40,491
  4.64
%
 
                                     
Noninterest-earning assets:
                                   
  Cash and due from banks
 
10,442
               
9,602
             
  Premises and equipment, net
 
19,827
               
17,229
             
  Other assets
 
22,342
               
10,695
             
Total Assets
 
1,357,514
               
1,204,074
             
                                     
Liabilities and Stockholders' Equity
                                   
Interest-bearing liabilities:
                                   
  Demand deposits
 
305,547
   
1,050
  0.46
%
   
209,279
   
644
  0.41
%
 
  Savings deposits
 
58,806
   
40
  0.09
%
   
51,535
   
37
  0.10
%
 
  Time deposits
 
667,103
   
8,905
  1.78
%
   
675,915
   
10,637
  2.10
%
 
  Borrowings
 
17,406
   
98
  0.74
%
   
13,304
   
50
  0.50
%
 
    Total interest-bearing liabilities
 
1,048,862
   
10,093
  1.28
%
   
950,033
   
11,368
  1.60
%
 
                                     
Noninterest-bearing liabilities:
                                   
  Demand deposits
 
171,854
               
145,548
             
  Other
 
6,027
               
6,234
             
Total Liabilities
 
1,226,743
               
1,101,815
             
                                     
Stockholders' equity
 
130,771
               
102,259
             
Total Liabilities and Stockholders'
 
1,357,514
             
 
1,204,074
             
Net interest income
     
$
31,621
             
$
29,123
       
                                     
Net interest rate spread [4]
            2.98
%
              3.04
%
 
Net interest-earning assets [5]
$
256,041
             
$
216,515
             
Net interest margin [6]
            3.23
%
              3.34
%
 
                                     
Average interest-earning assets to interest-bearing liabilities
            124.41
%
              122.79
%
 
 
 [3] Interest-earning deposits with banks include interest earning portion of reserves kept with the Federal Reserve Bank that are classified on the balance sheet as "cash and due from banks". The reserves are not classified as interest-earning demand deposits on the balance sheet because interest is only paid on amounts in excess of minimum reserve requirements.
[4] Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
[5] Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
[6] Net interest margin represents net interest income divided by average total interest-earning assets.
 
 
32

Provision for Loan Losses.
 
The provision for loan losses was $0.9 million and $3.5 million for the third quarter of 2012 and 2011, respectively. For the nine months ending September 30, 2012, the provision for loan loss was $3.0 million, a decrease from $6.9 million for the first nine months of 2011. The lower provision in 2012 was based on the current condition of the loan portfolio as well as other quantitative and qualitative factors considered by the Company's management team. Of the loan charge-offs for the year to date 2012, approximately $2.1 million were loans secured by real estate and $0.8 million were loans secured by non-real estate. The allowance for loan losses at September 30, 2012 was $9.5 million, compared to $8.9 million at December 31, 2011, and was 1.57% and 1.55% of total loans, at the respective dates. Management believes that the current allowance will cover losses that may currently exist in the loan portfolio given certain qualitative information (i.e. economic conditions, expected charge-offs, and nonperforming assets).

Noninterest Income.
 
For the quarter ending September 30, 2012 and 2011, noninterest income totaled $3.3 million and $4.0 million, respectively. Noninterest income totaled $8.0 million for the nine months ended September 30, 2012, a decrease of $0.9 million when compared to $8.9 million for the nine months ended September 30, 2011. The noninterest income for the quarter and nine months ended September 30, 2011 included a gain on acquisition of $1.4 million. Service charges, commissions and fees totaled $1.2 million for the third quarter ended September 30, 2012 and 2011. Service charges, commissions and fees totaled $3.6 million for the nine months ended September 30, 2012 and $3.4 million for the same period of 2011. Net securities gains were $1.7 million for the third quarter of 2012 compared to $0.9 million in 2011. Net securities gains were $3.2 million for the first nine months of 2012 compared to $3.1 million in 2011. Net losses on the sale of loans were $47,000 for the nine months ended September 30, 2012 and net gains on the sale of loans were $0.1 million for the same period in 2011. Other noninterest income remained relatively unchanged at $0.4 million for the third quarter ending September 30, 2012 and 2011. The Company’s other noninterest income increased by $0.2 million to $1.2 million in the first nine months of 2012 from $1.1 million for the same period in 2011.
 
Noninterest Expense.
 
Noninterest expense includes salaries and employee benefits, occupancy and equipment expense, net cost from other real estate and repossessions, regulatory assessments and other types of expenses. Noninterest expense totaled $7.8 million in the third quarter of 2012 and $7.9 million in 2011. Noninterest expense increased to $22.9 million for the first nine months of 2012 from $21.2 million for the first nine months of 2011. Salaries and benefits totaled $3.4 million for the third quarter of 2012 and 2011. Salaries and benefits totaled $10.1 million for the first nine months of 2012 compared to $9.4 million for the same period in 2011. Occupancy and equipment expense totaled $1.0 million for the third quarter of 2012 and $0.9 million for the same period in 2011. Occupancy and equipment expense totaled $2.8 million for the first nine months of 2012 and $2.6 million for the same period in 2011. Net costs from other real estate and repossession includes expenses to maintain properties (taxes, legal fees, and insurance) as well as write-downs of the carrying value of the Company's other real estate owned. The increase in net costs from other real estate and repossession is largely attributable to write-downs of $1.3 million for the first nine months of 2012 compared to $0.3 million for the same period in 2011. Other noninterest expense totaled $3.5 million in the third quarter of 2012 and 2011. Other noninterest expense increased by $0.7 million to $10.0 million for the nine months ended September 30, 2012 from $9.3 million for the nine months ended September 30, 2011.
 
The following is a summary of the significant components of other noninterest expense:  
   
  Nine Months Ended September 30,   Three Months Ended September 30,  
(in thousands)
2012
 
2011
  2012   2011  
Other noninterest expense:
                   
Legal and professional fees
$
1,527
 
$
1,691
  $ 438   $ 730  
Data processing
 
2,086
   
1,803
    721     684  
Marketing and public relations
 
657
   
746
    237     217  
Taxes - sales, capital, and franchise
 
541
   
403
    182     17  
Operating supplies
 
425
   
735
    150     170  
Travel and lodging
 
409
   
345
    118     151  
Net costs from other real estate and repossessions
 
1,838
   
520
    739     324  
Regulatory assessment
 
792
   
1,361
    295     413  
Other
 
1,720
   
1,659
    574     827  
Total other expense
$
9,995
 
$
9,263
  $ 3,454   $ 3,533  
 
Income Taxes.
 
The provision for income taxes was $1.5 million and $0.5 million for the quarters ending September 30, 2012 and 2011. The provision for the nine months ended September 30, 2012 and 2011 was $4.6 million and $3.1 million, respectively. The higher provision for income taxes for 2012 was a result of higher income for 2012 when compared to 2011 as well as the non-taxable nature of the Gain on Acquisition in 2011.
 
 
33

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 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, 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. Accordingly, our Board of Directors has established an Asset/Liability Committee which is responsible for evaluating 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. Senior Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee, which consists of executive Management and other bank personnel operating under a policy adopted by the Board of Directors, meets as needed to review our asset/liability policies and interest rate risk position.
 
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 being repriced 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.
 
To maximize our margin, we attempt to be somewhat more asset sensitive during periods of rising rates and more liability sensitive during periods of falling rates. The need for interest sensitivity gap management is most critical in times of rapid changes in overall interest rates. We generally seek to limit our exposure to interest rate fluctuations by maintaining a relatively balanced mix of rate sensitive assets and liabilities on a one-year time horizon. The mix is relatively difficult to manage. 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.
 
We monitor interest rate risk using an interest sensitivity analysis set forth on the following table. This analysis, which we prepare monthly, reflects the maturity and repricing characteristics of assets and liabilities over various time periods. The gap indicates whether more assets or liabilities are subject to repricing over a given time period. The interest sensitivity analysis at September 30, 2012 shown below reflects a liability-sensitive position with a negative cumulative gap on a one-year basis.
 
 
September 30, 2012
 
 
Interest Sensitivity Within
 
(in thousands)
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) $
72,378
 
$
117,461
 
$
189,839
 
$
416,403
 
$
606,242
 
Securities (including FHLB stock)
 
30,483
   
72,772
   
103,255
   
542,626
   
645,881
 
Federal Funds Sold
 
4,931
   
-
   
4,931
   
-
   
4,931
 
Other earning assets
 
20
   
-
   
20
   
747
   
767
 
Total earning assets
$
107,812
 
$
190,233
 
$
298,045
 
$
959,776
 
$
1,257,821
 
                               
Source of Funds:
                             
Interest-bearing accounts:
                             
  Demand deposits
$
148,790
 
$
-
 
$
148,790
 
$
148,789
 
$
297,579
 
  Savings deposits
 
15,034
   
-
   
15,034
   
45,101
   
60,135
 
  Time deposits
 
154,390
   
221,770
   
376,160
   
280,014
   
656,174
 
  Short-term borrowings
 
11,774
   
-
   
11,774
   
-
   
11,774
 
  Long-term borrowings
 
-
   
-
   
-
   
1,250
   
1,250
 
Noninterest-bearing, net
 
-
   
-
   
-
   
230,909
   
230,909
 
Total source of funds
$
329,988
 
$
221,770
 
$
551,758
 
$
706,063
 
$
1,257,821
 
                               
Period gap
$
(222,176
)
$
(31,537
)
$
(253,713
)
$
253,713
       
Cumulative gap
$
(222,176
)
$
(253,713
)
$
(253,713
)
$
-
       
                               
Cumulative gap as a percent of earning assets
 
-17.66
%
 
-20.17
%
 
-20.17
%
           
 
 
34

Liquidity and Capital Resources
 
On September 22, 2011, the Company received $39.4 million in funds from the U.S. Treasury's Small Business Lending Fund ("SBLF") program. $21.1 million of the funds from the SBLF program were used to refinance the Company's Series A and B Preferred Stock issued to the Treasury under the Capital Purchase Program. The dividend rate on the shares of the preferred stock issued in connection with the SBLF is dependent on the Company's volume of qualified small business loans. In the third quarter of 2012 the Company’s estimated growth in its qualified loans exceeded ten percent of its base line qualified loan portfolio. This increase should reduce the Company’s rate on its preferred equity from 5.00% on the total $39.4 million to 1.00% on the amount equal to the growth in qualified loans and 5.00% on the residual. Pursuant to the agreement with the Treasury, this rate reduction is anticipated to be recognized in the first quarter of 2013.
 
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, interest-earning time deposits, federal funds sold and unpledged available-for-sale investment securities. These assets represent 60.5% and 63.5% of the unpledged liquidity base at September 30, 2012 and December 31, 2011, respectively. The residual liquidity base is comprised of available lines of credit that are discussed in further detail below.
 
Loans maturing within one year or less at September 30, 2012 totaled $173.3 million.  At September 30, 2012, time deposits maturing within one year or less totaled $376.1 million.
 
The Company maintained a net borrowing capacity at the Federal Home Loan Bank totaling $125.8 million and $125.5 million at September 30, 2012 and December 31, 2011, respectively. The Company also maintain federal funds lines of credit at three correspondent banks with borrowing capacity of $55.5 million and a revolving line of credit for $2.5 million as of September 30, 2012. The Company did not have an outstanding balance on these lines of credit as of September 30, 2012. 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.
 
Total equity increased to $134.5 million as of September 30, 2012 from $126.6 million at December 31, 2011. The increase in stockholders' equity was the result of the increase in retained earnings totaling $4.5 million and an increase in accumulated other comprehensive income totaling $3.4 million. The increase in retained earnings was attributable to year to date earnings of $9.0 million which was partially offset by dividends paid to common shareholders totaling $3.0 million and dividends paid on preferred stock totaling $1.5 million. The increase in accumulated other comprehensive income was solely from increases in unrealized gains on available for sale securities. Stockholders’ equity was slightly decreased by the purchase of 2,895 shares of the Company’s common stock totaling $54,000.
 
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.
 
  As of September 30, 2012  
  "Well Capitalized Minimums"   Actual      
Tier 1 Leverage Ratio            
  Consolidated 5.00 %   9.15 %  
  Bank 5.00 %   9.14 %  
             
Tier 1 Risk-based Capital Ratio            
  Consolidated 6.00 %   14.16 %  
  Bank 6.00 %   14.14 %  
             
Total Risk-based Capital Ratio            
  Consolidated 10.00 %   15.26 %  
  Bank 10.00 %   15.24 %  
 
At September 30, 2012, the Company and its subsidiary satisfied the minimum regulatory capital requirements and were well capitalized within the meaning of federal regulatory requirements.
 
35

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.
 
The Company is subject to various other legal proceedings in the normal course of business and otherwise. It is management's 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.
 
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 management's 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.
 
 
Exhibit
 
Number
Exhibit
   
   14.3
Code of Ethics for Senior Financial Officers
   
   14.4 Code of conduct and Ethics for Employees, Officers, and Directors
   
   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.INS
XBRL Instance Document.
   
 101.SCH XBRL Taxonomy Extension Schema.
   
 101.CAL XBRL Taxonomy Extension Calculation Linkbase.
   
 101.DEF XBRL Taxonomy Extension Definition Linkbase.
   
 101.LAB XBRL Taxonomy Extension Label Linkbase.
   
 101.PRE XBRL Taxonomy Extension Presentation Linkbase.
   
 
 
36

 

 
 

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:  November 13, 2012
 
By: /s/ Alton B. Lewis
   
Alton B. Lewis
   
Principal Executive Officer
     
     
Date:  November 13, 2012
 
By: /s/ Eric J. Dosch
   
Eric J. Dosch
   
Principal Financial Officer
   
Secretary and Treasurer
 
37