First Guaranty Bancshares, Inc. - Annual Report: 2013 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
Commission file number: 000-52748
FIRST GUARANTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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Louisiana
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26-0513559
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(State or other jurisdiction incorporation or organization)
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(I.R.S. Employer Identification Number)
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400 East Thomas Street
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Hammond, Louisiana
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70401
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(Address of principal executive offices)
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(Zip Code)
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(985) 345-7685
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(Registrant’s telephone number, including area code)
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Not Applicable
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(Former name or former address, if changed since last report)
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $1 par value per share
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None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES o NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES o NO x
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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
YES x NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.T
YES o NOx
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 Act).
YES o NO x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2013 was $64,519,515 based upon the price from the last trade of $19.60. The common stock is not quoted or traded on an exchange and there is no established or liquid market for the common stock.
As of March 21, 2014, there were issued 6,294,227 and outstanding 6,291,332 shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Proxy Statement for the 2014 Annual Meeting of Stockholders of the Registrant (Part III).
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TABLE OF CONTENTS
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Page
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Part I.
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Item 1
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4
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Item 1A
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12
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Item 1B
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19
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Item 2
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20
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Item 3
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20
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Item 4
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20
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Part II.
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Item 5
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21 | |
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Item 6
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23
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Item 7
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25 | |
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Item 7A
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49
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Item 8
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51
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| Notes to the Financial Statements | 56 | |
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Item 9
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87 | |
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Item 9A
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87
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Item 9B
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87
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Part III.
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Item 10
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88
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Item 11
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88
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Item 12
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88
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Item 13
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88
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Item 14
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88
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Part IV.
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Item 15
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89
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3
Background
First Guaranty Bancshares, Inc. (the “Company”) is a bank holding company headquartered in Hammond, Louisiana with one wholly owned subsidiary, First Guaranty Bank (the “Bank”). At December 31, 2013, the Company had consolidated assets of $1.4 billion and $123.4 million consolidated stockholders’ equity. The Company’s executive office is located at 400 East Thomas Street, Hammond, Louisiana 70401. The telephone number is (985) 345-7685. The Company is subject to extensive regulation by the Board of Governors of the Federal Reserve System (“FRB”).
First Guaranty Bank is a Louisiana state chartered commercial bank with 21 banking facilities including one drive-up only facility located in Southeast, Southwest and North Louisiana. The Bank was organized under Louisiana law in 1934 and changed its name to First Guaranty Bank in 1971. Deposits are insured up to the maximum legal limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is not a member of the Federal Reserve System. As of December 31, 2013, the Bank was the sixth largest Louisiana-based bank and the fourth largest Louisiana-based bank not headquartered in New Orleans, as measured by total assets.
Business Objective
The Company’s business objective is to provide value to customers by delivering products and services matched to customer needs. We emphasize personal relationships and localized decision making. The Board of Directors and senior Management have extensive experience and contacts in our marketplace and are an important source of new business opportunities. The Company’s business plan emphasizes both growth and profitability.
Market Areas
Our focus is on the communities of metropolitan markets, small cities and rural areas in Southeast, Southwest and North Louisiana. In Southeast Louisiana, eight branches are located in Tangipahoa Parish in the towns of Amite, Hammond (2), Independence, Kentwood (2) and Ponchatoula (2). Three branches are located in Livingston Parish, with a branch in Denham Springs, Walker and Watson. In Southwest Louisiana, we have branches in Abbeville and Jennings which are located in Vermillion Parish and Jefferson Davis Parish, respectively. The Company also has two branches in St. Helena Parish, one in Greensburg and the other in Montpelier. The remaining six branches are located in North Louisiana, in Haynesville and Homer, which are both in Claiborne Parish; in Oil City and Vivian, both in Caddo Parish; in Dubach which is in Lincoln Parish and Benton, in Bossier Parish.
Our Southeast Louisiana market is strategically located near the intersection of Interstates 12 and 55, which places it at a crossroads of commercial activity for the Southeastern United States. The urban centers of New Orleans and Baton Rouge are approximately 60 miles and 45 miles, respectively, from Hammond, where the Company’s executive office is located. Hammond is home to one of the largest medical centers in the state as well as Southeastern Louisiana University.
Our Southwest Louisiana market benefits from a diverse economy which includes casino gaming, tourism, oil field and oil field services activity, and agriculture including rice, sugarcane and crawfish.
Timber cultivation and its related industries, including milling and logging, are key commercial activities in the North Louisiana market. It is also an agrarian center in which corn, cotton and soybeans are the primary crops. The poultry industry, including independent poultry grower farms that contract with national poultry processing companies, is also very important to the local economy.
Banking Products and Services
The Bank offers personalized commercial banking services to businesses, professionals and individuals. We offer a variety of deposit products including personal and business checking and savings accounts, time deposits, money market accounts and negotiable order of withdrawal (“NOW”) accounts. Other services provided include personal and commercial credit cards, remote deposit capture, safe deposit boxes, official checks, internet banking, online bill pay, mobile banking and lockbox services. Also offered is 24-hour banking through internet banking, voice response and automated teller machines (“ATM”). Although full trust powers have been granted, we do not actively operate or have any present intention to activate a trust department.
Loans
The Bank is engaged in a number of lending activities to serve the credit needs of its customer base including commercial loans, commercial real estate loans, real estate construction loans, residential mortgage loans, agricultural loans, home equity lines of credit, equipment loans, inventory financing and student loans. In addition, the Bank provides consumer loans for a variety of reasons such as the purchase of automobiles, recreational vehicles or boats, investments or other consumer needs. The Bank issues Visa credit cards and provides merchant processing services to commercial customers. The loan portfolio is divided, for regulatory purposes, into four broad classifications: (i) real estate loans, which include all loans secured in whole or part by real estate; (ii) agricultural loans, comprised of all farm loans; (iii) commercial and industrial loans, which include all commercial and industrial loans that are not secured by real estate; and (iv) consumer loans.
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Competition
The banking business in Louisiana is extremely competitive. We compete for deposits and loans with existing Louisiana and out-of-state financial institutions that have longer operating histories, larger capital reserves and more established customer bases. The competition includes large financial services companies and other entities in addition to traditional banking institutions such as savings and loan associations, savings banks, commercial banks and credit unions.
Many of our larger competitors have a greater ability to finance wide-ranging advertising campaigns through their greater capital resources. Marketing efforts depend heavily upon referrals from officers, directors and shareholders, selective advertising in local media and direct mail solicitations. We compete for business principally on the basis of personal service to customers, customer access to officers and directors and competitive interest rates and fees.
Financial institutions have been forced to diversify their services, increase fees on loans and deposits and become more cost effective, as a result of competition with one another and with new types of financial services companies, including non-banking competitors. Some of the results of these market dynamics in the financial services industry have been a number of new bank and non-bank competitors, increased merger activity, and increased customer awareness of product and service differences among competitors. These factors could affect business prospects.
Employees
At December 31, 2013, the Company employed 278 full-time equivalent employees. None of our employees are represented by a collective bargaining group. The Company has a good relationship with its employees.
Data Processing
Since November 2001, customer information has been housed on equipment owned by Financial Institution Service Corporation (“FISC”). FISC is a cooperative jointly owned by a number of Louisiana and Mississippi state banks that are currently serviced by FISC. The 2013 annual cost of this service was $0.6 million. The current arrangements are adequate and are expected to be able to accommodate our needs for the foreseeable future.
Information Technology Infrastructure
Our wide area network links more than 25 remote sites. All of the Company's network devices communicate via a secure network. We have a back-up data center located in North Louisiana to ensure continuity of business operations in the event of an interruption.
Subsidiaries
The Company is a one-bank holding company with First Guaranty Bank as its subsidiary.
Bank Regulatory Compliance
First Guaranty Bank is a FDIC insured, non-member Louisiana state bank. Regulation of financial institutions is intended primarily to protect depositors, the deposit insurance funds of the FDIC and the banking system as a whole, and generally is not intended to protect stockholders or other investors. The Bank is subject to regulation and supervision by both the Louisiana Office of Financial Institutions ("Louisiana OFI") and the FDIC. In addition, the Bank is subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that are made and the interest that is charged on those loans, and limitations on the types of investments that are made and the types of services that are offered. Various consumer laws and regulations also affect operations.
Bank Regulation and Supervision
Banking is a complex, highly regulated industry. Consequently, the growth and earnings performance of First Guaranty Bancshares, Inc. and its subsidiary bank can be affected not only by management decisions and general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. These authorities include, but are not limited to, the FRB, the FDIC, the Louisiana OFI, the U.S. Internal Revenue Service ("IRS") and state taxing authorities. The effect of these statutes, regulations and policies and any changes to any of them can be significant and cannot be predicted.
The primary goal of regulation is to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress has created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the banking industry. The system of supervision and regulation applicable to First Guaranty Bancshares, Inc. establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds, depositors and the public, rather than the shareholders and creditors. The following is an attempt to summarize some of the relevant laws, rules and regulations governing banks and bank holding companies, but does not purport to be a complete summary of all such applicable laws, rules and regulations. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed.
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The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”).
The Dodd-Frank Act made extensive changes in the regulation of depository institutions. For example, the Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations, a function previously assigned to prudential regulators, and has the authority to impose new requirements. Institutions of less than $10 billion in assets, such as First Guaranty Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the primary enforcement authority of, their federal prudential regulator rather than the Consumer Financial Protection Bureau.
In addition to creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, directs changes in the way that institutions are assessed for deposit insurance, requires more stringent consolidated capital requirements for bank holding companies, requires originators of securitized loans to retain a percentage of the risk for the transferred loans, establishes regulatory rate-setting for certain debit card interchange fees, repeals restrictions on the payment of interest on commercial demand deposits, contains a number of reforms related to mortgage originations and requires public companies to give stockholders a non-binding vote on executive compensation and golden parachutes. Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates and/or require the issuance of implementing regulations. Their impact on operations cannot yet be fully assessed. However, there is a significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden, compliance costs and interest expense for the Bank.
The rules effecting debit card interchange fees under the Durbin Amendment, which became effective on October 1, 2012, has negatively impacted our electronic banking income.
The Durbin Amendment required the Federal Reserve to establish a cap on the rate merchants pay banks for electronic clearing of debit transactions (i.e. the interchange rate). The Federal Reserve issued final rules, effective October 1, 2012, for establishing standards, including a cap, for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. The final rule established standards for assessing whether debit card interchange fees received by debit card issuers were reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction, a 1 cent fraud prevention adjustment, and 5 basis points multiplied by the value of the transaction.
First Guaranty Bancshares, Inc.
General.
First Guaranty Bancshares, Inc. is a bank holding company registered with, and subject to regulation by, the FRB under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). The Bank Holding Company Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. In accordance with FRB policy, a bank holding company, such as First Guaranty Bancshares, Inc., is expected to act as a source of financial strength to its subsidiary bank and commit resources to support its bank. This support may be required under circumstances when we might not be inclined to do so absent this FRB policy.
Certain Acquisitions.
Federal law requires every bank holding company to obtain the prior approval of the FRB before (i) acquiring more than five percent of the voting stock of any bank or other bank holding company, (ii) acquiring all or substantially all of the assets of any bank or bank holding company or (iii) merging or consolidating with any other bank holding company. Additionally, federal law provides that the FRB may not approve any of these transactions if it would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The FRB is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. Further, the FRB is required to consider the record of a bank holding company and its subsidiary bank(s) in combating money laundering activities in its evaluation of bank holding company merger or acquisition transactions. Under the Bank Holding Company Act, if adequately capitalized and adequately managed, any bank holding company located in Louisiana may purchase a bank located outside of Louisiana. However, as discussed below, restrictions currently exist on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits.
Change in Bank Control.
The Bank Holding Company Act and the Change in Bank Control Act of 1978, as amended, generally require FRB approval prior to any person or company acquiring control of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities.
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Permitted Activities.
Generally, bank holding companies are prohibited by federal law from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in any activity other than (i) banking or managing or controlling banks or (ii) an activity that the FRB determines to be so closely related to banking as to be a proper incident to the business of banking. Activities that the FRB has found to be so closely related to banking as to be a proper incident to the business of banking include, but are not limited to:
| ● | factoring accounts receivable; |
| ● | making, acquiring, brokering or servicing loans and usual related activities; |
| ● | leasing personal or real property; |
| ● | operating a non-bank depository institution, such as a savings association; |
| ● | trust company functions; |
| ● | financial and investment advisory activities; |
| ● | conducting discount securities brokerage activities; |
| ● | underwriting and dealing in government obligations and money market instruments; |
| ● | providing specified management consulting and counseling activities; |
| ● | performing selected data processing services and support services; |
| ● | acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and |
| ● | performing selected insurance underwriting activities. |
Despite prior approval, the FRB has the authority to require a bank holding company to terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries.
Anti-tying Restrictions.
Bank holding companies and affiliates are prohibited from tying the provision of services, such as extensions of credit, to other services offered by a holding company or its affiliates.
Insurance of Deposit Accounts.
First Guaranty Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in First Guaranty Bank are insured by the FDIC for each separately insured depositor up to $250,000.
The FDIC imposes an assessment for deposit insurance against all depository institutions. That assessment is based on the risk category of each institution, which is derived from examination and supervisory information. The FDIC first establishes an institution's initial base assessment rate based upon the risk category, with less risky institution paying lower rates. That initial base assessment rate ranged, from 12 to 45 basis points, depending upon the risk category of the institution. The initial base assessment was then adjusted (higher or lower) to obtain the total base assessment rate. The adjustments to the initial base assessment rate were generally based upon an institution's levels of unsecured debt, secured liabilities and brokered deposits. The total adjusted base assessment rate ranges from 7 to 77.5 basis points of the institution's assessable deposits. The FDIC may adjust the scale uniformly, except that no adjustment may vary more than three basis points from the base scale without notice and comment.
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Insurance of Deposit Accounts continued.
The Dodd-Frank Act required the FDIC to revise its risk-based assessment schedule and procedures to base the assessment on each institution’s average total assets less tangible capital, rather than deposits. The FDIC implemented that directive effective April 1, 2012. In so doing, the FDIC revised its assessment schedule so that it now ranges from 2.5 basis points for the institutions perceived as less risky to 45 basis points for those perceived as the riskiest.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2013, the annualized FICO assessment was 0.006% of the Company's average assets less average equity.
Other Regulations.
Interest and other charges collected or contracted are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to federal laws applicable to credit transactions, such as:
| ● | the federal "Truth -In-Lending Act," governing disclosures of credit terms to consumer borrowers; |
| ● | the "Home Mortgage Disclosure Act of 1975," requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
| ● | the "Equal Credit Opportunity Act," prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; |
| ● | the "Fair Credit Reporting Act of 1978," governing the use and provision of information to credit reporting agencies; |
| ● | the "Real Estate Settlement Procedures Act" |
| ● | the "Fair Debt Collection Act," governing the manner in which consumer debts may be collected by collection agencies |
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the Community Reinvestment Act (“CRA”), which encourages banks to meet the credit needs of borrowers in all segments of their communities, including neighborhoods with low or moderate incomes; and
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| ● | The rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws. |
The deposit operations are subject to:
| ● | the "Right to Financial Privacy Act," which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
| ● | the "Electronic Funds Transfer Act," and Regulation E issued by the FRB to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services; |
| ● | the "Truth in Savings Act" and |
| ● | the "Expedited Funds Availability Act". |
Dividends.
The Company is a legal entity separate and distinct from its subsidiary, First Guaranty Bank. The majority of the Company’s revenue is from dividends paid to the Company by the Bank. First Guaranty Bank may not pay dividends or distribute capital assets if it is in default on any assessment due to the FDIC. The FRB has indicated generally that it may be an unsafe or unsound practice for a bank holding company to pay dividends unless the bank holding company’s net income over the preceding year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition.
First Guaranty Bank is also subject to regulations that impose minimum regulatory capital and minimum state law earnings requirements that affect the amount of cash available for distribution. In addition, under the Louisiana Banking Law, dividends may not be paid if it would reduce the unimpaired surplus below 50% of outstanding capital stock in any year. If the Bank does not comply with these laws, regulations or policies it may materially affect the ability of the Company to pay dividends on its common stock.
The Company is a participant in the U.S. Treasury’s Small Business Lending Fund (“SBLF”). The Company is permitted to pay dividends on its common stock provided that the SBLF dividends have been declared and paid to the U.S. Treasury as of the most recent applicable dividend period. To date, the Company has met each SBLF dividend obligation in a timely manner. As of December 31, 2013, qualified small business lending has increased 23.3%. See Note 13 of the Consolidated Financial Statements for disclosure on the Company’s SBLF Preferred Stock Series C and Note 16 for further information on dividend restrictions.
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Capital Adequacy.
The FRB monitors the capital adequacy of bank holding companies, such as First Guaranty Bancshares, Inc., and the OFI and FDIC monitor the capital adequacy of First Guaranty Bank. The federal bank regulators use a combination of risk-based guidelines and leverage ratios to evaluate capital adequacy and consider these capital levels when taking action on various types of applications and when conducting supervisory activities related to safety and soundness. The risk-based guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $500 million or more and, generally, on a bank-only basis for bank holding companies with less than $500 million in consolidated assets. Each insured depository subsidiary of a bank holding company with less than $500 million in consolidated assets is expected to be “well-capitalized.”
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and their holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, preferred stock (other than that which is included in Tier I Capital), and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital.
In addition, the FRB has established minimum leverage ratio guidelines for bank holding companies with assets of $500 million or more. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the FRB’s risk-based capital measure for market risk. All other bank holding companies with assets of $500 million or more generally are required to maintain a leverage ratio of at least 4%. The guidelines also provide that bank holding companies of such size experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The FRB considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities. The FRB and the FDIC have adopted amendments to their risk-based capital regulations to provide for the consideration of interest rate risk in the agencies’ determination of a banking institution’s capital adequacy.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of federal deposit insurance, a prohibition on accepting brokered deposits and other restrictions on its business.
Basel 3 Regulatory Capital Rules.
In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. Additional constraints will also be imposed on the inclusion in regulatory capital of mortgage-servicing assets, defined tax assets and minority interests. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for First Guaranty Bancshares, Inc. and First Guaranty Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.
Concentrated Commercial Real Estate Lending Regulations.
The FRB and FDIC have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a company has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and non-farm residential properties and loans for construction, land development, and other land represent 300% or more of total capital and the outstanding balance of such loans has increased 50% or more during the prior 36 months. If a concentration is present, Management must employ heightened risk management practices including board and Management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and increasing capital requirements. The Company is subject to these regulations.
9
Prompt Corrective Action Regulations.
Under the prompt corrective action regulations, bank regulators are required and authorized to take supervisory actions against undercapitalized banks. For this purpose, a bank is placed in one of the following five categories based on its capital:
| ● | well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital); |
| ● | adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital); |
| ● | undercapitalized (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3% leverage capital); |
| ● | significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); and |
| ● | critically undercapitalized (less than 2% tangible capital). |
Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, banking regulators must appoint a receiver or conservator for an institution that is “critically undercapitalized.” The federal banking agencies have specified by regulation the relevant capital level for each category. An institution that is categorized as “undercapitalized”, “significantly undercapitalized” or “critically undercapitalized” is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an “undercapitalized” subsidiary’s assets at the time it became “undercapitalized” or the amount required to meet regulatory capital requirements. An “undercapitalized” institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with regulatory approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital. See Note 15 of the Consolidated Financial Statements for information on the Company's capital ratios.
Restrictions on Transactions with Affiliates and Loans to Insiders.
First Guaranty Bank is subject to the provisions of Section 23A of the FRB Act and its implementing regulations. These provisions place limits on the amount of:
| ● | First Guaranty Bank’s loans or extensions of credit to affiliates; |
| ● | First Guaranty Bank’s investment in affiliates; |
| ● | assets that First Guaranty Bank may purchase from affiliates, except for real and personal property exempted by the FRB; |
| ● | the amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and |
| ● | First Guaranty Bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate. |
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of First Guaranty Bank’s capital and surplus and, as to all affiliates combined, to 20% of its capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. First Guaranty Bank is also subject to the provisions of Section 23B of the FRB Act and its implementing regulations, which, among other things, prohibit First Guaranty Bank from engaging in any transaction with an affiliate, such as First Guaranty Bancshares, Inc., unless the transaction is on terms substantially the same, or at least as favorable to First Guaranty Bank as those prevailing at the time for comparable transactions with nonaffiliated companies. First Guaranty Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These types of extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and must not involve more than the normal risk of repayment or present other unfavorable features.
Anti-terrorism Legislation.
Financial institutions are required to establish anti-money laundering programs. In 2001, the USA Patriot Act was enacted. The USA Patriot Act significantly enhanced the powers of the federal government and law enforcement organizations to combat terrorism, organized crime and money laundering. While the USA Patriot Act imposed additional anti-money laundering requirements, these additional requirements are not material to our operations. Aside from the above, the USA Patriot Act also requires the federal banking regulators to assess the effectiveness of an institution’s anti-money laundering program in connection with merger and acquisition transactions. Failure to maintain an effective anti-money laundering program is grounds for the denial of merger or acquisition transactions.
Federal Securities Laws
First Guaranty Bancshares, Inc. common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. First Guaranty Bancshares, Inc. will continue to be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Brokered Deposits and Pass-Through Insurance
An FDIC-insured depository institution cannot accept rollover, or renew brokered deposits, unless it is well capitalized or adequately capitalized and receives a waiver from the FDIC. A depository institution that cannot receive brokered deposits also cannot offer “pass-through” insurance on certain employee benefit accounts. Whether or not it has obtained such a waiver, an adequately capitalized depository institution may not pay an interest rate on any deposits in excess of 0.75% over certain prevailing market rates specified by regulation.
10
Community Reinvestment Act
Under the Community Reinvestment Act, or CRA, a financial institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The FDIC assigns banks a CRA rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance,” and the bank must publicly disclose its rating. The FDIC rated the Bank as “satisfactory” in meeting community credit needs under the CRA at its most recent CRA performance examination.
Privacy Provisions
Under the Gramm-Leach-Bliley Act, federal banking regulators have adopted new rules requiring disclosure of privacy policies and information sharing practices to consumers. These rules prohibit depository institutions from sharing customer information with nonaffiliated parties without the customer’s consent, except in limited situations, and require disclosure of privacy policies to consumers and, in some circumstances, enable consumers to prevent disclosure of personal information to nonaffiliated third parties. In addition, the Fair and Accurate Credit Transactions Act of 2003 requires banks to notify their customers if they report negative information about them to a credit bureau or if they grant credit to them on terms less favorable than those generally available. The Company has instituted risk management systems to comply with all required privacy provisions and believes that the new disclosure requirements and implementation of the privacy laws will not materially increase operating expenses.
Sarbanes-Oxley Act
The Company is also subject to the Sarbanes-Oxley Act of 2002, which has imposed corporate governance and accounting oversight restrictions and responsibilities on the board of directors, executive officers and independent auditors. The law has increased the time spent discharging responsibilities and costs for audit services. Beginning in 2007, Management was required to report on the effectiveness of internal controls and procedures. The Company is a smaller reporting company and is not required to get an attestation report from our external auditor on the effectiveness of our internal controls over financial reporting until our public float exceeds $75 million. However, the Company is required to get an attestation report from our auditors for the Federal Deposit Insurance Corporation Improvement Act (FDICIA), due to the Company's asset size.
Effect of Governmental Policies
The difference between the interest rate paid on deposits and other borrowings and the interest rate received on loans and securities comprise most of a bank’s earnings. In order to mitigate the interest rate risk inherent in the industry, the banking business is becoming increasingly dependent on the generation of fee and service charge revenue. The earnings and growth of a bank will be affected by both general economic conditions and the monetary and fiscal policy of the United States Government and its agencies, particularly the Federal Reserve. The Federal Reserve sets national monetary policy such as seeking to curb inflation and combat recession. This is accomplished by its open-market operations in United States government securities, adjustments to the discount rates on borrowings and target rates for federal funds transactions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates on loans and deposits. The nature and timing of any future changes in monetary policies and their potential impact on the Company cannot be predicted. Our noninterest income and expenses can be affected by increasing rates of inflation; however, unlike most industrial companies, the assets and liabilities of financial institutions such as the Banks are primarily monetary in nature. Interest rates, therefore, have a more significant impact on the Bank’s performance than the effect of general levels of inflation on the price of goods and services.
Troubled Assets Relief Program and Small Business Lending Fund.
On September 22, 2011, the Company redeemed all 2,069.9 Preferred Series A and all 103 Preferred Series B shares to exit the U.S. Treasury’s Capital Purchase Program.
The Company redeemed the Preferred Series A and B shares with a portion of the $39.4 million of proceeds received in exchange for issuing 39,435 Preferred Series C shares to the U.S. Treasury as a participant in the Small Business Lending Fund program. The Preferred Series C shares receive quarterly dividends and the initial dividend rate was 5.00%. The rate was dependent on the growth in qualified small business loans made by the Bank. The Bank has increased its qualified small business loans 23.3% which qualifies the Company to pay the minimum 1.0% rate on the preferred Series C shares. The 1.0% rate is locked in until December 31, 2015. The dividend rate after 4.5 years will increase to 9.00% if the Preferred Series C shares have not been redeemed by that time.
(references to “our,” “we” or similar terms under this subheading refer to First Guaranty Bancshares, Inc.)
Various factors, such as general economic conditions in the U.S. and Louisiana, regulatory and legislative initiatives and increasing competition could impact our business. The risks and uncertainties described below are not the only risks that may have a material adverse effect on us. Additional risks and uncertainties also could adversely affect our business and results of operations. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.
Risks Associated with our Business
We will become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.
In July 2013, the FDIC and the Federal Reserve Board approved a new rule that will substantially amend the regulatory risk-based capital rules applicable to First Guaranty Bancshares, Inc. First Guaranty Bank. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
The final rule includes new minimum risk-based capital and leverage ratios, which will be effective for First Guaranty Bancshares, Inc. and First Guaranty Bank on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a “capital conservation buffer” of 2.5%, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
The application of more stringent capital requirements for First Guaranty Bank and First Guaranty Bancshares could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply with such requirements.
Our Participation in the Small Business Lending Program May Result in Higher Cost of Capital Expenses and/or Additional Government Restrictions on Our Operations.
On September 22, 2011 the Company entered into a Securities Purchase Agreement with the Secretary of the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued and sold to the Treasury 39,435 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series C (“Series C Preferred Stock”), having a liquidation preference of $1,000 per share (the “Liquidation Amount”), for aggregate proceeds of $39,435,000. The Securities Purchase Agreement was entered into, and the Series C Preferred Stock was issued, pursuant to the Treasury’s Small Business Lending Fund program (“SBLF”), as established under the Small Business Jobs Act of 2010.
The Series C Preferred Stock is entitled to receive non-cumulative dividends payable quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate, which is calculated on the aggregate Liquidation Amount, was initially set at 5.0% per annum based upon the current level of “Qualified Small Business Lending”, or “QSBL” by the Company’s wholly owned subsidiary First Guaranty Bank (the “Bank”). The Bank has increased its QSBL and achieved the contractual minimum dividend rate of 1% per annum through December 31, 2015. If the Series C Preferred Stock remains outstanding for more than four-and-one-half years, the dividend rate will be fixed at 9%. The Company may only declare and pay dividends on its common stock (or any other equity securities junior to the Series C Preferred Stock) if it has declared and paid dividends for the current dividend period on the Series C Preferred Stock, and will be subject to other restrictions on its ability to repurchase or redeem other securities.
In the event we maintain our SBLF funds, our cost of capital may increase significantly which would adversely affect our net income available to common shareholders. Moreover, so long as we continue to participate in SBLF the possibility exists for the U.S. Government to impose additional regulatory requirements on SBLF participants which may increase our costs of operations.
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We may be vulnerable to certain sectors of the economy.
A portion of our loan portfolio is secured by real estate. If the economy deteriorated and depressed real estate values beyond a certain point, that collateral value of the portfolio and the revenue stream from those loans could come under stress and possibly require additional provision to the allowance for loan losses. Our ability to dispose of foreclosed real estate at prices above the respective carrying values could also have an adverse effect on our operations.
Difficult market conditions have adversely affected the industry in which we operate.
If capital and credit markets experience volatility and disruption as they did during the recent financial crisis, we may face the following risks:
| ● |
Increased regulation of our industry.
|
| ● | Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities. |
| ● | Market developments and the resulting economic pressure on consumers may affect consumer confidence levels and may cause increases in delinquencies and default rates, which, among other effects, could affect our charge-offs and provision for loan losses. Competition in the industry could intensify as a result of the increasing consolidation of financial services companies in connection with the current market conditions. |
| ● | Market disruptions make valuation even more difficult and subjective, and our ability to measure the fair value of our assets could be adversely affected. If we determine that a significant portion of our assets have values significantly below their recorded carrying value, we could recognize a material charge to earnings in the quarter in which such determination was made, our capital ratios would be adversely affected and a rating agency might downgrade our credit rating or put us on credit watch. |
| ● | The downgrade of the U.S. government’s sovereign credit rating, any related rating agency action in the future, and the downgrade of the sovereign credit ratings for several European nations could negatively impact our business, financial condition and results of operations. |
Changes in the policies of monetary authorities and other government action could adversely affect our profitability.
The results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve Board. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in U.S. government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, particularly in light of the continuing threat of terrorist attacks and the current military operations in the Middle East, we cannot predict possible future changes in interest rates, deposit levels, loan demand or our business and earnings. Furthermore, the actions of the United States government and other governments in responding to such terrorist attacks or the military operations in the Middle East may result in currency fluctuations, exchange controls, market disruption and other adverse effects.
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We may engage in acquisitions of other businesses from time to time.
On occasion, we will engage in acquisitions of other businesses. Inability to successfully integrate acquired businesses can pose varied risks to us, including customer and employee turnover, thus increasing the cost of operating the new businesses. The acquired companies may also have legal contingencies, beyond those that we are aware of, that could result in unexpected costs. Moreover, there can be no assurance that acquired businesses will achieve prior or planned results of operations.
We may not be able to successfully maintain and manage our growth.
Continued growth depends, in part, upon the ability to expand market presence, to successfully attract core deposits, and to identify attractive commercial lending opportunities. Management cannot be certain as to its ability to manage increased levels of assets and liabilities. We may be required to make additional investments in equipment and personnel to manage higher asset levels and loan balances, which may adversely impact our efficiency, earnings and shareholder returns. In addition, franchise growth may increase through acquisitions and de novo branching. The ability to successfully integrate such acquisitions into our consolidated operations will have a direct impact on our financial condition and results of operations.
Our loan portfolio consists of a high percentage of loans secured by non-farm non-residential real estate. These loans are riskier than loans secured by one- to four-family properties.
Non-farm non-residential real estate loans, primarily loans secured by commercial real estate such as office buildings, hotels and gaming facilities, generally expose a lender to greater risk of nonpayment and loss than 1-4 family residential mortgage loans because repayment of the loans often depends on the successful operation and income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to 1-4 family residential loans. Consequently, an adverse development on one or more of these types of loans can expose us to a significantly greater risk of loss compared to an adverse development with respect to a 1-4 residential mortgage loan.
Emphasis on the origination of short-term loans could expose us to increased lending risks.
Loan payments on these types of loans are typically based on ten to twenty-year amortization schedules but have maturities typically ranging from one to five years. This results in our borrowers having significantly higher final payments due at maturity, known as a “balloon payment”. In the event our borrowers are unable to make their balloon payments when they are due, we may incur significant losses in our loan portfolio. Moreover, while the shorter maturities of our loan portfolio help us to manage our interest rate risk, they also increase the reinvestment risk associated with new loan originations. To mitigate this risk, we generally originate loans to existing customers. There can be no assurance that during an economic slow-down we might not incur significant losses as our loan portfolio matures.
We obtain a significant portion of our noninterest revenue through service charges on core deposit accounts, and regulations impacting service charges could reduce our fee income.
A significant portion of our noninterest revenue is derived from service charge income. The largest component of this service charge income is overdraft-related fees. Management anticipates that changes in banking regulations pertaining to rules on certain overdraft payments on consumer accounts may have an adverse impact on our service charge income. Additionally, changes in customer behavior, as well as increased competition from other financial institutions, may result in declines in deposit accounts or in overdraft frequency resulting in a decline in service charge income. A reduction in deposit account fee income could have a material adverse effect on our earnings.
We may be required to pay significantly higher FDIC premiums or special assessments that could adversely affect our earnings.
We may be required to pay significantly higher premiums or additional special assessments that could adversely affect our earnings. We are generally unable to control the amount of premiums that we pay for FDIC insurance. In the event of bank or financial institution failures, we may be required to pay even higher FDIC premiums. Any future increases or required prepayments in FDIC insurance premiums may materially adversely affect our results of operations.
Repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.
All current prohibitions on the payment of interest on demand deposits were repealed as part of the Dodd-Frank Act, effective one year after the date of enactment. As a result, beginning on July 21, 2012, financial institutions were permitted to offer interest on demand deposits. If competitive conditions result in First Guaranty offering interest on demand deposits our cost of deposits and interest expense may increase.
14
Hurricane Activity in Louisiana can have an adverse impact on our market area.
Our market area in Southeast Louisiana is close to New Orleans and the Gulf of Mexico, an area which is susceptible to hurricanes and tropical storms. Hurricane Katrina hit the greater New Orleans area in August 2005. The hurricane caused widespread property damage, required the relocation of an unprecedented number of residents and business operations, and severely disrupted normal economic activity in the impacted areas. The hurricane affected our loan originations and impacted our deposit base. While Hurricane Katrina did not affect our operations as adversely as other areas of Southeast Louisiana, future hurricane activity may have a severe and adverse affect on our operations. More generally, our ability to compete effectively with financial institutions whose operations are not concentrated in areas affected by hurricanes or whose resources are greater than ours will depend primarily on our ability to continue normal business operations following a hurricane. The severity and duration of the effects of hurricanes will depend on a variety of factors that are beyond our control, including the amount and timing of government, private and philanthropic investments including deposits in the region, the pace of rebuilding and economic recovery in the region and the extent to which a hurricane’s property damage is covered by insurance. As a result, significant uncertainty remains regarding the impact a hurricane may have on our business, financial condition and results of operations.
If the allowance for loan losses is not sufficient to cover actual loan losses, earnings could decrease.
Loan customers may not repay their loans according to the terms of their loans, and the collateral securing the payment of their loans may be insufficient to assure repayment. We may experience significant credit losses, which could have a material adverse effect on our operating results. Various assumptions and judgments about the collectability of the loan portfolio are made, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of many loans. In determining the amount of the allowance for loan losses, Management reviews the loans and the loss and delinquency experience and evaluates economic conditions. If assumptions prove to be incorrect, the allowance for loan losses may not cover inherent losses in the loan portfolio at the date of the financial statements. Significant additions to the allowance would materially decrease net income. We can give no assurance that the nonperforming loans will not increase or that nonperforming or delinquent loans will not adversely affect future performance. In addition, federal and state regulators periodically review the allowance for loan losses and may require an increase in the allowance for loan losses or recognize further loan charge-offs. Any significant increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a material adverse effect on the results of operations and financial condition.
Adverse events in Louisiana, where our business is concentrated, could adversely affect our results and future growth.
Our business, the location of our branches and the real estate used as collateral on our real estate loans are primarily concentrated in Louisiana. As a result, we are exposed to geographic risks. The occurrence of an economic downturn in Louisiana, or adverse changes in laws or regulations in Louisiana could impact the credit quality of our assets, the businesses of our customers and our ability to expand our business. Our success significantly depends upon the growth in population, income levels, deposits and housing in our market area. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may be negatively affected. In addition, the economies of the communities in which we operate are substantially dependent on the growth of the economy in the state of Louisiana. To the extent that economic conditions in Louisiana are unfavorable or do not continue to grow as projected, the economy in our market area would be adversely affected. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our market area if they do occur.
In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions. Adverse developments affecting commerce or real estate values in the local economies in our primary market areas could increase the credit risk associated with our loan portfolio. In addition, substantially all of our loans are to individuals and businesses in Louisiana. Our business customers may not have customer bases that are as diverse as businesses serving regional or national markets. Consequently, any decline in the economy of our market area could have an adverse impact on our revenues and financial condition. In particular, we may experience increased loan delinquencies, which could result in a higher provision for loan losses and increased charge-offs. Any sustained period of increased non-payment, delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues, results of operations and financial condition.
A significant portion of our deposits come from municipalities.
Such deposits tend to be more interest rate sensitive than core deposits. Consequently the possibility exists that such deposits may be more volatile in a rising interest rate environment. In addition, we may have to increase our cost of funds in order to maintain such deposits.
15
Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed and could result in dilution of shareholders’ ownership.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future. We may, at some point, need to raise additional capital to support continued growth, both internally and for potential acquisitions. Such issuance of our securities may dilute the ownership interest of our shareholders. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control. Accordingly, we cannot provide assurance that we will have the ability to raise additional capital if needed or that the terms acceptable to us will be available. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and potential acquisitions could be materially impaired.
We rely on our Management team for the successful implementation of our business strategy.
The success of First Guaranty Bancshares, Inc. and First Guaranty Bank has been largely due to the efforts of our Executive Management team consisting of Alton B. Lewis, President and Chief Executive Officer, and Eric J. Dosch, Chief Financial Officer. In addition, we substantially rely upon Marshall T. Reynolds, our Chairman of the Board of Directors. The loss of services of one or more of these individuals may have a material adverse effect on our ability to implement our business plan.
There is no assurance that we will be able to successfully compete with others for business.
The area in which we operate is considered attractive from an economic and demographic viewpoint, and is a highly competitive banking market. We compete for loans and deposits with numerous regional and national banks and other community banking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers and private lenders. Many competitors have substantially greater resources than we do and operate under less stringent regulatory environments. The differences in resources and regulations may make it harder for us to compete profitably, reduce the rates that we can earn on loans and investments, increase the rates we must offer on deposits and other funds, and adversely affect our overall financial condition and earnings.
We depend primarily on net interest income for our earnings rather than noninterest income.
Net interest income is the most significant component of our operating income. We do not rely on nontraditional sources of fee income utilized by some community banks, such as fees from sales of insurance, securities or investment advisory products or services. The amount of our net interest income is influenced by the overall interest rate environment, competition, and the amount of interest-earning assets relative to the amount of interest-bearing liabilities. In the event that one or more of these factors were to result in a decrease in our net interest income, we do not have significant sources of fee income to make up for decreases in net interest income.
Fluctuations in interest rates could reduce our profitability.
We realize income primarily from the difference between the interest we earn on loans and investments and the interest we pay on deposits and borrowings. Unexpected movement in interest rates markedly changing the slope of the current yield curve could cause our net interest margins to decrease, subsequently decreasing net interest income. We rely upon the use of models to forecast the impact of changes in interest rates on the balance sheet and to the income statement. Errors in the model or the assumptions used for the model could have a material impact to the decision making of the asset liability risk management process. In addition, such changes could adversely affect the valuation of our assets and liabilities. The economic value of equity may be adversely affected by changes in interest rates. The interest rates on our assets and liabilities respond differently to changes in market interest rates, which means our interest-bearing liabilities may be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. This can be the result of differences in maturity terms, payment structures on bank products and investments, market behavior, and other economic factors. In either event, if market interest rates change, this “gap” between the amount of interest-earning assets and interest-bearing liabilities that reprice in response to these interest rate changes may work against us, and our earnings may be negatively affected.
We are unable to predict fluctuations in market interest rates, which are affected by, among other factors, changes in the following:
| ● | inflation rates; |
| ● | business activity levels; |
| ● | money supply; and |
| ● | domestic and foreign financial markets. |
The value of our investment portfolio and the composition of our deposit base are influenced by prevailing market conditions and interest rates. The securities are usually fixed rate and their market value is affected by changes in market interest rates. Our asset-liability management strategy, which is designed to mitigate the risk to us from changes in market interest rates, may not prevent changes in interest rates or securities market downturns from reducing deposit outflow or from having a material adverse effect on our results of operations, our financial condition or the value of our investments. Rising interest rates reduce the value of our fixed rate debt securities in our investment portfolio. The unrealized losses resulting from holding such securities are recognized in other comprehensive income and reduce total shareholders' equity. Unrealized losses do not negatively impact regulatory capital ratios, however tangible common equity and the associated ratios are reduced. If debt securities in an unrealized loss position are sold, such losses become realized and reduce Tier One and Total Risk based Capital regulatory ratios.
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Future legislative or regulatory actions responding to perceived financial and market problems could impair the Company’s rights against borrowers.
Future legislative or regulatory actions responding to perceived financial and market problems could impair the Company’s rights against borrowers. There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. If proposals such as these or other proposals limiting the Company’s rights as a creditor were to be implemented, the Company could experience increased credit losses or increased expense in pursuing its remedies as a creditor.
We face risks related to our operational, technological and organizational infrastructure.
Our ability to grow and compete is dependent on our ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure as we expand. Similar to other large corporations, operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or outside persons and exposure to external events. As discussed below, we are dependent on our operational infrastructure to help manage these risks. In addition, we are heavily dependent on the strength and capability of our technology systems which we use both to interface with our customers and to manage our internal financial and other systems. Our ability to develop and deliver new products that meet the needs of our existing customers and attract new ones depends on the functionality of our technology systems. Additionally, our ability to run our business in compliance with applicable laws and regulations is dependent on these infrastructures.
We continuously monitor our operational and technological capabilities and make modifications and improvements when we believe it will be cost effective to do so. In some instances, we may build and maintain these capabilities ourselves. We also outsource some of these functions to third parties. These third parties may experience errors or disruptions that could adversely impact us and over which we may have limited control. We also face risk from the integration of new infrastructure platforms and/or new third party providers of such platforms into its existing businesses.
A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our businesses, result in the unauthorized disclosure of confidential information, damage our reputation and cause financial losses.
Our businesses are dependent on their ability to process and monitor, on a daily basis, a large number of transactions, many of which are highly complex, across numerous and diverse markets. These transactions, as well as the information technology services we provide to clients, often must adhere to client-specific guidelines, as well as legal and regulatory standards. Due to the breadth of our client base and our geographical reach, developing and maintaining our operational systems and infrastructure is challenging, particularly as a result of rapidly evolving legal and regulatory requirements and technological shifts. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a spike in transaction volume, cyber-attack or other unforeseen catastrophic events, which may adversely affect our ability to process these transactions or provide services.
In addition, our operations rely on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. Although we take protective measures to maintain the confidentiality, integrity and availability of information across all geographic and product lines, and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve. As a result, our computer systems, software and networks may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks and other events that could have an adverse security impact. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support providers and application developers, or may originate internally from within our organization. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified.
17
Continued or further declines in the value of certain investment securities could require write-downs, which would reduce the Company’s earnings and book value.
There can be no assurance that future factors or combinations of factors will not cause the Company to conclude in one or more future reporting periods that an unrealized loss that exists with respect to any of its securities constitutes an impairment that is other than temporary.
We operate in a highly regulated environment and may be adversely affected by changes in federal, state and local laws and regulations.
We are subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change in applicable regulations or federal, state or local legislation could have a substantial impact on us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on our results of operations and financial condition. Like other bank holding companies and financial institutions, we must comply with significant anti-money laundering and anti-terrorism laws. Under these laws, we are required, among other things, to enforce a customer identification program and file currency transaction and suspicious activity reports with the federal government. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws or make required reports.
We hold certain intangible assets that could be classified as impaired in the future. If these assets are considered to be either partially or fully impaired in the future, our earnings and the book values of these assets would decrease.
We are required to test goodwill and core deposit intangible assets for impairment on a periodic basis. The impairment testing process considers a variety of factors, including macroeconomic conditions, industry and market considerations, cost factors, and financial performance. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our common shares or our regulatory capital levels.
If we were unable to borrow funds through access to capital markets, we may not be able to meet the cash flow requirements of our depositors and borrowers or the operating cash needs to fund corporate expansion and other corporate activities.
Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of our Company is used to make investments to repay deposit liabilities as they become due or are demanded by customers. Liquidity policies and limits are established by the Board of Directors. Management and our Investment Committee regularly monitor the overall liquidity position of the Company to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. Management and the Investment Committee also establish policies and monitor guidelines to diversify the bank's funding sources. Funding sources include Federal funds purchased, securities sold under repurchase agreements, non-core deposits, and short- and long-term debt. We are also members of the Federal Home Loan Bank (“FHLB”) System, which provides funding through advances to members that are collateralized with certain loans.
We maintain a portfolio of securities that can be used as a secondary source of liquidity. There are other sources of liquidity available to us should they be needed. These sources include sales of loans, additional collateralized borrowings such as FHLB advances, unsecured borrowing lines with other financial institutions, the issuance and sale of debt securities, and the issuance and sale of preferred or common securities. We can also borrow from the Federal Reserve’s discount window. If we were unable to access any of these funding sources when needed, we might be unable to meet customers’ needs, which could adversely impact our financial condition, results of operations, cash flows, and level of regulatory-qualifying capital.
18
Risk Associated with an Investment in our Common Stock
The market price of our common stock is established between a buyer and seller.
First Guaranty Bank acts as the transfer agent for First Guaranty Bancshares, Inc. The price for all shares traded are agreed upon by buyers and sellers. There is no active or liquid market for our common stock. First Guaranty Bancshares, Inc. is not traded on an exchange, therefore liquidation and/or purchases of stock may not be readily available.
Failure to maintain effective internal controls over financial reporting in the future could impair our ability to accurately and timely report our financial results or prevent fraud.
Effective internal controls over financial reporting are necessary to provide reliable financial reports and prevent fraud. As a financial holding company, we are subject to regulation that focuses on effective internal controls and procedures. Such controls and procedures are modified, supplemented, and changed from time-to-time as necessary in relation to our growth and in reaction to external events and developments. Any failure to maintain, in the future, an effective internal control environment could impact our ability to report our financial results on an accurate and timely basis, which could result in regulatory actions, loss of investor confidence, and adversely impact our business.
Our Management and Directors control a substantial percentage of our common stock and therefore has the ability to exercise substantial control over our affairs.
Because of the large percentage of common stock held by our directors and executive officers, such persons could significantly influence the outcome of any matter submitted to a vote of our shareholders even if other shareholders were in favor of a different result.
None.
The Company does not directly own any real estate, but it does own real estate indirectly through its subsidiary. The Bank operates 21 banking centers, including one drive-up facility. The following table sets forth certain information relating to each office. The net book value of our properties at December 31, 2013 was $9.9 million. We believe that our properties are adequate for our business operations as they are currently being conducted.
|
Location
|
Use of Facilities
|
Year Facility Opened or Acquired
|
Owned/Leased
|
|||
|
First Guaranty Square
400 East Thomas Street
Hammond, LA 70401
|
Bank’s Main Office
|
1975
|
Owned
|
|||
|
2111 West Thomas Street
Hammond, LA 70401
|
Guaranty West Banking Center
|
1974
|
Owned
|
|||
|
100 East Oak Street
Amite, LA 70422
|
Amite Banking Center
|
1970
|
Owned
|
|||
|
455 West Railroad Avenue
Independence, LA 70443
|
Independence Banking Center
|
1979
|
Owned
|
|||
|
301 Avenue F
Kentwood, LA 70444
|
Kentwood Banking Center
|
1975
|
Owned
|
|||
|
189 Burt Blvd
Benton, LA 71006
|
Benton Banking Center
|
2010
|
Owned
|
|||
|
126 South Hwy. 1
Oil City, LA 71061
|
Oil City Banking Center
|
1999
|
Owned
|
|||
|
401 North 2nd Street
Homer, LA 71040
|
Homer Main Banking Center
|
1999
|
Owned
|
|||
|
10065 Hwy 79
Haynesville, LA 71038
|
Haynesville Banking Center
|
1999
|
Owned
|
|||
|
117 East Hico Street
Dubach, LA 71235
|
Dubach Banking Center
|
1999
|
Owned
|
|||
|
102 East Louisiana Avenue
Vivian, LA 71082
|
Vivian Banking Center
|
1999
|
Owned
|
|||
|
500 North Cary Ave
Jennings, LA 70546
|
Jennings Banking Center
|
1999
|
Owned
|
|||
|
799 West Summers Drive
Abbeville, LA 70510
|
Abbeville Banking Center
|
1999
|
Owned
|
|||
|
105 Berryland Shopping Center
Ponchatoula, LA 70454
|
Berryland Banking Center
|
2004
|
Leased
|
|||
|
2231 S. Range Avenue
Denham Springs, LA 70726
|
Denham Springs Banking Center
|
2005
|
Owned
|
|||
|
195 North 6th Street
Ponchatoula, LA 70454
|
Ponchatoula Banking Center
|
2007
|
Owned
|
|||
|
29815 Walker Rd S
Walker, LA 70785
|
Walker Banking Center
|
2007
|
Owned
|
|||
|
6151 Hwy 10
Greensburg, LA 70441
|
Greensburg Banking Center | 2011 | Owned | |||
|
723 Avenue G
Kentwood, LA 70444
|
Kentwood West Banking Center | 2011 | Owned | |||
|
35651 Hwy 16
Montpelier, LA 70422
|
Montpelier Banking Center | 2011 | Owned | |||
|
33818 Hwy 16
Denham Springs, LA 70706
|
Watson Banking Center | 2011 | Owned |
The Company is subject to various legal proceedings in the normal course of its business. At December 31, 2013, we were not involved in any legal proceedings, the outcome of which would have a material adverse effect on the financial condition or results of operation of the Company.
Not applicable.
Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
There is no liquid or active market for our common stock. The Company’s shares of common stock are not traded on a stock exchange or in any established over-the-counter market. Trades occur primarily between individuals at a price mutually agreed upon by the buyer and seller. Trading in the Company’s common stock has been infrequent and such trades cannot be characterized as constituting an active trading market.
The following table sets forth the high and low bid quotations for First Guaranty Bancshares, Inc.’s common stock for the periods indicated. These quotations represent trades of which we are aware and do not include retail markups, markdowns, or commissions and do not necessarily reflect actual transactions.
|
2013
|
2012
|
|||||||||||||||||
|
Quarter Ended:
|
High
|
Low
|
Dividend
|
High
|
Low
|
Dividend
|
||||||||||||
|
March 31,
|
$
|
18.75
|
$
|
14.00
|
$
|
0.16
|
$
|
17.51
|
$
|
14.09
|
$
|
0.16
|
||||||
|
June 30,
|
$ |
19.60
|
$ |
13.25
|
$ |
0.16
|
$ |
18.59
|
$ |
18.59
|
$ |
0.16
|
||||||
|
September 30,
|
$ |
19.60
|
$ |
12.00
|
$ |
0.16
|
$ |
18.59
|
$ |
18.59
|
$ |
0.16
|
||||||
|
December 31,
|
$ |
19.60
|
$ |
13.50
|
$ |
0.16
|
$ |
18.59
|
$ |
18.59
|
$ |
0.16
|
||||||
Our stockholders are entitled to receive dividends when, and if, declared by the Board of Directors, out of funds legally available for dividends. We have paid consecutive quarterly cash dividends on our common stock for each of the last 82 quarters dating back to the third quarter of 1993. The Board of Directors intends to continue to pay regular quarterly cash dividends. The ability to pay dividends in the future will depend on earnings and financial condition, liquidity and capital requirements, regulatory restrictions, the general economic and regulatory climate and ability to service any equity or debt obligations senior to common stock. There are legal restrictions on the ability of First Guaranty Bank to pay cash dividends to First Guaranty Bancshares, Inc. Under federal and state law, we are required to maintain certain surplus and capital levels and may not distribute dividends in cash or in kind, if after such distribution we would fall below such levels. Specifically, an insured depository institution is prohibited from making any capital distribution to its shareholders, including by way of dividend, if after making such distribution, the depository institution fails to meet the required minimum level for any relevant capital measure including the risk-based capital adequacy and leverage standards.
Additionally, under the Louisiana Business Corporation Act, First Guaranty Bancshares, Inc. is prohibited from paying any cash dividends to shareholders if, after the payment of such dividend, its total assets would be less than its total liabilities or where net assets are less than the liquidation value of shares that have a preferential right to participate in First Guaranty Bancshares, Inc.’s assets in the event First Guaranty Bancshares, Inc. were to be liquidated.
21
Stock Performance Graph
The line graph below compares the cumulative total return for the Company’s common stock with the cumulative total return of both the NASDAQ Stock Market Index for U.S. companies and the NASDAQ Index for bank stocks for the period December 31, 2008 through December 31, 2013. The total return assumes the reinvestment of all dividends and is based on a $100 investment on December 31, 1999. It also reflects the stock price on December 31st of each year shown, although this price reflects only a small number of transactions involving a small number of directors of the Company or affiliates or associates and cannot be taken as an accurate indicator of the market value of the Company’s common stock.
The following selected financial data should be read in conjunction with the financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this Form 10-K. Except for the data under “Performance Ratios,” “Capital Ratios” and “Asset Quality Ratios,” the income statement data and share and per share data for the years ended December 31, 2013, 2012 and 2011 and the balance sheet data as of December 31, 2013 and 2012 are derived from the audited financial statements and related notes which are included elsewhere in this Form 10-K, and the income statement data and share and per share data for the years ended December 31, 2010 and 2009 and the balance sheet data as of December 31, 2011, 2010 and 2009 are derived from the audited financial statements and related notes that are not included in this Form 10-K.
| At or For the Years Ended December 31, | |||||||||||||||
| (in thousands except for %) | 2013 | 2012 | 2011 |
2010
|
2009
|
||||||||||
|
Year End Balance Sheet Data:
|
|||||||||||||||
|
Securities
|
$ | 634,504 | $ | 659,243 | $ | 631,163 |
$
|
481,961
|
$
|
261,829
|
|||||
|
Federal funds sold
|
$ | 665 | $ | 2,891 | $ | 68,630 | $ |
9,129
|
$ |
13,279
|
|||||
|
Loans, net of unearned income
|
$ | 703,166 | $ | 629,500 | $ | 573,100 | $ |
575,640
|
$ |
589,902
|
|||||
|
Allowance for loan losses
|
$ | 10,355 | $ | 10,342 | $ | 8,879 | $ |
8,317
|
$ |
7,919
|
|||||
|
Total assets
|
$ | 1,436,441 | $ | 1,407,303 | $ | 1,353,866 | $ |
1,132,792
|
$ |
930,847
|
|||||
|
Total deposits
|
$ | 1,303,099 | $ | 1,252,612 | $ | 1,207,302 | $ |
1,007,383
|
$ |
799,746
|
|||||
|
Borrowings
|
$ | 6,288 | $ | 15,846 | $ | 15,423 | $ |
12,589
|
$ |
31,929
|
|||||
|
Stockholders' equity
|
$ | 123,405 | $ | 134,181 | $ | 126,602 | $ |
97,938
|
$ |
94,935
|
|||||
|
Common Stockholders' equity
|
$ | 83,970 | $ | 94,746 | $ | 87,167 | $ |
76,963
|
$ |
74,165
|
|||||
|
Average Balance Sheet Data:
|
|||||||||||||||
|
Securities
|
$ | 628,073 | $ | 659,440 | $ | 555,808 |
$
|
342,589
|
$
|
245,952
|
|||||
|
Federal funds sold
|
$ | 1,738 | $ | 19,397 | $ | 23,172 | $ |
11,007
|
$ |
24,662
|
|||||
|
Loans, net of unearned income
|
$ | 667,814 | $ | 589,735 | $ | 582,687 | $ |
593,429
|
$ |
599,609
|
|||||
|
Total earning assets
|
$ | 1,362,297 | $ | 1,314,969 | $ | 1,191,400 | $ |
964,039
|
$ |
906,158
|
|||||
|
Total assets
|
$ | 1,400,790 | $ | 1,357,513 | $ | 1,230,587 | $ |
1,015,681
|
$ |
948,556
|
|||||
|
Total deposits
|
$ | 1,246,341 | $ | 1,202,614 | $ | 1,103,355 | $ |
883,440
|
$ |
842,274
|
|||||
|
Borrowings
|
$ | 19,286 | $ | 16,508 | $ | 12,742 | $ |
27,324
|
$ |
22,907
|
|||||
|
Stockholders' equity
|
$ | 130,053 | $ | 131,991 | $ | 108,321 | $ |
99,575
|
$ |
77,135
|
|||||
|
Common Stockholders' equity
|
$ | 90,618 | $ | 92,556 | $ | 82,225 | $ |
79,245
|
$ |
70,055
|
|||||
|
Performance Ratios:
|
|||||||||||||||
|
Return on average assets
|
0.65 | % | 0.89 | % | 0.65 | % |
0.99
|
%
|
0.80
|
%
|
|||||
|
Return on average common equity
|
10.09 | % | 13.03 | % | 9.77 | % |
12.65
|
%
|
10.84
|
%
|
|||||
| Return on average common equity adjusted for preferred stock dividends | 9.31 | % | 10.90 | % | 7.37 | % | 10.97 | % | 9.99 | % | |||||
|
Return on average tangible assets
|
0.68 | % | 0.92 | % | 0.68 | % | 1.01 |
%
|
0.82 |
%
|
|||||
|
Return on average tangible common equity
|
10.96 | % | 14.11 | % | 10.64 | % | 13.58 |
%
|
11.78 |
%
|
|||||
|
Return on average tangible common equity adjusted for preferred stock dividends
|
10.13 | % | 11.87 | % | 8.12 | % | 11.81 | % | 10.88 | % | |||||
|
Net interest margin
|
2.92 | % | 3.20 | % | 3.31 | % |
3.96
|
%
|
3.57
|
%
|
|||||
|
Average loans to average deposits
|
53.58 | % | 49.04 | % | 52.81 | % |
67.17
|
%
|
71.19
|
%
|
|||||
|
Efficiency ratio
|
65.61 | % | 58.56 | % | 56.77 | % |
56.20
|
%
|
60.80
|
%
|
|||||
|
Efficiency ratio (excluding amortization of intangibles and securities transactions)
|
67.17 | % | 63.73 | % | 60.29 | % |
59.25
|
%
|
61.99
|
%
|
|||||
|
Full time equivalent employees (year end)
|
278 | 274 | 269 |
246
|
230
|
||||||||||
| At or For the Years Ended December 31, | |||||||||||||||
| (in thousands except for % and share data) | 2013 | 2012 | 2011 |
2010
|
2009
|
||||||||||
|
Capital Ratios:
|
|||||||||||||||
|
Average stockholders' equity to average assets
|
9.28 | % | 9.72 | % | 8.80 | % |
9.80
|
%
|
8.13
|
%
|
|||||
|
Average tangible equity to average tangible assets
|
9.01 | % | 9.42 | % | 8.50 | % |
9.46
|
%
|
7.74
|
%
|
|||||
|
Common stockholders' equity to total assets
|
5.85 | % | 6.73 | % |
6.44
|
% |
6.79
|
%
|
7.97
|
%
|
|||||
|
Tier 1 leverage capital Consolidated
|
9.14 | % | 9.24 | % | 9.03 | % |
8.69
|
%
|
9.58
|
%
|
|||||
|
Tier 1 capital Consolidated
|
13.61 | % | 14.13 | % | 13.71 | % |
11.98
|
%
|
11.90
|
%
|
|||||
|
Total risk-based capital Consolidated
|
14.71 | % | 15.31 | % | 14.75 | % |
13.03
|
%
|
12.97
|
%
|
|||||
|
Income Data:
|
|||||||||||||||
|
Interest income
|
$ | 50,886 | $ | 55,195 | $ | 54,609 |
$
|
51,390
|
$
|
47,191
|
|||||
|
Interest expense
|
$ | 11,134 | $ | 13,120 | $ | 15,118 | $ |
13,223
|
$ |
14,844
|
|||||
|
Net interest income
|
$ | 39,752 | $ | 42,075 | $ | 39,491 | $ |
38,167
|
$ |
32,347
|
|||||
|
Provision for loan losses
|
$ | 2,520 | $ | 4,134 | $ | 10,187 | $ |
5,654
|
$ |
4,155
|
|||||
|
Noninterest income (excluding securities transactions)
|
$ | 5,907 | $ | 6,272 | $ | 7,839 | $ |
6,741
|
$ |
5,909
|
|||||
|
Securities gains
|
$ | 1,571 | $ | 4,868 | $ | 3,531 | $ |
2,824
|
$ |
2,056
|
|||||
|
Loss on securities impairment
|
$ | - | $ | - | $ | (97 | ) | $ |
-
|
$ |
(829
|
)
|
|||
|
Noninterest expense
|
$ | 30,987 | $ | 31,161 | $ | 28,821 | $ |
26,827
|
$ |
24,007
|
|||||
|
Earnings before income taxes
|
$ | 13,723 | $ | 17,920 | $ | 11,756 | $ |
15,251
|
$ |
11,321
|
|||||
|
Net income
|
$ | 9,146 | $ | 12,059 | $ | 8,033 | $ |
10,025
|
$ |
7,595
|
|||||
|
Net income available to common shareholders
|
$ | 8,433 | $ | 10,087 | $ | 6,057 | $ |
8,692
|
$ |
7,001
|
|||||
|
Per Common Share Data:
|
|||||||||||||||
|
Net earnings
|
$ | 1.34 | $ | 1.60 | $ | 0.98 |
$
|
1.42
|
$
|
1.14
|
|||||
|
Cash dividends paid
|
$ | 0.64 | $ | 0.64 | $ | 0.58 | $ |
0.58
|
$ |
0.58
|
|||||
|
Book value
|
$ |
13.35
|
$ | 15.06 | $ | 13.85 | $ |
12.58
|
$ |
12.13
|
|||||
|
Dividend payout ratio
|
47.75 | % | 40.00 | % | 59.60 | % |
40.94
|
%
|
50.82
|
%
|
|||||
|
Weighted average number of shares outstanding
|
6,291,332 | 6,292,855 | 6,205,652 |
6,115,608
|
6,115,608
|
||||||||||
|
Number of shares outstanding
|
6,291,332 | 6,291,332 | 6,294,227 |
6,115,608
|
6,115,608
|
||||||||||
|
Market data:
|
|||||||||||||||
|
High
|
$ | 19.60 | $ | 18.59 | $ | 17.51 |
$
|
16.93
|
$
|
22.73
|
|||||
|
Low
|
$ | 12.00 | $ | 14.09 | $ | 12.05 |
$
|
15.45
|
$
|
10.91
|
|||||
|
Trading Volume
|
234,503 | 101,038 | 625,197 |
199,488
|
181,925
|
||||||||||
|
Stockholders of record
|
1,459 | 1,444 | 1,407 |
1,361
|
1,356
|
||||||||||
|
Asset Quality Ratios:
|
|||||||||||||||
|
Nonperforming assets to total assets
|
1.27 | % | 1.67 | % | 2.13 | % |
2.73
|
%
|
1.68
|
%
|
|||||
|
Nonperforming assets to total loans
|
2.60 | % | 3.74 | % | 5.04 | % |
5.38
|
%
|
2.65
|
%
|
|||||
|
Loan loss reserve to nonperforming assets
|
56.72 | % | 43.94 | % | 30.73 | % |
26.86
|
%
|
50.68
|
%
|
|||||
|
Net charge-offs to average loans
|
0.38 | % | 0.45 | % | 1.65 | % |
0.89
|
%
|
0.45
|
%
|
|||||
|
Provision for loan loss to average loans
|
0.38 | % | 0.70 | % | 1.75 | % |
0.95
|
%
|
0.69
|
%
|
|||||
|
Allowance for loan loss to total loans
|
1.47 | % | 1.64 | % | 1.55 | % |
1.44
|
%
|
1.34
|
%
|
|||||
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-K. 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.
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 located throughout Southeast, Southwest and North Louisiana. Our merger with Greensburg Bancshares in 2011 brought new branch locations in Montpelier, Greensburg and Watson, LA and increased our market share in Kentwood, LA. 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.
25
2013 Financial Overview
Financial highlights for 2013 and 2012:
| ● |
Net income for the years ended December 31, 2013 and 2012 was $9.1 million and $12.1 million, respectively.
|
| ● |
Net income available to common shareholders after preferred stock dividends was $8.4 million and $10.1 million for the twelve month periods ended December, 31 2013 and 2012, respectively. Dividends on preferred stock decreased $1.3 million to $0.7 million for 2013 when compared to $2.0 million for 2012. This decrease is the result of a lower dividend rate due to the increase in qualified small business loans as a part of the U.S. Treasury’s SBLF program.
|
| ● |
Earnings per common share were $1.34 and $1.60 for the year ended December 31, 2013 and 2012, respectively.
|
| ● |
Net interest income for 2013 was $39.8 million compared to $42.1 million for 2012.
|
| ● |
Total assets at December 31, 2013 increased $29.1 million or 2.1% to $1.44 billion when compared to $1.41 billion at December 31, 2012.
|
| ● |
Investment securities totaled $634.5 million at December 31, 2013, a decrease of $24.7 million when compared to $659.2 million at December 31, 2012. At December 31, 2013, available for sale securities, at fair value, totaled $484.2 million; a decrease of $116.1 million when compared to $600.3 million at December 31, 2012. At December 31, 2013, held to maturity securities, at amortized cost, totaled $150.3 million; an increase of $91.4 million when compared to $58.9 million at December 31, 2012. Mortgage-backed securities, backed by U.S. Government agencies, made up $63.4 million of the $150.3 million of the HTM securities at December 31, 2013.
|
| ● |
Average weighted life of investment securities at December 31, 2013 was 5.7 years a decline of 1.3 years when compared to the average life of 7.0 years at December 31, 2012. The Company has continued to reduce the average life of the securities portfolio as a part of its overall interest rate risk management process.
|
| ● |
The net loan portfolio at December 31, 2013 totaled $692.8 million, a net increase of $73.7 million from $619.2 million at December 31, 2012. Net loans are reduced by the allowance for loan losses which totaled $10.4 million at December 31, 2013 and $10.3 million at December 31, 2012. Total loans net of unearned income were $703.2 million at December 31, 2013 compared to $629.5 million at December 31, 2012.
|
| ● |
Total impaired loans decreased $18.7 million to $29.9 million at December 31, 2013 compared to $48.6 million at December 31, 2012.
|
| ● |
Nonaccrual loans decreased $6.2 million to $14.5 million at December 31, 2013 compared to $20.7 million at December 31, 2012.
|
| ● |
Retained earnings increased $4.4 million to $47.5 million at December 31, 2013 when compared to $43.1 million at December 31, 2012.
|
| ● |
Return on average assets for the year end December 31, 2013 and December 31, 2012 was 0.65% and 0.89%, respectively.
|
| ● |
Return on average common equity adjusted for preferred stock dividends was 9.31% and 10.90% for 2013 and 2012, respectively.
|
| ● |
Book value per common share was $13.35 as of December 31, 2013 compared to $15.06 as of December 31, 2012. The decrease in book value is principally due to a change in accumulated other comprehensive income from an unrealized gain on AFS securities of $6.0 million at December 31, 2012 to an unrealized loss on AFS securities of $9.1 million at December 31, 2013. This unrealized loss on AFS securities was partially offset by an increase in retained earnings of $4.4 million.
|
| ● |
The Company's Board of Directors declared and the Company paid cash dividends of $0.64 per common share in 2013 and 2012.
|
26
Application of Critical Accounting Policies
The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America and to predominant accounting practices within the banking industry. Certain critical accounting policies require judgment and estimates which are used in the preparation of the financial statements.
Other-Than-Temporary Impairment of Investment Securities.
Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. The term “other-than-temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Management reviews criteria such as the magnitude and duration of the decline, the reasons for the decline, and the performance and valuation of the underlying collateral, when applicable, to predict whether the loss in value is other-than-temporary. Once a decline in value is determined to be other-than-temporary, the carrying value of the security is reduced to its fair value and a corresponding charge to earnings is recognized.
Allowance for Loan Losses.
The Company’s most critical accounting policy relates to its allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when Management believes that the collectability of the principal is unlikely. The allowance, which is based on the evaluation of the collectability of loans and prior loan loss experience, reflects the risks inherent in the existing loan portfolio and that exist at the reporting date. The evaluations take into consideration a number of subjective factors including changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect a borrower’s ability to pay, adequacy of loan collateral and other relevant factors. Changes in such estimates may have a significant impact on the financial statements. For further discussion of the allowance for loan losses, see the “Allowance for Loan Losses” section of this analysis as well as Note 1 and Note 7 to the Consolidated Financial Statements.
Valuation of Goodwill, Intangible Assets and Other Purchase Accounting Adjustments.
Intangible assets are comprised of goodwill, core deposit intangibles and mortgage servicing rights. Goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. The Company’s goodwill is tested for impairment on an annual basis, or more often if events or circumstances indicate impairment may exist. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. If the implied fair value is less than the carrying amount, a loss would be recognized in other non-interest expense to reduce the carrying amount to implied fair value of goodwill. The Company’s goodwill impairment test includes two steps that are preceded by a, “step zero”, qualitative test. The qualitative test allows Management to assess whether qualitative factors indicate that it is more likely than not that impairment exists. If it is not more likely than not that impairment exists, then the two step quantitative test would not be necessary. These qualitative indicators include factors such as earnings, share price, market conditions, etc. If the qualitative factors indicate that it is more likely than not that impairment exists, then the two step quantitative test would be necessary. Step one is used to identify potential impairment and compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit’s goodwill, an impairment loss is recognized in an amount equal to the excess.
Identifiable intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or legal rights or because the assets are capable of being sold or exchanged either on their own or in combination with related contract, asset or liability. The Company’s intangible assets primarily relate to core deposits. Management periodically evaluates whether events or circumstances have occurred that would result in impairment of value.
27
Financial Condition
Assets.
Total assets at December 31, 2013 were $1.44 billion, an increase of $29.1 million, or 2.1%, from $1.41 billion at December 31, 2012. The increase in total assets is from increased deposits and retained earnings that were invested into loans.
Investment Securities.
At December 31, 2013 our securities portfolio consisted principally of U.S. Treasury, U.S. government agency, corporate debt, and municipal securities.
U.S. Government Agencies, also known as Government Sponsored Enterprises ("GSEs"), are privately owned but federally chartered companies. While they enjoy certain competitive advantages as a result of their government charters, their debt obligations are unsecured and are not direct obligations of the U.S. Government. However, debt securities issued by GSEs are considered to be of high credit quality and the senior debt of GSEs is AA+/Aaa rated. GSEs raise funds through a variety of debt issuance programs, including:
| ● | Federal Home Loan Mortgage Corporation ("FHLMC") |
| ● | Federal National Mortgage Association ("FNMA") |
| ● | Federal Home Loan Bank ("FHLB") |
| ● | Federal Farm Credit Bank System ("FFCB") |
With the variety of GSE-issued debt securities and programs available, investors may benefit from a unique combination of high credit quality, liquidity, pricing transparency and cash flows that can be customized to closely match their objectives. GSE securities in our portfolio are used to collateralize public fund deposits (“public funds”). Public funds continue to be a significant part of our deposit base and will need to be collateralized by securities in the investment portfolio. Refer to the deposit section of this discussion for more information on public funds.
At December 31, 2013 and 2012 the carrying value of pledged securities totaled $503.1 million and $476.5 million, respectively
Corporate bonds are fully taxable debt obligations issued by corporations. These bonds fund capital improvements, expansions, debt refinancing or acquisitions that require more capital than would ordinarily be available from a single lender. Corporate bond rates are set according to prevailing interest rates at the time of the issue, the credit rating of the issuer, the length of the maturity and the other terms of the bond, such as a call feature. Corporate bonds have historically been one of the highest yielding of all taxable debt securities. Interest may be paid monthly, quarterly or semi-annually. There are five main sectors of corporate bonds: industrials, banks/finance, public utilities, transportation, and Yankee and Canadian bonds. The secondary market for corporate bonds is fairly liquid. Therefore, an investor who wishes to sell a corporate bond will often be able to find a buyer for the security at market prices. However, the market price of a bond may be significantly higher or lower than its face value due to fluctuations in interest rates and other price determining factors. Other factors include credit risk, market risk, event risk, call risk, make-whole call risk and inflation risk.
Mortgage-backed securities (MBS) represent an investment in mortgage loans. An MBS investor owns an interest in a pool of mortgages, which serves as the underlying assets and source of cash flow for the security. The loans backing the MBS are issued by a nation-wide network of lenders consisting of mortgage bankers, savings and loan associations, commercial banks and other lending institutions. MBS are issued by Government National Mortgage Association (GNMA or Ginnie Mae), Federal Home Loan Mortgage Corporation (FHLMC or Freddie MAC), and Federal National Mortgage Association (FNMA or Fannie Mae). Mortgage-backed securities typically carry some of the highest yields of any government or agency security. The secondary market is generally liquid with active trading by dealers and investors. The risks associated with MBS including interest rate risk, prepayment risk and extension risk.
A municipal bond is a bond issued by a city or other local government, or their agencies. Potential issuers of municipal bonds include cities, counties, redevelopment agencies, hospitals, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any other governmental entity (or group of governments) below the state level. Municipal bonds may be general obligations of the issuer or secured by specified revenues. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt.
Mutual funds are a professionally managed type of collective investment that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. The mutual fund will have a fund manager that trades the pooled money on a regular basis. Mutual funds allow investors to spread their investment around widely.
An equity security is a share in the capital stock of a company (typically common stock, although preferred equity is also a form of capital stock). The holder of an equity security is a shareholder, owning a share, or fractional part of the issuer. Unlike debt securities, which typically require regular payments (interest) to the holder, equity securities are not entitled to any payment. In bankruptcy, they share only in the residual interest of the issuer after all obligations have been paid out to creditors. However, equity generally entitles the holder to a pro rata portion of control of the company, meaning that a holder of a majority of the equity is usually entitled to control the issuer. Equity also enjoys the right to profits and capital gain, whereas holders of debt securities receive only interest and repayment of principal regardless of how well the issuer performs financially. Furthermore, debt securities do not have voting rights outside of bankruptcy. In other words, equity holders are entitled to the "upside" of the business and to control the business. Equity securities may include, but not be limited to: bank stock, bank holding company stock, listed stock, savings and loan association stock, savings and loan association holding company stock, subsidiary structured as a limited liability company, subsidiary structured as a limited partnership, limited liability company and unlisted stock. Equity securities are generally traded on either one of the listed stock exchanges, including NASDAQ or an over-the-counter market. The market value of equity shares is influenced by prevailing economic conditions such as the Company’s performance (i.e. earnings) supply and demand and interest rates.
We believe our securities portfolio provides a stable source of income and provides a balance to credit risks relative to other categories of earning assets. Average securities as a percentage of average interest-earning assets were 46.1% and 50.1% at December 31, 2013 and 2012, respectively.
28
Investment Securities continued.
Securities classified as available for sale are measured at fair market value. For these securities, we obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, market yield curves, prepayment speeds, credit information and the instrument’s contractual terms and conditions, among other things. Securities classified as held to maturity are measured at amortized cost. We have both the intent and ability to hold to maturity the HTM securities. The investment portfolio has been modeled for liquidity risks which gives us the ability under multiple interest rate scenarios to hold the portfolio to maturity.
A summary comparison of securities by type at December 31, 2013 and December 31, 2012 is shown below.
|
December 31, 2013
|
December 31, 2012
|
|||||||||||||||||||||||
| (in thousands) |
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
| U.S Treasuries | $ | 36,000 | $ | - | $ | - | $ | 36,000 | $ | 20,000 | $ | - | $ | - | $ | 20,000 | ||||||||
|
U.S. Government Agencies
|
302,816 |
-
|
(16,117
|
)
|
286,699
|
392,616
|
751
|
(278
|
)
|
393,089
|
||||||||||||||
|
Corporate debt securities
|
142,580 |
3,729
|
(1,828
|
)
|
144,481
|
159,488
|
8,024
|
(401
|
)
|
167,111
|
||||||||||||||
|
Mutual funds or other equity securities
|
564 |
-
|
(8
|
)
|
556
|
564
|
23
|
-
|
587
|
|||||||||||||||
|
Municipal bonds
|
16,091 |
384
|
-
|
16,475
|
18,481
|
1,032
|
-
|
|
19,513
|
|||||||||||||||
|
Total available-for-sale securities
|
|
498,051
|
|
4,113
|
|
(17,953
|
)
|
|
484,211
|
|
591,149
|
|
9,830
|
|
(679
|
)
|
|
600,300
|
||||||
|
Held to maturity:
|
||||||||||||||||||||||||
|
U.S. Government Agencies
|
|
86,927
|
|
-
|
|
(5,971
|
)
|
|
80,956
|
|
58,943
|
|
175
|
|
(179
|
)
|
58,939
|
|||||||
| Mortgage-backed securities | 63,366 | - | (2,680 | ) | 60,686 | - | - | - | - | |||||||||||||||
|
Total held to maturity securities
|
$
|
150,293
|
$
|
-
|
$
|
(8,651
|
)
|
$
|
141,642
|
$
|
58,943
|
$
|
175
|
$
|
(179
|
)
|
$
|
58,939
|
||||||
29
Investment Securities continued.
The table below depicts changes in contractual maturity of the securities portfolio from 2012 to 2013. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Actual maturities may be shorter than contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are not due at a single maturity because of amortization and potential prepayment of the underlying mortgages. For this reason they are presented separately in the maturity table below.
| December 31, 2013 | December 31, 2012 | ||||||||||||||
| (in thousands except for %) |
Balance
|
% of Portfolio | Balance | % of Portfolio | $ Change |
% of Portfolio Change
|
|||||||||
|
Available For Sale, at fair value:
|
|||||||||||||||
|
Due in one year or less
|
$
|
45,738
|
7.2 | % | $ | 38,625 | 5.9 | % | $ |
7,113
|
18.4 | % | |||
|
Due after one year through five years
|
189,238
|
29.8 | % | 146,884 | 22.3 | % | 42,354 | 28.8 | % | ||||||
|
Due after five years through 10 years
|
211,724
|
33.4 | % |
306,694
|
46.5 | % | (94,970 | ) | -31.0 | % | |||||
|
Over 10 years
|
37,511
|
5.9 | % |
108,097
|
16.4 | % | (70,586 | ) | -65.3 | % | |||||
|
Total available for sale securities
|
484,211
|
76.3 | % |
600,300
|
91.1 | % |
(116,089
|
) | |||||||
|
Held to Maturity, at amortized cost:
|
|||||||||||||||
|
Due after five years through 10 years
|
86,927
|
13.7 | % |
58,943
|
8.9 | % | 27,984 | 47.5 | % | ||||||
| Mortgage-backed securities | 63,366 | 10.0 | % | - | - | % | 63,366 | ||||||||
| Total held to maturity securities | 150,293 | 23.7 | % | 58,943 | 8.9 | % | 91,350 | ||||||||
| Total securities | $ | 634,504 | 100.0 | % | $ | 659,243 | 100.0 | % | $ | (24,739 | ) | ||||
The table below is a summary of the yields for each category of securities within the portfolio.
| December 31, 2013 | December 31, 2012 |
|
||||||||||||||
| (in thousands except for %) |
Amortized Cost
|
Fair Value | Weighted Average Yield |
Amortized Cost
|
Fair Value |
Weighted Average Yield
|
||||||||||
|
Available for sale:
|
||||||||||||||||
| U.S Treasuries | $ | 36,000 | $ | 36,000 | 0.0 | % | $ | 20,000 | $ | 20,000 | 0.0 | % | ||||
|
U.S. Government Agencies
|
302,816 | 286,699 | 1.5 | % |
392,616
|
393,089 |
1.7
|
% | ||||||||
|
Corporate debt securities
|
142,580 | 144,481 | 3.7 | % |
159,488
|
167,111 |
4.0
|
% | ||||||||
|
Mutual funds or other equity securities
|
564 | 556 | 0.0 | % |
564
|
587 |
0.0
|
% | ||||||||
|
Municipal bonds
|
16,091 | 16,475 | 3.0 | % |
18,481
|
19,513 |
3.1
|
% | ||||||||
|
Total available for sale securities
|
498,051 | 484,211 | 2.1 | % |
591,149
|
600,300 |
2.6
|
% | ||||||||
|
Held to maturity:
|
||||||||||||||||
| U.S. Government Agencies | 86,927 | 80,956 | 1.7 | % | 58,943 | 58,939 | 1.8 | % | ||||||||
| Mortgage-backed secuties | 63,366 | 60,686 | 2.3 | % |
-
|
- |
-
|
% | ||||||||
|
Total held to maturity securities
|
$ | 150,293 | $ | 141,642 | 2.0 | % |
$
|
58,943
|
$ | 58,939 |
1.8
|
% | ||||
30
Investment Securities continued.
The table below depicts the weighted average yield for each category in the securities portfolio by contractual maturity time buckets. Mortgage-backed securities are not due at a single maturity because of amortization and potential prepayment of the underlying mortgages. For this reason they are presented separately in the maturity table below.
|
December 31, 2013
|
|||||||||||||||||||||||||
| One Year or Less | More than One Year through Five Years | More than Five Years through Ten Years | More than Ten Years | Mortgage-Backed Securities | |||||||||||||||||||||
| (in thousands except for %) |
Amortized Cost
|
Weighted Average Yield
|
Amortized Cost
|
Weighted Average Yield
|
Amortized Cost
|
Weighted Average Yield
|
Amortized Cost
|
Weighted Average Yield
|
Amortized Cost
|
Weighted Average Yield
|
|||||||||||||||
|
Available for sale:
|
|||||||||||||||||||||||||
| U.S Treasuries | $ | 36,000 | 0.0 | % | $ | - | - | % | $ | - | - | % | $ | - | - | % | |||||||||
|
U.S. Government Agencies
|
|
-
|
- | % |
|
127,521
|
1.0 | % |
|
144,914
|
1.8 | % |
|
30,381
|
2.6 | % | |||||||||
|
Corporate debt securities
|
8,725
|
3.6 | % |
58,466
|
3.3 | % |
70,390
|
3.9 | % |
4,998
|
4.5 | % | |||||||||||||
|
Mutual funds or other equity securities
|
-
|
- | % |
-
|
- | % |
-
|
- | % |
564
|
0.0 | % | |||||||||||||
|
Municipal bonds
|
885
|
0.8 | % |
4,252
|
1.7 | % |
6,052
|
2.9 | % |
4,903
|
4.5 | % | |||||||||||||
|
Total available for sale securities
|
45,610
|
0.7 | % |
190,239
|
1.7 | % |
221,356
|
2.5 | % |
40,846
|
3.0 | % | |||||||||||||
|
Held to maturity:
|
|||||||||||||||||||||||||
| U.S. Government Agencies | - | - | % | - | - | % | 86,927 | 1.7 | % | - | - | % | |||||||||||||
| Mortgage-backed secuties | 63,366 | 2.3 | % | ||||||||||||||||||||||
|
Total held to maturity securities
|
$
|
-
|
- | % |
$
|
-
|
- | % |
$
|
86,927
|
1.7 | % |
$
|
-
|
- | % | $ | 63,366 | 2.3 | % | |||||
|
|
December 31, 2012
|
|||||||||||||||||||
| One Year or Less | More than One Year through Five Years | More than Five Years through Ten Years | More than Ten Years | |||||||||||||||||
| (in thousands except for %) |
Amortized Cost
|
Weighted Average Yield
|
Amortized Cost
|
Weighted Average Yield
|
Amortized Cost
|
Weighted Average Yield
|
Amortized Cost
|
Weighted Average Yield
|
||||||||||||
|
Available for sale:
|
||||||||||||||||||||
| U.S Treasuries | $ | 20,000 | 0.0 | % | $ | - | - | % | $ | - | - | % | $ | - | - | % | ||||
|
U.S. Government Agencies
|
|
5,182
|
0.0 | % |
|
76,987
|
|
0.2 | % |
|
217,683
|
0.8 | % |
|
92,764
|
|
0.7 | % | ||
|
Corporate debt securities
|
11,891
|
0.4 | % |
62,523
|
|
1.3 | % |
76,714
|
2.0 | % |
8,360
|
|
0.3 | % | ||||||
|
Mutual funds or other equity securities
|
-
|
- | % |
-
|
|
- | % |
-
|
- | % |
564
|
|
0.0 | % | ||||||
|
Municipal bonds
|
1,378
|
0.2 | % |
4,732
|
|
0.5 | % |
7,002
|
1.0 | % |
5,369
|
|
1.3 | % | ||||||
|
Total available for sale securities
|
38,451
|
0.1 | % |
|
144,242
|
|
0.6 | % |
301,399
|
1.1 | % |
107,057
|
|
0.7 | % | |||||
|
Held to maturity:
|
||||||||||||||||||||
| U.S. Government Agencies | - | - | % | - | - | % | 58,943 | 1.8 | % | - | - | % | ||||||||
|
Total held to maturity securities
|
$
|
-
|
- | % |
$
|
-
|
|
- | % |
$
|
58,943
|
1.8 | % |
$
|
-
|
|
- | % | ||
The changes in the securities portfolio, including the purchase of $63.4 million of amortizing mortgage-backed securities during 2013, highlight our current and prospective strategy to grow loans, increase cash flow, and manage risks associated with interest rates.
The gross unrealized loss in the portfolio is due to the increase in long-term market interest rates during 2013. We believe that we will collect all amounts contractually due and have the ability to hold these securities until the fair value is at least equal to the carrying value, which may be at maturity. The weighted average contractual maturity of the securities portfolio at December 31, 2013 was 5.7 years. See Note 5 to the Consolidated Financial Statements for additional information on securities and Note 22 for additional information on fair value.
31
Loans.
The Company’s credit policy has specific loan-to-value and debt service coverage requirements. Generally, we require a loan-to-value of 85.0% or less and a debt service coverage ratio of 1.25x to 1.0x or higher for non-farm non-residential real estate loans. In addition, personal guarantees of borrowers are required as well as applicable insurance. Additional real estate or non-real estate collateral may be taken when deemed appropriate to secure a loan.
We generally require all 1-4 family residential loans to be underwritten based on the Fannie Mae guidelines. These guidelines include the evaluation of risk and eligibility, verification and approval of conditions, credit and liabilities, employment and income, assets, property and appraisal information. It is required that all borrowers have proper hazard, flood and title insurance prior to a loan closing. Appraisals and approvals are valid for 90 days and adhere to regulatory requirements.
Generally, we require a loan-to-value of 80.0% or less and a debt service coverage ratio of 1.25x to 1.0x or higher for construction and land development loans. In addition, detailed construction cost breakdowns, personal guarantees of borrowers and applicable insurance are required. Loans may have a maximum maturity of 12-18 months for the construction phase and a maximum maturity of 24 months for land development or 60 months for commercial construction. Additional real estate or non-real estate collateral may be necessary when deemed appropriate to secure the loan.
The Company has specific guidelines for the underwriting of commercial and industrial loans that is specific for the collateral type and the business type. Commercial and industrial loans are secured by non-real estate collateral such as equipment, inventory, accounts receivable, or may be unsecured. Each of these collateral types has maximum loan to value ratios. Commercial and industrial loans have debt service coverage ratio requirements of 1.25x to 1.0x or higher.
Exceptions to policies are considered when appropriate mitigating circumstances warrant such exceptions. We have defined credit underwriting processes for all loan requests. Loan concentrations by industry type are monitored on an ongoing basis. Our loan review department monitors the performance and credit quality of loans. The special assets department manages loans that have become delinquent or have serious credit issues.
Appraisals and evaluations on all properties shall be valid for a period not to exceed two calendar years from the effective appraisal date for non-residential properties and one calendar year from the effective appraisal date for residential properties. However, appraisals may be valid longer if there has been no material decline in the property condition or market condition that would negatively affect the bank’s collateral position.
Appraisals for seasoned loans must be reviewed and deemed to be valid. Any renewal loan request, in which new money will be disbursed, and the appraisal is older than five years, requires a new appraisal. New appraisals between renewals are not required unless the loan becomes impaired and is considered collateral dependent. When a loan is impaired and considered collateral dependent, an appraisal may be ordered in accordance with our allowance for loan losses policy. We do not mitigate risk using products such as credit default agreements and/or credit derivatives. These, accordingly, have no impact on our financial statements. The Company generally does not offer loan products with established loan-funded interest reserves.
When a loan is determined to be impaired, we measure for impairment based on a well-documented calculation of the present value of expected cash flows discounted at the loan’s original contractual interest rate, an observable market price for the loan, or a determination of the net realizable collateral value based on an external third party valuation or an internal valuation using third party data such as a recent valuation on similar collateral. The external valuations are obtained through the bank’s appraisal department. Once impairment has been determined, the appropriate provision or charge off is recorded in the respective reporting period.
Management evaluates loans for impairment on a quarterly basis or more frequently if circumstances warrant it. Existing appraisals are first reviewed to determine their suitability based on age or market conditions to determine the impairment amount. If the existing appraisals are deemed satisfactory, impairment is recognized in the reporting period. If it is determined that an updated external valuation is needed, it is ordered through the bank’s appraisal department. The external valuation can take between one to eight weeks depending upon the type of collateral. Once the valuation is received and reviewed; if impairment is determined it is recognized in the respective reporting period. There have not been any significant delays in this process during the reporting periods presented.
The Company has not charged off an amount different from what was determined to be the fair value of the collateral as presented in the appraisal for any period reported.
32
The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the dates indicated.
| December 31, | |||||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
| (in thousands except for %) | Balance |
As % of Category
|
Balance | As % of Category |
Balance
|
As % of Category
|
Balance
|
As % of Category
|
Balance | As % of Category | |||||||||||||||
|
Real Estate:
|
|||||||||||||||||||||||||
|
Construction & land development
|
$ | 47,550 | 6.7 | % | $ | 44,856 | 7.1 | % |
$
|
78,614
|
13.7
|
%
|
$
|
65,570
|
11.4
|
%
|
$ | 78,686 | 13.3 | % | |||||
|
Farmland
|
9,826 | 1.4 | % | 11,182 | 1.8 | % |
11,577
|
2.0
|
%
|
13,337
|
2.3
|
%
|
11,352 | 1.9 | % | ||||||||||
|
1- 4 Family
|
103,764 | 14.7 | % | 87,473 | 13.8 | % |
89,202
|
15.6
|
%
|
73,158
|
12.7
|
%
|
77,470 | 13.1 | % | ||||||||||
|
Multifamily
|
13,771 | 2.0 | % | 14,855 | 2.4 | % |
16,914
|
2.9
|
%
|
14,544
|
2.5
|
%
|
8,927 | 1.5 | % | ||||||||||
|
Non-farm non-residential
|
336,071 | 47.7 | % | 312,716 | 49.6 | % |
268,618
|
46.8
|
%
|
292,809
|
50.8
|
%
|
300,673 | 51.0 | % | ||||||||||
|
Total Real Estate
|
510,982 | 72.5 | % | 471,082 | 74.7 | % |
464,925
|
81.0
|
%
|
459,418
|
79.7
|
%
|
477,108 | 80.8 | % | ||||||||||
| Non-real Estate: | |||||||||||||||||||||||||
|
Agricultural
|
21,749 | 3.1 | % | 18,476 | 2.9 | % |
17,338
|
3.0
|
%
|
17,361
|
3.0
|
%
|
14,017 | 2.4 | % | ||||||||||
|
Commercial and industrial
|
151,087 | 21.4 | % | 117,425 | 18.6 | % |
68,025
|
11.9
|
%
|
76,590
|
13.3
|
%
|
82,348 | 13.9 | % | ||||||||||
|
Consumer and other
|
20,917 | 3.0 | % | 23,758 | 3.8 | % |
23,455
|
4.1
|
%
|
22,970
|
4.0
|
%
|
17,226 | 2.9 | % | ||||||||||
| Total Non-real Estate | 193,753 | 27.5 | % | 159,659 | 25.3 | % | 108,818 | 19.0 | % | 116,921 | 20.3 | % | 113,591 | 19.2 | % | ||||||||||
|
Total loans before unearned income
|
704,735 | 100.0 | % | 630,741 | 100.0 | % |
573,743
|
100.0
|
%
|
576,339
|
100.0
|
%
|
590,699 | 100.0 | % | ||||||||||
|
Less: Unearned income
|
(1,569 | ) | (1,241 | ) |
(643
|
)
|
(699
|
)
|
(797 | ) | |||||||||||||||
|
Total loans net of unearned income
|
$ | 703,166 | $ | 629,500 |
$
|
573,100
|
$
|
575,640
|
$ | 589,902 | |||||||||||||||
The origination of loans is a primary use of our financial resources and represented 49.0% and 44.9% of average earning assets for 2013 and 2012. The increase in loans of $73.7 million from December 31, 2012 primarily includes increases in 1-4 family, non-farm non-residential real estate, and commercial and industrial credits of $16.3 million, $23.4 million and $33.7 million, respectively. The growth of 1-4 family loans can be attributed to the continued recovery in the housing market as well as mortgage rates that are attractive to prospective homeowners for originations as well as existing home owners for refinancing. The growth of non-farm non-residential and commercial and industrial loans can be attributed to the bank wide effort to meet our qualified small business lending goals as part of the SBLF program. The growth in the loans helped the Company qualify for the contractual minimum 1.00% dividend rate on the Preferred Series C shares issued to the U.S. Treasury in connection with the SBLF program.
33
Loans continued.
The following table summarizes the contractual maturity of our loan portfolio including nonaccruals at December 31, 2013. Loans having no stated repayment schedule or maturity and overdraft loans are reported as being due in one year or less. Maturities are based on the final contractual payment date and do not reflect the effect of prepayments and scheduled principal amortization. With prepayments and principal amortization considered the life of our loan portfolio may be significantly shorter.
| December 31, 2013 | ||||||||||||
|
(in thousands)
|
One Year or Less | One Through Five Years | After Five Years | Total | ||||||||
|
Real Estate:
|
||||||||||||
|
Construction & land development
|
$
|
20,697
|
$ | 24,718 | $ | 2,135 | $ | 47,550 | ||||
|
Farmland
|
2,533
|
4,335 | 2,958 | 9,826 | ||||||||
|
1 - 4 family
|
12,931
|
43,526 | 47,307 | 103,764 | ||||||||
|
Multifamily
|
2,632
|
9,908 | 1,231 | 13,771 | ||||||||
|
Non-farm non-residential
|
40,205
|
248,011 | 47,855 | 336,071 | ||||||||
|
Total Real Estate
|
78,998
|
330,498 | 101,486 | 510,982 | ||||||||
| Non-real Estate: | ||||||||||||
|
Agricultural
|
7,903
|
3,688 | 10,158 | 21,749 | ||||||||
|
Commercial and industrial
|
47,795
|
90,985 | 12,307 | 151,087 | ||||||||
|
Consumer and other
|
6,627
|
7,383 | 6,907 | 20,917 | ||||||||
| Total Non-Real Estate | 62,325 | 102,056 | 29,372 | 193,753 | ||||||||
|
Total loans before unearned income
|
$
|
141,323
|
$ | 432,554 | $ |
130,858
|
704,735 | |||||
| Less: unearned income | (1,569 | ) | ||||||||||
| Total loans net of unearned income | $ | 703,166 | ||||||||||
| December 31, 2012 | ||||||||||||
|
(in thousands)
|
One Year or Less | One Through Five Years | After Five Years | Total | ||||||||
|
Real Estate:
|
||||||||||||
|
Construction & land development
|
$
|
27,758
|
$ | 16,472 | $ | 627 | $ | 44,857 | ||||
|
Farmland
|
2,503
|
6,409 | 2,269 | 11,181 | ||||||||
|
1 - 4 family
|
20,967
|
35,966 | 30,541 | 87,474 | ||||||||
|
Multifamily
|
9,584
|
4,015 | 1,256 | 14,855 | ||||||||
|
Non-farm non-residential
|
103,112
|
173,051 | 36,554 | 312,717 | ||||||||
|
Total Real Estate
|
163,924
|
235,913 | 71,247 | 471,084 | ||||||||
| Non-real Estate: | ||||||||||||
|
Agricultural
|
6,977
|
3,747 | 7,751 | 18,475 | ||||||||
|
Commercial and industrial
|
25,081
|
79,589 | 12,754 | 117,424 | ||||||||
|
Consumer and other
|
16,537
|
7,031 | 190 | 23,758 | ||||||||
| Total Non-Real Estate | 48,595 | 90,367 | 20,695 | 159,657 | ||||||||
|
Total loans before unearned income
|
$
|
212,519
|
$ | 326,280 | $ | 91,942 | 630,741 | |||||
| Less: unearned income | (1,241 | ) | ||||||||||
| Total loans net of unearned income | $ | 629,500 | ||||||||||
The following table summarizes fixed and floating rate loans by contractual maturity, excluding nonaccrual loans, as of December 31, 2013 and December 31, 2012 unadjusted for scheduled principal amortization, prepayments, or repricing opportunities. The average life of the loan portfolio may be substantially less than the contractual terms when these adjustments are considered.
|
December 31, 2013
|
December 31, 2012 | |||||||||||||||||
| (in thousands) |
Fixed
|
Floating
|
Total
|
Fixed | Floating | Total | ||||||||||||
|
One year or less
|
$
|
60,642
|
$
|
70,602
|
$
|
131,244
|
$ | 89,117 | $ | 107,176 | $ | 196,293 | ||||||
|
One to five years
|
220,490
|
209,587
|
430,077
|
147,896 | 175,743 | 323,639 | ||||||||||||
|
Five to 15 years
|
71,655
|
26,076
|
97,731
|
33,770 | 42,595 | 76,365 | ||||||||||||
|
Over 15 years
|
8,503
|
22,695
|
31,198
|
7,829 | 5,927 | 13,756 | ||||||||||||
|
Subtotal
|
$
|
361,290
|
$ |
328,960
|
690,250
|
$ | 278,612 | $ | 331,441 | 610,053 | ||||||||
|
Nonaccrual loans
|
14,485
|
20,688 | ||||||||||||||||
|
Total loans before unearned income
|
704,735
|
630,741 | ||||||||||||||||
|
Less: Unearned income
|
(1,569
|
)
|
(1,241 | ) | ||||||||||||||
|
Total loans net of unearned income
|
$
|
703,166
|
$ | 629,500 | ||||||||||||||
As of December 31, 2013 $209.5 million of floating rate loans were at their interest rate floor. At December 31, 2012 $231.7 million of floating rate loans were at the floor rate. Nonaccrual loans have been excluded from these totals.
34
Nonperforming Assets.
The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
| December 31, | |||||||||||||||
|
(in thousands)
|
2013 | 2012 |
2011
|
2010 | 2009 | ||||||||||
|
Nonaccrual loans:
|
|||||||||||||||
|
Real Estate:
|
|||||||||||||||
|
Construction and land development
|
$ | 73 |
$
|
854
|
$
|
1,520
|
$ | 3,383 | $ | 2,841 | |||||
|
Farmland
|
130 |
312
|
562
|
- | 54 | ||||||||||
|
1 - 4 family residential
|
4,248 |
4,603
|
5,647
|
1,480 | 2,814 | ||||||||||
|
Multifamily
|
- |
-
|
-
|
1,357 | - | ||||||||||
|
Non-farm non-residential
|
7,539 |
11,571
|
12,400
|
21,944 | 7,439 | ||||||||||
| Total Real Estate | 11,990 | 17,340 | 20,129 | 28,164 | 13,148 | ||||||||||
|
Non-Real Estate:
|
|||||||||||||||
|
Agricultural
|
526 |
512
|
315
|
446 | - | ||||||||||
|
Commercial and industrial
|
1,946 |
2,831
|
1,986
|
76 | 830 | ||||||||||
|
Consumer and other
|
23 |
5
|
20
|
32 | 205 | ||||||||||
| Total Non-Real Estate | 2,495 | 3,348 | 2,321 | 554 | 1,035 | ||||||||||
|
Total nonaccrual loans
|
14,485 |
20,688
|
22,450
|
28,718 | 14,183 | ||||||||||
|
Loans 90 days and greater delinquent & accruing:
|
|||||||||||||||
|
Real Estate:
|
|||||||||||||||
|
Construction and land development
|
- |
-
|
-
|
- | - | ||||||||||
|
Farmland
|
- |
-
|
-
|
- | - | ||||||||||
|
1 - 4 family residential
|
414 |
455
|
309
|
1,663 | 757 | ||||||||||
|
Multifamily
|
- |
-
|
-
|
- | - | ||||||||||
|
Non-farm non-residential
|
- |
-
|
419
|
- | - | ||||||||||
| Total Real Estate | 414 | 455 | 728 | 1,663 | 757 | ||||||||||
|
Non-Real Estate:
|
|||||||||||||||
|
Agricultural
|
- |
-
|
-
|
- | - | ||||||||||
|
Commercial and industrial
|
- |
-
|
-
|
- | - | ||||||||||
|
Consumer and other
|
- |
-
|
8
|
10 | 28 | ||||||||||
| Total Non-Real Estate | - | - | 8 | 10 | 28 | ||||||||||
|
Total loans 90 days and greater delinquent & accruing
|
414 |
455
|
736
|
1,673 | 785 | ||||||||||
|
Total nonperforming loans
|
$ | 14,899 | $ |
21,143
|
$ |
23,186
|
$ | 30,391 | $ | 14,968 | |||||
|
Real Estate Owned:
|
|||||||||||||||
|
Construction and land development
|
754 |
1,083
|
1,161
|
231 | - | ||||||||||
|
1 - 4 family residential
|
1,803 |
1,186
|
1,342
|
232 | 292 | ||||||||||
|
Non-farm non-residential
|
800 |
125
|
3,206
|
114 | 366 | ||||||||||
| Total Real Estate Owned | 3,357 | 2,394 | 5,709 | 577 | 658 | ||||||||||
|
Total nonperforming assets
|
$ | 18,256 |
$
|
23,537
|
$
|
28,895
|
$ | 30,968 | $ | 15,626 | |||||
| Nonperforming assets to total loans | 2.60 | % | 3.74 | % | 5.04 | % | 5.38 | % | 2.65 | % | |||||
| Nonperforming assets to total assets | 1.27 | % | 1.67 | % | 2.13 | % | 2.73 | % | 1.68 | % | |||||
35
Nonperforming Assets continued.
Nonperforming assets were $18.3 million, or 1.3% of total assets at December 31, 2013, compared to $23.5 million, or 1.7% of total assets at December 31, 2012. This represents a decrease in nonperforming assets of $5.3 million. Nonperforming assets consist of loans 90 days or greater delinquent and still accruing, nonaccrual loans, and other real estate. The most notable changes to nonperforming assets include a loan relationship of $2.8 million returning to accrual status, the sale of four other real estate properties totaling $0.7 million, and charge-offs totaling $3.0 million. Of the $3.0 million in charged off loans, approximately $1.2 million was related to loans secured by non-farm non-residential properties. Three loans in this category comprised $1.0 million of the $1.2 million total in charge offs. The other major category for charge-offs were commercial and industrial loans principally secured by accounts receivable, inventory, or equipment. These charge-offs totaled $1.1 million and were concentrated in three relationships that totaled $0.8 million of the charge-offs. The most significant additions to nonperforming assets were the addition of five non-accrual loans totaling $1.2 million. Four of these loans were secured by residential properties and one was a non-farm non-residential property. Management has not identified additional information on any loans not already included in impaired loans or the nonperforming assets that indicates possible credit problems that could cause doubt as to the ability of borrowers to comply with the loan repayment terms in the future.
Other real estate owned was $3.4 million at 12/31/2013 an increase of $1.0 million from 12/31/2012. The increase was concentrated in one non-farm non-residential property which totaled $0.7 million. Included in the total for other real estate owned was one large residential property which totaled $1.1 million at 12/31/2013. See Note 10 to the Consolidated Financial Statements for additional information on other real estate owned.
The following is a summary of loans restructured in a troubled debt restructuring ("TDR") at December 31, 2013 and 2012:
| (in thousands) | December 31, 2013 |
December 31, 2012
|
||||
| TDR Loans: | ||||||
| In Compliance with Modified Terms |
$
|
3,006
|
$
|
14,656
|
||
| Past Due 30 through 89 days and still accruing | - | - | ||||
| Past Due 90 days and greater and still accruing | - | - | ||||
| Nonaccrual | 230 | 221 | ||||
| Restructured Loans that subsequently defaulted | - | 1,753 | ||||
| Total TDR Loans | $ | 3,236 | $ | 16,630 | ||
The decrease of $13.4 million in TDRs from December 31, 2012 to December 31, 2013 was the result of $11.9 million of TDRs that were restructured to market terms and are performing, $1.1 million that subsequently defaulted after restructuring that moved to other real estate, and $0.4 million that subsequently defaulted after restructuring and was charged off. We did not restructure any loans in a troubled debt restructuring during 2013. Please see Note 7 to the Consolidated Financial Statements for more information on TDRs.
36
Allowance for Loan Losses.
The allowance for loan losses is maintained 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 commensurate with Management’s evaluation of the risks inherent in the loan portfolio. Various factors are taken into consideration when determining the amount of the provision and the adequacy of the allowance. These factors include but are not limited to:
| ● | past due and nonperforming assets; |
| ● |
specific internal analysis of loans requiring special attention;
|
| ● |
the current level of regulatory classified and criticized assets and the associated risk factors with each;
|
| ● |
changes in underwriting standards or lending procedures and policies;
|
| ● |
charge-off and recovery practices;
|
| ● |
national and local economic and business conditions;
|
| ● |
nature and volume of loans;
|
| ● |
overall portfolio quality;
|
| ● |
adequacy of loan collateral;
|
| ● |
quality of loan review system and degree of oversight by its Board of Directors;
|
| ● |
competition and legal and regulatory requirements on borrowers;
|
| ● |
examinations of the loan portfolio by federal and state regulatory agencies and examinations;
|
| ● |
and review by our internal loan review department and independent accountants.
|
The data collected from all sources in determining the adequacy of the allowance is evaluated on a regular basis by Management with regard to current national and local economic trends, prior loss history, underlying collateral values, credit concentrations and industry risks. An estimate of potential loss on specific loans is developed in conjunction with an overall risk evaluation of the total loan portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.
The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, and impaired. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Also, a specific reserve is allocated for our syndicated loans. The general component covers non-classified loans and special mention loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect Management's estimate of probable losses.
Provisions made pursuant to these processes totaled $2.5 million in 2013 as compared to $4.1 million for 2012. The provisions were taken to provide for current loan losses and to maintain the allowance proportionate to risks inherent in the loan portfolio. We continue to see improvement in the credit quality of our loan portfolio which is evident by the downward trend in nonperforming assets, charge-offs, provision for loan losses, and 30-89 day past due loans. As previously disclosed in the nonperforming section of this discussion, our nonperforming assets were $18.3 million at December 31, 2013 compared to $23.5 million at December 31, 2012; a decrease of $5.3 million. Charge-offs were $3.0 million for 2013 compared to $3.5 million for 2012, and $10.4 million for 2011. Loans past due 30-89 days decreased $2.7 million from $6.7 million at December 31, 2012 to $4.0 million at December 31, 2013. Another improving quality indicator is the decrease in special mention and substandard loans as classified by our internal risk rating process. Special mention loans decreased $6.8 million to $21.3 million at December 31, 2013 and substandard loans have decreased $18.9 million to $39.9 million at December 31, 2013. We anticipate that the improvement in credit quality will continue for 2014. For an explanation of the risk ratings, see the credit quality section of Note 1 to the Consolidated Financial Statements. For more information on loans and the allowance for loan losses, see Notes 6 and 7 to the Consolidated Financial Statements.
37
Allowance for Loan Losses continued.
The following table shows the allocation of the allowance for loan losses by loan type at the dates indicated.
|
December 31, 2013
|
||||||||||||||||||||||||||||||
|
Real Estate Loans:
|
Non-Real Estate Loans: | |||||||||||||||||||||||||||||
|
(in thousands except for %)
|
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 Loan Loss | $ | 1,530 | $ | 17 | $ | 1,974 | $ | 376 | $ | 3,607 | $ | 46 | $ | 2,176 | $ | 208 | $ | 421 | $ | 10,355 | ||||||||||
| % of Allowance to Total Allowance for Loan Losses |
14.8
|
% |
0.2
|
% |
19.1
|
% |
3.6
|
% |
34.8
|
% |
0.4
|
% |
21.0
|
% |
2.0
|
% |
4.1
|
% |
100.0
|
% | ||||||||||
| % of Loans in Each Category to Total Loans |
6.7
|
% |
1.4
|
% |
14.7
|
% |
2.0
|
% |
47.7
|
% |
3.1
|
% |
21.4
|
% |
3.0
|
% |
|
100.0
|
%
|
|||||||||||
|
December 31, 2012
|
||||||||||||||||||||||||||||||
|
Real Estate Loans:
|
Non-Real Estate Loans: | |||||||||||||||||||||||||||||
|
(in thousands except for %)
|
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 Loan Loss | $ | 1,098 | $ | 50 | $ | 2,239 | $ | 284 | $ | 3,666 | $ | 64 | $ | 2,488 | $ | 233 | $ | 220 | $ | 10,342 | ||||||||||
| % of Allowance to Total Allowance for Loan Losses |
|
10.6
|
% |
0.5
|
% |
21.7
|
% |
2.7
|
% |
35.4
|
% |
0.6
|
% |
24.1
|
% |
2.3
|
% |
2.1
|
% |
100.0
|
% | |||||||||
| % of Loans in Each Category to Total Loans |
7.1
|
% |
|
1.8
|
% |
13.8
|
% |
|
2.4
|
% |
49.6
|
% |
|
2.9
|
% |
18.6
|
% |
|
3.8
|
% |
|
|
100.0
|
%
|
||||||
|
December 31, 2011
|
||||||||||||||||||||||||||||||
|
Real Estate Loans:
|
Non-Real Estate Loans: | |||||||||||||||||||||||||||||
|
(in thousands except for %)
|
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 Loan Loss | $ | 1,002 | $ | 65 | $ | 1,917 | $ | 780 | $ | 2,980 | $ | 125 | $ | 1,407 | $ | 314 | $ | 289 | $ | 8,879 | ||||||||||
| % of Allowance to Total Allowance for Loan Losses |
|
11.3
|
% |
0.7
|
% |
21.6
|
% |
8.8
|
% |
33.6
|
% |
1.4
|
% |
15.8
|
% |
3.5
|
% |
3.3
|
% |
100.0
|
% | |||||||||
| % of Loans in Each Category to Total Loans |
13.7
|
% |
|
2.0
|
% |
15.6
|
% |
|
2.9
|
% |
46.8
|
% |
|
3.0
|
% |
11.9
|
% |
|
4.1
|
% |
|
|
100.0
|
%
|
||||||
|
December 31, 2010
|
||||||||||||||||||||||||||||||
|
Real Estate Loans:
|
Non-Real Estate Loans: | |||||||||||||||||||||||||||||
|
(in thousands except for %)
|
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 Loan Loss | $ | 977 | $ | 46 | $ | 1,891 | $ | 487 | $ | 3,423 | $ | 80 | $ | 510 | $ | 390 | $ | 513 | $ | 8,317 | ||||||||||
| % of Allowance to Total Allowance for Loan Losses |
|
11.7
|
% |
0.5
|
% |
22.7
|
% |
5.9
|
% |
41.2
|
% |
1.0
|
% |
6.1
|
% |
4.7
|
% |
6.2
|
% |
100.0
|
% | |||||||||
| % of Loans in Each Category to Total Loans |
11.4
|
% |
|
2.3
|
% |
12.7
|
% |
|
2.5
|
% |
50.8
|
% |
|
3.0
|
% |
13.3
|
% |
|
4.0
|
% |
|
|
100.0
|
%
|
||||||
|
December 31, 2009
|
||||||||||||||||||||||||||||||
|
Real Estate Loans:
|
Non-Real Estate Loans: | |||||||||||||||||||||||||||||
|
(in thousands except for %)
|
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 Loan Loss | $ | 1,176 | $ | 56 | $ | 2,466 | $ | 128 | $ | 2,727 | $ | 82 | $ | 1,031 | $ | 246 | $ | 7 | $ | 7,919 | ||||||||||
| % of Allowance to Total Allowance for Loan Losses |
|
14.9
|
% |
0.7
|
% |
31.2
|
% |
1.6
|
% |
34.4
|
% |
1.0
|
% |
13.0
|
% |
3.1
|
% |
0.1
|
% |
100.0
|
% | |||||||||
| % of Loans in Each Category to Total Loans |
13.3
|
% |
|
1.9
|
% |
13.1
|
% |
|
1.5
|
% |
51.0
|
% |
|
2.4
|
% |
13.9
|
% |
|
2.9
|
% |
|
|
100.0
|
%
|
||||||
38
Allowance for Loan Losses continued.
The following table sets forth activity in our allowance for loan losses for the periods indicated.
| At or For the Years Ended December 31, | |||||||||||||||
|
(in thousands)
|
2013 | 2012 | 2011 |
2010
|
2009
|
||||||||||
|
Balance at beginning of period
|
$ | 10,342 | $ | 8,879 | $ | 8,317 |
$
|
7,919
|
$
|
6,482
|
|||||
|
Charge-offs:
|
|||||||||||||||
|
Real Estate loans:
|
|||||||||||||||
|
Construction and land development
|
(233 | ) | (65 | ) | (1,093 | ) |
(5
|
)
|
(448
|
)
|
|||||
|
Farmland
|
(31 | ) | - | (144 | ) |
-
|
-
|
)
|
|||||||
|
1 - 4 family residential
|
(220 | ) | (1,409 | ) | (1,613 | ) |
(1,534
|
)
|
(564
|
)
|
|||||
|
Multifamily
|
- | (187 | ) | - |
-
|
-
|
|||||||||
|
Non-farm non-residential
|
(1,148 | ) | (459 | ) | (5,193 | ) |
(235
|
)
|
(586
|
)
|
|||||
| Total Real Estate | (1,632 | ) | (2,120 | ) | (8,043 | ) | (1,774 | ) | (1,598 | ) | |||||
| Non-Real Estate: | |||||||||||||||
| Agricultural | (41 | ) | (49 | ) | (23 | ) | - | - | |||||||
|
Commercial and industrial loans
|
(1,098 | ) | (809 | ) | (1,638 | ) |
(3,395
|
)
|
(678
|
)
|
|||||
|
Consumer and other
|
(262 | ) | (473 | ) | (653 | ) |
(444
|
)
|
(603
|
)
|
|||||
| Total Non-Real Estate | (1,401 | ) | (1,331 | ) | (2,314 | ) | (3,839 | ) | (1,281 | ) | |||||
|
Total charge-offs
|
(3,033 | ) | (3,451 | ) | (10,357 | ) |
(5,613
|
)
|
(2,879
|
)
|
|||||
|
Recoveries:
|
|||||||||||||||
|
Real Estate loans:
|
|||||||||||||||
|
Construction and land development
|
10 | 15 | 1 |
1
|
1
|
||||||||||
|
Farmland
|
140 | 1 | - |
-
|
1
|
||||||||||
|
1 - 4 family residential
|
49 | 35 | 118 |
11
|
15
|
||||||||||
|
Multifamily
|
- | - | - |
-
|
-
|
||||||||||
|
Non-farm non-residential
|
8 | 116 | 13 |
30
|
-
|
||||||||||
| Total Real Estate | 207 | 167 | 132 | 42 | 17 | ||||||||||
| Non-Real Estate: | |||||||||||||||
| Agricultural | 5 | 1 | 2 | - | - | ||||||||||
|
Commercial and industrial loans
|
71 | 329 | 371 |
164
|
28
|
||||||||||
|
Consumer and other
|
243 | 283 | 227 |
151
|
116
|
||||||||||
| Total Non-Real Estate | 319 | 613 | 600 | 315 | 144 | ||||||||||
|
Total recoveries
|
526 | 780 | 732 |
357
|
161
|
||||||||||
|
Net charge-offs
|
(2,507 | ) | (2,671 | ) | (9,625 | ) |
(5,256
|
)
|
(2,718
|
)
|
|||||
|
Provision for loan losses
|
2,520 | 4,134 | 10,187 |
5,654
|
4,155
|
||||||||||
|
Balance at end of period
|
$ | 10,355 | $ | 10,342 | $ | 8,879 |
$
|
8,317
|
$
|
7,919
|
|||||
|
Ratios:
|
|||||||||||||||
|
Net loan charge-offs to average loans
|
0.38 | % | 0.45 | % | 1.65 | % |
0.89
|
%
|
0.45
|
%
|
|||||
|
Net loan charge-offs to loans at end of period
|
0.36 | % | 0.42 | % | 1.68 | % |
0.91
|
%
|
0.46
|
%
|
|||||
|
Allowance for loan losses to loans at end of period
|
1.47 | % | 1.64 | % | 1.55 | % |
1.44
|
%
|
1.34
|
%
|
|||||
|
Net loan charge-offs to allowance for loan losses
|
24.21 | % | 25.83 | % | 108.40 | % |
63.2
|
%
|
34.32
|
%
|
|||||
|
Net loan charge-offs to provision charged to expense
|
99.48 | % | 64.61 | % | 94.48 | % |
92.96
|
%
|
65.42
|
%
|
|||||
39
Deposits.
Total deposits increased $50.5 million or 4.0%, to $1.30 billion at December 31, 2013 from $1.25 billion at December 31, 2012. In 2013, noninterest-bearing demand deposits increased $12.1 million, interest-bearing demand deposits increased $42.5 million and savings deposits increased $2.4 million. Time deposits decreased $6.4 million, or 1.0% from December 31, 2012. The increase in deposits was principally due to an increase of $33.0 million in public fund deposits. Public fund deposits totaled $503.5 million or 38.6% of total deposits at December 31, 2013. At December 31, 2012, public fund deposits represented 37.6% of total deposits with a balance of $470.5 million. We believe public fund deposits are a low cost source of funds that are relatively stable. These deposits will continue to be a significant portion of our deposit base in the near term.
The following table reflects the average balances of and average rates paid on each category of deposits for the periods indicated.
| December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||
| (in thousands except for %) | Average Balance | As % of Total |
Average Rate
|
Average Balance | As % of Total |
Average Rate
|
Average Balance | As % of Total | Average Rate | ||||||||||||||||||
| Noninterest-bearing Demand | $ | 196,589 | 15.8 | % | 0.0 | % | $ | 175,979 | 14.6 | % | 0.0 | % | $ | 149,523 | 13.6 | % | 0.0 | % | |||||||||
| Interest-bearing Demand | 334,573 | 26.8 | % | 0.4 | % | 302,207 | 25.1 | % | 0.5 | % | 221,053 | 20.0 | % | 0.4 | % | ||||||||||||
| Savings | 64,639 | 5.2 | % | 0.1 | % | 59,899 | 5.0 | % | 0.1 | % | 53,043 | 4.8 | % | 0.1 | % | ||||||||||||
| Time | 650,540 | 52.2 | % | 1.5 | % | 664,529 | 55.3 | % | 1.7 | % | 679,736 | 61.6 | % | 2.1 | % | ||||||||||||
| Total Deposits | $ | 1,246,341 | 100.0 | % | $ | 1,202,614 | 100.0 | % | $ | 1,103,355 | 100.0 | % | |||||||||||||||
The aggregate amount of time deposits having a remaining term of more than one year for the next five years are as follows:
|
(in thousands)
|
December 31, 2013 | ||
|
2014
|
$ | 405,031 | |
|
2015
|
135,032 | ||
|
2016
|
51,982 | ||
| 2017 | 23,009 | ||
| 2018 and thereafter | 26,959 | ||
|
Total
|
$ | 642,013 | |
The table above includes, for December 31, 2013, brokered deposits totaling $21.2 million. The aggregate amount of jumbo time deposits, each with a minimum denomination of $100,000, was approximately $433.1 million and $425.0 million at December 31, 2013 and 2012, respectively.
The following table sets forth the distribution of our time deposit accounts.
|
(in thousands)
|
December 31, 2013
|
December 31, 2012 | December 31, 2011 | ||||||
|
Time deposits of less than $100,000
|
$
|
208,923
|
$ | 223,483 | $ | 229,505 | |||
|
Time deposits of $100,000 through $250,000
|
|
162,793
|
166,858 | 166,962 | |||||
|
Time deposits of more than $250,000
|
|
270,297
|
258,107 | 296,050 | |||||
|
Total Time Deposits
|
$
|
642,013
|
$ | 648,448 | $ | 692,517 | |||
The maturity of time deposits greater than $100,000 and weighted average rates of each maturity bucket for the periods indicated is as follows:
|
December 31, 2013
|
December 31, 2012
|
December 31, 2011
|
|||||||||||||
| (in thousands except for %) |
Balance
|
Weighted Average Rate
|
Balance
|
Weighted Average Rate
|
Balance
|
Weighted Average Rate
|
|||||||||
|
Due in one year or less
|
$
|
287,282
|
0.7
|
%
|
$
|
281,197
|
2.4
|
%
|
$
|
339,192
|
1.5
|
%
|
|||
|
Due after one year through three years
|
120,206
|
1.0
|
%
|
126,495
|
1.7
|
%
|
100,318
|
2.3
|
%
|
||||||
|
Due after three years
|
25,602
|
1.1
|
%
|
17,273
|
2.2
|
%
|
23,502
|
3.0
|
%
|
||||||
|
Total
|
$
|
433,090
|
1.2
|
%
|
$
|
424,965
|
1.5
|
%
|
$
|
463,012
|
1.8
|
%
|
|||
Public fund deposits as a percent of total deposits at the periods indicated are as follows:
| December 31, | |||||||||||||||
|
(in thousands except for %)
|
2013 |
2012
|
2011
|
2010
|
2009
|
||||||||||
|
Total Public Funds
|
$ | 503,495 |
$
|
470,498 |
$
|
431,905
|
$
|
356,153
|
$
|
268,474
|
|||||
|
Total Deposits
|
$ | 1,303,099 |
$
|
1,252,612
|
$
|
1,207,302
|
$
|
1,007,383
|
$
|
799,746
|
|||||
|
Total Public Funds as a percent of Total Deposits
|
38.6 | % |
37.6
|
% |
35.8
|
% |
35.4
|
% |
33.6
|
% | |||||
40
Borrowings.
Short-term borrowings decreased $9.0 million to $5.8 million at December 31, 2013 from $14.7 million at December 31, 2012. Short-term borrowings are used to manage liquidity on a daily or otherwise short-term basis. The short-term borrowings at December 31, 2013 were comprised of repurchase agreements totaling $4.0 million and a line of credit with a balance of $1.8 million. Overnight repurchase agreement balances are monitored daily for sufficient collateralization. Long-term borrowings consisted of one loan which decreased to $0.5 million at December 31, 2013 from $1.1 million at December 31, 2012. This long-term debt was used for acquisition purposes in 2011. The decrease was the result of normal principal payments. See Note 12 of the Consolidated Financial Statements for additional information.
Balances and interest rates on our short-term borrowings at the dates and for the periods indicated are as follows:
| December 31, | |||||||||
| (in thousands except for %) | 2013 |
2012
|
2011
|
||||||
|
Outstanding at year end
|
$ | 5,788 |
$
|
14,746
|
$
|
12,223
|
|||
|
Maximum month-end outstanding
|
$ | 57,302 | $ |
31,850
|
$ |
22,493
|
|||
|
Average daily outstanding
|
$ | 21,387 | $ |
14,560
|
$ |
11,030
|
|||
|
Weighted average rate during the year
|
0.98 | % |
0.25
|
%
|
0.18
|
%
|
|||
|
Average rate at year end
|
1.51 | % |
0.75
|
%
|
0.21
|
%
|
|||
Stockholders’ Equity and Return on Equity and Assets.
Total stockholders’ equity decreased $10.8 million or 8.0% to $123.4 million at December 31, 2013 from $134.2 million at December 31, 2012. The decrease in stockholders’ equity is attributable to the market valuation change of the AFS securities portfolio from an unrealized gain to an unrealized loss position. This unrealized loss was $9.1 million at December 31, 2013 compared to and unrealized gain of $6.0 million at December 31, 2012.Unrealized gains and losses are reported in accumulated other comprehensive income on the Consolidated Balance Sheets. The decrease in accumulated other comprehensive income was partially offset by an increase in retained earnings of $4.4 million. The increase in retained earnings is from 2013 earnings of $9.1 million which was partially offset by dividends paid to common shareholders of $4.0 million and dividends on preferred shares of $0.7 million.
Information regarding performance and equity ratios is as follows:
| December 31, | ||||||
|
2013
|
2012
|
2011
|
||||
|
Return on average assets
|
0.65
|
% |
0.89
|
% |
0.65
|
% |
|
Return on average common equity
|
10.09
|
% |
13.03
|
% |
9.77
|
% |
|
Return on average common equity adjusted for preferred stock dividends
|
9.31 | % | 10.90 | % | 7.37 | % |
|
Dividend payout ratio
|
47.75
|
% |
40.00
|
% |
59.60
|
% |
41
Results of Operations for the Years Ended December 31, 2013 and 2012
Net Income.
Net income for the year ended December 31, 2013 was $9.1 million, a decrease of $2.9 million or 24.2% from $12.1 million for the year ended December 31, 2012. In 2012 we began shortening the duration of our securities portfolio in order to mitigate risks associated with changes in market interest rates; shorter duration securities typically provide lower yields. As a result, interest income on the securities portfolio decreased $5.5 million for the year ended December 31, 2013 when compared to the same period in 2012. In addition, gains of $1.6 million taken on securities during 2013 are a decrease of $3.3 million when compared to $4.9 million of securities gains in 2012. The impact of these factors was mitigated by a combination of increased income on loans of $1.2 million as a result of loan growth as well as a reduction of funding costs totaling $2.0 million when compared to 2012. In addition, the credit quality of the loan portfolio continued to improve and as a result the provision for loan losses was $2.5 million for 2013 compared to $4.1 for 2012; a decrease of $1.6 million.
Although net income for 2013 was down $2.9 million from 2012, income available to common shareholders for the period ending December 31, 2013 was $8.4 million; a decrease of $1.7 million from 2012. This is the result of loan growth that reduced the dividends paid on preferred shares to $0.7 million in 2013 compared to $2.0 million in 2012
Net Interest Income.
Net interest income is the largest component of our earnings. It is calculated by subtracting the cost of interest-bearing liabilities from the income earned on interest-earning assets and represents the earnings from our primary business of using deposits to make loans and buy investment securities. Our long-term objective is to manage this income to provide the optimum return that balances interest rate, credit and liquidity risks. A financial institution’s asset and liability structure is substantially different from that of an industrial company, in that virtually all assets and liabilities are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a financial institution’s performance. The impact of interest rate changes depends on the sensitivity to change of our interest-earning assets and interest-bearing liabilities.
Net interest income in 2013 was $39.8 million, a decrease of $2.3 million or 5.5%, when compared to $42.1 million in 2012. Interest on loans increased $1.2 million, or 3.2% to $37.3 million for 2013 from $36.1 million for 2012.
Interest on securities decreased $5.5 million to $13.4 million for 2013 compared to $18.9 million for 2012.
Interest expense decreased $2.0 million for the year ended December 31, 2013 to $11.1 million compared to $13.1 million for 2012.
42
The net interest income yield shown below in the average balance sheet is calculated by dividing net interest income by average interest-earning assets and is a measure of the efficiency of the earnings from balance sheet activities. It is affected by changes in the difference between interest on interest-earning assets and interest-bearing liabilities and the percentage of interest-earning assets funded by interest-bearing liabilities.
The average balance sheet, average yields and costs, and certain other information for the periods indicated are in the following table. No tax-equivalent yield adjustments were made. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
| December 31, 2013 | December 31, 2012 | December 31, 2011 | ||||||||||||||||||||||
|
(in thousands except for %)
|
Average Balance | Interest | Yield/Rate | Average Balance | Interest | Yield/Rate | Average Balance | Interest | Yield/Rate | |||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||
|
Interest-earning deposits with banks(1)
|
$
|
63,417
|
$
|
157
|
0.2 | % |
$
|
46,188
|
$
|
92
|
0.2 | % | $ | 29,733 | $ | 50 | 0.2 | % | ||||||
|
Securities (including FHLB stock)
|
629,209
|
13,439
|
2.1 | % |
659,440
|
18,949
|
2.9 | % | 555,808 | 19,691 | 3.5 | % | ||||||||||||
|
Federal funds sold
|
1,738
|
1
|
0.1 | % |
19,397
|
10
|
0.1 | % | 23,172 | 19 | 0.1 | % | ||||||||||||
| Loans held for sale | 119 | - | - | % | 209 | 8 | 3.8 | % | 199 | 10 | 5.0 | % | ||||||||||||
|
Loans, net of unearned income
|
667,814
|
37,289
|
5.6 | % |
589,735
|
36,136
|
6.1 | % | 582,488 | 34,839 | 6.0 | % | ||||||||||||
|
Total interest-earning assets
|
|
1,362,297
|
50,886
|
3.7 | % |
|
1,314,969
|
55,195
|
4.2 | % | 1,191,400 | 54,609 | 4.6 | % | ||||||||||
|
Noninterest-earning assets:
|
||||||||||||||||||||||||
|
Cash and due from banks
|
|
9,219
|
|
10,275
|
9,418 | |||||||||||||||||||
|
Premises and equipment, net
|
19,681
|
19,787
|
17,893 | |||||||||||||||||||||
|
Other assets
|
9,593
|
12,482
|
11,876 | |||||||||||||||||||||
|
Total Assets
|
1,400,790
|
1,357,513
|
1,230,587 | |||||||||||||||||||||
|
Liabilities and Stockholders' Equity
|
||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Demand deposits
|
334,573
|
1,262
|
0.4 | % |
302,207
|
1,383
|
0.5 | % | 221,053 | 920 | 0.4 | % | ||||||||||||
|
Savings deposits
|
64,639
|
41
|
0.1 | % |
59,899
|
55
|
0.1 | % | 53,043 | 50 | 0.1 | % | ||||||||||||
|
Time deposits
|
650,540
|
9,682
|
1.5 | % |
664,529
|
11,560
|
1.7 | % | 679,736 | 13,962 | 2.1 | % | ||||||||||||
|
Borrowings
|
19,286
|
149
|
0.8 | % |
16,508
|
122
|
0.7 | % | 12,742 | 186 | 1.5 | % | ||||||||||||
|
Total interest-bearing liabilities
|
|
1,069,038
|
11,134
|
1.0 | % |
1,043,143
|
13,120
|
1.3 | % | 966,574 | 15,118 | 1.6 | % | |||||||||||
|
Noninterest-bearing liabilities:
|
||||||||||||||||||||||||
|
Demand deposits
|
|
196,589
|
|
302,207
|
149,523 | |||||||||||||||||||
|
Other
|
5,110
|
6,400
|
6,169 | |||||||||||||||||||||
|
Total Liabilities
|
|
1,270,737
|
|
1,225,522
|
1,122,266 | |||||||||||||||||||
|
Stockholders' equity
|
130,053
|
131,991
|
108,321 | |||||||||||||||||||||
|
Total Liabilities and Stockholders'
|
$
|
1,400,790
|
$
|
1,357,513
|
$ | 1,230,587 | ||||||||||||||||||
|
Net interest income
|
$
|
39,752
|
$
|
42,075
|
$ | 39,491 | ||||||||||||||||||
|
Net interest rate spread(2)
|
2.7 | % | 2.9 | % | 3.0 | % | ||||||||||||||||||
|
Net interest-earning assets(3)
|
$
|
293,259
|
$
|
398,054
|
$ | 224,826 | ||||||||||||||||||
|
Net interest margin(4)
|
2.9 | % | 3.2 | % | 3.3 | % | ||||||||||||||||||
|
Average interest-earning assets to interest-bearing liabilities
|
127.4 | % | 126.1 | % | 123.3 | % | ||||||||||||||||||
| (1) | Includes Federal Reserve balances reported in cash and due from banks on the consolidated balance sheets. |
| (2) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
| (3) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
| (4) | Net interest margin represents net interest income divided by average total interest-earning assets. |
43
Rate/Volume Analysis.
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the periods indicated. The table distinguishes between (i) changes attributable to rate (change in rate multiplied by the prior period’s volume), (ii) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (iii) mixed changes (changes that are not attributable to either rate of volume) and (iv) total increase (decrease) (the sum of the previous columns).
| Years Ended December 31, | ||||||||||||||||||||||||
| 2013 Compared to 2012 | 2012 Compared to 2011 | |||||||||||||||||||||||
| Increase (Decrease) Due To | Increase (Decrease) Due To | |||||||||||||||||||||||
| (in thousands except for %) | Volume | Rate | Rate/Volume | Increase/Decrease | Volume | Rate | Rate/Volume | Increase/Decrease | ||||||||||||||||
|
Interest earned on:
|
||||||||||||||||||||||||
|
Interest-earning deposits with banks
|
$ | 34 |
|
$ |
23
|
|
$ |
8
|
$ |
65
|
|
$ |
28
|
$ |
9
|
|
$ |
5
|
|
$ |
42
|
|||
|
Securities (including FHLB stock)
|
(869 | ) |
(4,864
|
)
|
223
|
|
(5,510
|
) |
3,671
|
(3,720
|
)
|
(693
|
)
|
(742
|
) | |||||||||
|
Federal funds sold
|
(9
|
)
|
1
|
|
(1
|
) |
(9
|
)
|
(3
|
) |
(7
|
)
|
1
|
|
(9
|
)
|
||||||||
| Loans held for sale | (3 | ) | (8 | ) | 3 | (8 | ) | 1 |
(2
|
) | (1 | ) | (2 |
)
|
||||||||||
|
Loans, net of unearned income
|
4,784
|
(3,206
|
) |
(425
|
)
|
1,153
|
432
|
853
|
12
|
1,297
|
|
|||||||||||||
|
Total interest income
|
3,937
|
(8,054
|
) |
(192
|
) |
(4,309
|
) |
4,129
|
(2,867
|
)
|
(676
|
) |
586
|
|||||||||||
|
Interest paid on:
|
||||||||||||||||||||||||
|
Demand deposits
|
148
|
|
(243
|
)
|
(26
|
) |
(121
|
)
|
338
|
92
|
|
33
|
|
463
|
|
|||||||||
|
Savings deposits
|
4
|
(17
|
)
|
(1
|
)
|
(14
|
)
|
6
|
|
(1
|
)
|
-
|
5
|
|
||||||||||
|
Time deposits
|
(243
|
) |
(1,670
|
)
|
35
|
|
(1,878
|
)
|
(313
|
) |
(2,137
|
)
|
48
|
|
(2,402
|
) | ||||||||
|
Borrowings
|
21
|
5
|
|
1
|
|
27
|
|
55
|
(92
|
)
|
(27
|
)
|
(64
|
)
|
||||||||||
|
Total interest expense
|
(70
|
) |
(1,925
|
)
|
9
|
|
(1,986
|
)
|
86
|
(2,138
|
)
|
54
|
|
(1,998
|
)
|
|||||||||
|
Change in net interest income
|
$ |
4,007
|
$ |
(6,129
|
) | $ |
(201
|
) | $ |
(2,323
|
) | $ |
4,043
|
$ |
(729
|
)
|
$ |
(730
|
) | $ |
2,584
|
|||
Noninterest Income.
Noninterest income totaled $7.5 million in 2013 which is a decrease of $3.7 million compared to $11.1 million in 2012. This can largely be explained by a decrease in gains from the sale of investment securities of $3.3 million. Service charges, commissions and fees totaled $4.6 million for 2013 and $4.8 million for 2012. Other noninterest income decreased $0.3 million to $1.3 million in 2013 from $1.7 million in 2012.
44
Noninterest Expense.
Noninterest expense totaled $31.0 million in 2013 and $31.2 million in 2012. Salaries and benefits increased $0.7 million to $14.4 million for 2013 compared to $13.7 million in 2012. This can be explained by the total number of full-time equivalent employees increasing during 2013 as well as an increase in salaries of existing employees for tenure, experience and performance. Occupancy and equipment expense totaled $3.9 million and $3.7 million in 2013 and 2012, respectively. Other noninterest expense totaled $12.7 million in 2013, a decrease of $1.1 million or 8.1% when compared to $13.8 million in 2012.
Components of other noninterest expense for the periods indicated are as follows:
|
(in thousands)
|
December 31, 2013 |
December 31, 2012
|
December 31, 2011
|
||||||
|
Other noninterest expense:
|
|||||||||
|
Legal and professional fees
|
$ | 2,347 |
$
|
1,990
|
$
|
2,208
|
|||
|
Data processing
|
1,269 |
1,225
|
1,230
|
||||||
|
Marketing and public relations
|
638 |
697
|
654
|
||||||
|
Taxes - sales, capital, and franchise
|
584 |
661
|
640
|
||||||
|
Operating supplies
|
487 |
581
|
574
|
||||||
|
Travel and lodging
|
563 |
523
|
492
|
||||||
| Telephone | 206 | 220 | 197 | ||||||
| Amortization of core deposits | 320 | 350 | 285 | ||||||
| Donations | 294 | 195 | 297 | ||||||
|
Net costs from other real estate and repossessions
|
941 |
2,083
|
1,317
|
||||||
|
Regulatory assessment
|
1,784 |
1,471
|
1,663
|
||||||
|
Other
|
3,237 |
3,784
|
3,262 | ||||||
|
Total other noninterest expense
|
$ | 12,670 |
$
|
13,780
|
$
|
12,819
|
|||
Net costs in real estate and repossessions decreased $1.1 million or 54.8% in 2013 to $0.9 million compared to $2.1 million for 2013. This decrease is mainly the result of a decrease in write-downs on other real estate of $1.0 million to $0.4 million for 2013 compared to write-downs of $1.4 million for 2012.
Income Taxes.
The provision for income taxes for the years ended December 31, 2013 and 2012 was $4.6 million and $5.9 million, respectively. The decrease in the provision for income taxes for 2013 is a result of lower income when compared to 2012. The Company's statutory tax rate was 35.0%, 35.0%, and 34.0% in 2013 and 2012, respectively. See Note 20 to the Consolidated Financial Statements for additional information.
45
Results of Operations for the Years Ended December 31, 2012 and 2011
Net Income.
Net income for the year ended December 31, 2012 was $12.1 million, an increase of $4.0 million or 50.1%, from $8.0 million for the year ended December 31, 2011. Net income available to common shareholders for the period ending December 31, 2012 was $10.1 million, an increase of $4.0 million from the $6.1 million for the year ended December 31, 2011. The increase of net income is primarily attributable to a decrease of $6.1 million in the provision for loan loss expense. Earnings per common share for the year ended December 31, 2012 was $1.60 per common share, an increase of 63.3% or $0.62 per common share from $0.98 per common share for the year ended December 31, 2011. The weighted average common shares outstanding for 2012 were 6,292,855 compared to 6,205,652 for 2011.
Net Interest Income.
Net interest income in 2012 was $42.1 million, an increase of $2.6 million or 6.5%, when compared to $39.5 million in 2011. Interest on loans increased $1.3 million, or 3.7% to $36.1 million for the year ended December 31, 2012 from $34.8 million for the same period in 2011. Approximately $0.9 million of the increase in loan income can be attributed to an increase in the yield and approximately $0.4 million attributed to an increase in the volume of loans.
Interest on securities decreased $0.7 million to $18.9 million for 2012 compared to $19.7 million for 2011. The average securities portfolio for 2012 was $659.4 million compared to $555.8 million for 2011. The decrease in interest on securities reflects the compression of securities yields during 2012.
Interest expense decreased $2.0 million for the year ended December 31, 2012 to $13.1 million. Average interest-bearing deposits for 2012 were $900.4 million compared to $953.8 million for 2011. Average borrowings for 2012 were $16.5 million compared to $12.7 million in 2011. The average yield on interest-bearing liabilities for 2012 was 1.4% compared to 1.6% for 2011.
Provision for Loan Losses.
The provision for loan losses was $4.1 million and $10.2 million in 2012 and 2011, respectively. The decreased 2012 provision is attributable to $2.7 million in net loan charge-offs during 2012 compared to $9.6 million in 2011. Of the loan charge-offs in 2012, approximately $2.1 million were loans secured by real estate of which $0.5 million were commercial real estate and approximately $1.5 million were residential properties. The loan charge-offs for commercial and industrial loans totaled $0.8 million. Recoveries for 2012 of $0.8 million were recognized on loans previously charged off as compared to $0.7 million in 2011. The allowance for loan losses at December 31, 2012 was $10.3 million, compared to $8.9 million at December 31, 2011, and was 1.64% and 1.55% of total loans, respectively. Management believes that the current level of the allowance is adequate to cover losses in the loan portfolio given the current economic conditions, expected net charge-offs and nonperforming asset levels.
Noninterest Income.
Noninterest income totaled $11.1 million in 2012 which is relatively unchanged when compared to $11.3 million in 2011. Service charges, commissions and fees totaled $4.8 million for 2012 and $4.6 million for 2011. Realized gains from securities totaled $4.9 million for 2012 compared to $3.5 million for 2011. Other noninterest income increased $0.2 million to $1.7 million in 2012 from $1.5 million in 2011. In 2011 the Company recognized a $1.7 million gain on acquisition which is reported in the noninterest income section of the income statement.
Noninterest Expense.
Noninterest expense totaled $31.2 million in 2012 and $28.8 million in 2011. Salaries and benefits increased $1.1 million in 2012 to $13.7 million compared to $12.5 million in 2011. This can be partly explained by the total number of employees increasing from 269 full-time equivalents at December 31, 2011 to 274 at December 31, 2012. Occupancy and equipment expense totaled $3.7 million and $3.5 million in 2012 and 2011, respectively. Other noninterest expense totaled $13.8 million in 2012, an increase of $1.0 million or 7.5% when compared to $12.8 million in 2011. Regulatory assessment expense totaled $1.5 million in 2012 compared to $1.7 million in 2011. For 2012 the net cost of other real estate and repossessions increased $0.8 million to $2.1 million, when compared to $1.3 million in 2011.
Income Taxes.
The provision for income taxes for the years ended December 31, 2012 and 2011 was $5.9 million and $3.7 million, respectively. The increase in the provision for income taxes is a result of higher income and non-taxable gain on acquisition for 2011 when compared to 2012. The Company's statutory tax rate was 35.0% and 34.0% in 2012 and 2011, respectively. See Note 20 to the Consolidated Financial Statements for additional information.
46
Asset/Liability Management and Market Risk
Asset/Liability Management.
Our asset/liability management (ALM) process consists of quantifying, analyzing and controlling interest rate risk (IRR) to maintain reasonably stable net interest income levels under various interest rate environments. The principal objective of ALM is to maximize net interest income while operating within acceptable limits established for interest rate risk and to maintain adequate levels of liquidity.
The majority of our assets and liabilities are monetary in nature. Consequently, one of our most significant forms of market risk is interest rate risk. Our assets, consisting primarily of loans secured by real estate and fixed rate securities in our investment portfolio, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Our Board of Directors has established the Management Asset Liability Committee and the Board Investment Committee to oversee the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. The Management Asset Liability Committee is comprised of senior members of Management and meets as needed to review our asset liability policies and interest rate risk position. The Board Investment Committee is comprised of board members and meets monthly. Senior Management makes a monthly report to the Board Investment Committee.
The need for interest sensitivity gap management is most critical in times of rapid changes in overall interest rates. We generally seek to limit our exposure to interest rate fluctuations by maintaining a relatively balanced mix of rate sensitive assets and liabilities on a one-year time horizon and greater than one year time horizon. 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. These strategies include, but are not limited to, frequent internal modelling of asset and liability values and behavior due to changes in interest rates. Cash flow forecasts are closely monitored and the impact of both prepayments and extension risk is evaluated. Periodic simulations for the impact to both economic value of equity and net interest income are also done.
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.
The following interest sensitivity analysis is one measurement of interest rate risk. This analysis, which we prepare monthly, reflects the contractual maturity characteristics of assets and liabilities over various time periods. This analysis does not factor in prepayments or interest rate floors on loans which may significantly change the report. This table includes nonaccrual loans in their respective maturity periods. The gap indicates whether more assets or liabilities are subject to repricing over a given time period. The interest sensitivity analysis at December 31, 2013 shown below reflects a liability-sensitive position with a negative cumulative gap on a one-year basis.
|
December 31, 2013
|
|||||||||||||||
|
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) | $ |
362,591
|
$
|
39,788
|
$
|
402,379
|
$
|
300,875
|
$
|
703,254
|
|||||
|
Securities (including FHLB stock)
|
39,190
|
8,383
|
47,573
|
588,766
|
636,339
|
||||||||||
|
Federal Funds Sold
|
665
|
-
|
665
|
-
|
665
|
||||||||||
|
Other earning assets
|
52,156
|
-
|
52,156
|
-
|
52,156
|
||||||||||
|
Total earning assets
|
$
|
454,602
|
$
|
48,171
|
$
|
502,773
|
$
|
889,641
|
$
|
1,392,414
|
|||||
|
Source of Funds:
|
|||||||||||||||
|
Interest-bearing accounts:
|
|||||||||||||||
|
Demand deposits
|
$
|
391,350
|
$
|
-
|
$
|
391,350
|
$
|
-
|
$
|
391,350
|
|||||
|
Savings deposits
|
65,445
|
-
|
65,445
|
-
|
65,445
|
||||||||||
|
Time deposits
|
118,958
|
286,073
|
405,031
|
236,982
|
642,013
|
||||||||||
|
Short-term borrowings
|
5,788
|
-
|
5,788
|
-
|
5,788
|
||||||||||
|
Long-term borrowings
|
150
|
350
|
500
|
-
|
500
|
||||||||||
|
Noninterest-bearing, net
|
-
|
-
|
-
|
287,318
|
287,318
|
||||||||||
|
Total source of funds
|
$
|
581,691
|
$
|
286,423
|
$
|
868,114
|
$
|
524,300
|
$
|
1,392,414
|
|||||
|
Period gap
|
$
|
(127,089
|
)
|
$
|
(238,252
|
)
|
$
|
(365,341
|
)
|
$
|
365,341
|
||||
|
Cumulative gap
|
$
|
(127,089
|
)
|
$
|
(365,341
|
)
|
$
|
(365,341
|
)
|
$
|
-
|
||||
|
Cumulative gap as a percent of earning assets
|
-9.1
|
%
|
-26.2
|
%
|
-26.2
|
%
|
|||||||||
47
Net Interest Income at Risk.
Net interest income (NII) at risk measures the risk of a decline in earnings due to changes in interest rates. The table below presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from an instantaneous and sustained parallel shift in the yield curve at December 31, 2013. Shifts are measured in 100 basis point increments (+200 through -100 basis points,) from base case. Base case encompasses key assumptions for asset/liability mix, loan and deposit growth, pricing, prepayment speeds, deposit decay rates, securities portfolio cash flows and reinvestment strategy and the market value of certain assets under the various interest rate scenarios. The base case scenario assumes that the current interest rate environment is held constant throughout the forecast period for a static balance sheet and the instantaneous shocks are performed against that yield curve.
| December 31, 2013 | |||
| Change in Interest Rates (basis points) |
Estimated Increase (Decrease) in NII
|
||
| -100 | -4.6 | % | |
| Stable | 0.0 | % | |
| +100 | -1.8 | % | |
| +200 | -5.2 | % | |
These scenarios are instantaneous shocks that assume balance sheet management will mirror the base case. Should the yield curve begin to rise or fall, Management has several strategies available to maximize earnings opportunities or offset the negative impact to earnings. For example, in a falling rate environment, deposit pricing strategies could be adjusted to further sway customer behavior to non-contractual or short-term (less than 12 months) contractual deposit products which would reset downward with the changes in the yield curve and prevailing market rates. Another opportunity at the start of such a cycle would be reinvesting the securities portfolio cash flows into longer term, non-callable bonds that would lock in higher yields.
Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as anticipated. Additionally, a change in the U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the U.S. Treasury yield curve would cause significantly different changes to NII than indicated above. Strategic management of our balance sheet and earnings would be adjusted to accommodate these movements. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Also, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring exposure to interest rate risk.
We pursued a strategy that began in 2012 and continued through 2013 to reduce long term interest rate risk. The contractual maturity of the investment portfolio was shortened and mortgage backed securities were purchased to enhance cash flow. The Company was able to grow its loan portfolio while reducing the size of the investment portfolio. New loans originated generally were either floating rate or were fixed rate with maturities that did not exceed five years. Securities as a percentage of average earning assets decreased from 50.1% in 2012 to 46.1% in 2013. Deposit maturities were extended and generally priced lower. We believe that the addition of more amortizing securities and loans will help to lower interest rate risk.
Liquidity and Capital Resources
Liquidity.
Liquidity refers to the ability or flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity provides sufficient funds to meet customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. Liquid assets include cash and due from banks, interest-earning demand deposits with banks, federal funds sold and available for sale investment securities. Including securities pledged to collateralize public fund deposits.
Available lines of credit totaled $210.6 million at December 31, 2013.
At December 31, 2013, letters of credit issued by the FHLB totaling $90.0 million were outstanding and carried as off-balance sheet items, all of which expire in 2014. The letters of credit are solely used for pledging for public fund deposits. The FHLB has a blanket lien on substantially all of the loans in the portfolio which is used to secure borrowing availability from the FHLB. We have obtained a subordination agreement from the FHLB on farmland, agricultural, and commercial and industrial loans. These loans are available to be pledged for additional reserve liquidity.
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.
As of December 31, 2013, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. See Note 15 to the Consolidated Financial Statements for the actual capital ratios and regulatory requirements.
48
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.
The notional amounts of the financial instruments with off-balance sheet risk at December 31, 2013 and December 31, 2012 are as follows:
|
Contract Amount
|
|
(in thousands)
|
December 31, 2013 | December 31, 2012 | ||||
| Commitments to Extend Credit | $ | 30,516 | $ | 26,755 | ||
| Unfunded Commitments under lines of credit | $ | 115,311 | $ | 71,423 | ||
| Commercial and Standby letters of credit | $ | 7,695 | $ | 5,470 | ||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on our credit evaluation of the counterpart. Collateral requirements vary but may include accounts receivable, inventory, property, plant and equipment, residential real estate and commercial properties.
Standby and commercial letters of credit are conditional commitments to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The majority of these guarantees are short-term, one year or less; however, some guarantees extend for up to three years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral requirements are the same as on-balance sheet instruments and commitments to extend credit. There were no losses incurred on any commitments in 2013, 2012 or 2011.
Contractual Obligations
The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at December 31, 2013. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.
| Payments Due by Period: | December 31, 2013 | |||||||||||
| (in thousands) |
One Year or Less
|
One Through Three Years
|
Over Three Years
|
Total
|
||||||||
|
Operating leases
|
$
|
18
|
$
|
37
|
$
|
19
|
$
|
74
|
||||
|
Software contracts
|
1,322
|
2,644
|
1,322
|
5,288
|
||||||||
|
Time deposits
|
405,031
|
187,014
|
49,968
|
642,013
|
||||||||
|
Short-term borrowings
|
5,788
|
-
|
-
|
5,788
|
||||||||
|
Long-term borrowings
|
500
|
-
|
-
|
500
|
||||||||
|
Total
|
$
|
412,659
|
$
|
189,695
|
$
|
51,309
|
$
|
653,663
|
||||
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, the majority of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on the Company’s performance than does the effect of inflation. Although fluctuations in interest rates are neither completely predictable or controllable, the Company regularly monitors its interest rate position and oversees its financial risk management by establishing policies and operating limits. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates. Although not as critical to the banking industry as to other industries, inflationary factors may have some impact on the Company’s growth, earnings, total assets and capital levels. We do not expect inflation to be a significant factor in 2014.
Item 7A – Quantitative and Qualitative Disclosures about Market Risk
For discussion on this matter, see the “Asset/Liability Management and Market Risk” section of Management's Discussion and Analysis.
Report of Castaing, Hussey & Lolan, LLC
Independent Registered Accounting Firm
To the Stockholders and Board of Directors
First Guaranty Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of First Guaranty Bancshares, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2013. These financial statements are the responsibility of the Company's Management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Guaranty Bancshares, Inc. as of December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
We also audited, in accordance with the standards of the American Institute of Certified Public Accountants, First Guaranty Bancshares, Inc.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 27, 2014 expressed an unqualified opinion thereon.
/s/ Castaing, Hussey & Lolan, LLC
Castaing, Hussey & Lolan, LLC
New Iberia, Louisiana
March 27, 2014
50
|
CONSOLIDATED BALANCE SHEETS
|
||||||
| (in thousands, except share data) | December 31, 2013 |
December 31, 2012
|
||||
|
Assets
|
||||||
|
Cash and cash equivalents:
|
||||||
|
Cash and due from banks
|
$ | 60,819 |
$
|
83,342
|
||
|
Federal funds sold
|
665 |
2,891
|
||||
|
Cash and cash equivalents
|
61,484 |
86,233
|
||||
| Interest-earning time deposits with banks | 747 | 747 | ||||
|
Investment securities:
|
||||||
|
Available for sale, at fair value
|
484,211 |
600,300
|
||||
|
Held to maturity, at cost (estimated fair value of $141,642 and $58,939, respectively)
|
150,293 |
58,943
|
||||
|
Investment securities
|
634,504 |
659,243
|
||||
|
Federal Home Loan Bank stock, at cost
|
1,835 |
1,275
|
||||
| Loans held for sale | 88 | 557 | ||||
|
Loans, net of unearned income
|
703,166 |
629,500
|
||||
|
Less: allowance for loan losses
|
10,355 |
10,342
|
||||
|
Net loans
|
692,811 |
619,158
|
||||
|
Premises and equipment, net
|
19,612 |
19,564
|
||||
|
Goodwill
|
1,999 |
1,999
|
||||
|
Intangible assets, net
|
2,073 |
2,413
|
||||
|
Other real estate, net
|
3,357 |
2,394
|
||||
|
Accrued interest receivable
|
6,258 |
6,711
|
||||
|
Other assets
|
11,673 |
7,009
|
||||
|
Total Assets
|
$ | 1,436,441 |
$
|
1,407,303
|
||
|
Liabilities and Stockholders' Equity
|
||||||
|
Deposits:
|
||||||
|
Noninterest-bearing demand
|
$ | 204,291 |
$
|
192,232
|
||
|
Interest-bearing demand
|
391,350 |
348,870
|
||||
|
Savings
|
65,445 |
63,062
|
||||
|
Time
|
642,013 |
648,448
|
||||
|
Total deposits
|
1,303,099 |
1,252,612
|
||||
|
Short-term borrowings
|
5,788 |
14,746
|
||||
|
Accrued interest payable
|
2,364 |
2,840
|
||||
| Long-term borrowing | 500 | 1,100 | ||||
|
Other liabilities
|
1,285 |
1,824
|
||||
|
Total Liabilities
|
1,313,036 |
1,273,122
|
||||
|
Stockholders' Equity
|
||||||
|
Preferred stock:
|
||||||
| Series C - $1,000 par value - authorized 39,435 shares; issued and outstanding 39,435 | 39,435 | 39,435 | ||||
|
Common stock:
|
||||||
|
$1 par value - authorized 100,600,000 shares; issued 6,294,227 shares
|
6,294 |
6,294
|
||||
|
Surplus
|
39,387 |
39,387
|
||||
| Treasury stock, at cost, 2,895 shares | (54 | ) | (54 | ) | ||
|
Retained earnings
|
47,477 |
43,071
|
||||
|
Accumulated other comprehensive (loss) income
|
(9,134 | ) |
6,048
|
|
||
|
Total Stockholders' Equity
|
123,405 |
134,181
|
||||
|
Total Liabilities and Stockholders' Equity
|
$ | 1,436,441 |
$
|
1,407,303
|
||
| See Notes to the Consolidated Financial Statements. | ||||||
51
|
CONSOLIDATED STATEMENTS OF INCOME
|
|||||||||
| Years Ended December 31, | |||||||||
| (in thousands, except share data) | 2013 | 2012 |
2011
|
||||||
|
Interest Income:
|
|||||||||
|
Loans (including fees)
|
$ | 37,289 |
$
|
36,136 | $ |
34,839
|
|||
|
Loans held for sale
|
- | 8 |
10
|
||||||
|
Deposits with other banks
|
157 | 92 |
50
|
||||||
|
Securities (including FHLB stock)
|
13,439 | 18,949 |
19,691
|
||||||
|
Federal funds sold
|
1 | 10 |
19
|
||||||
|
Total Interest Income
|
50,886 | 55,195 |
54,609
|
||||||
|
Interest Expense:
|
|||||||||
|
Demand deposits
|
1,262 | 1,383 |
920
|
||||||
|
Savings deposits
|
41 | 55 |
50
|
||||||
|
Time deposits
|
9,682 | 11,560 |
13,962
|
||||||
|
Borrowings
|
149 | 122 |
186
|
||||||
|
Total Interest Expense
|
11,134 | 13,120 |
15,118
|
||||||
|
Net Interest Income
|
39,752 | 42,075 |
39,491
|
||||||
|
Less: Provision for loan losses
|
2,520 | 4,134 |
10,187
|
||||||
|
Net Interest Income after Provision for Loan Losses
|
37,232 | 37,941 |
29,304
|
||||||
|
Noninterest Income:
|
|||||||||
|
Service charges, commissions and fees
|
4,640 | 4,770 |
4,596
|
||||||
|
Net gains on securities
|
1,571 | 4,868 |
3,531
|
||||||
|
Loss on securities impairment
|
- | - |
(97
|
) | |||||
|
Net (loss) gains on sale of loans
|
(70 | ) | (68 | ) |
114
|
||||
| (Loss) gain on sale of fixed assets | - | (109 | ) | 1 | |||||
| Gain on acquisition | - | - | 1,665 | ||||||
|
Other
|
1,337 | 1,679 |
1,463
|
||||||
|
Total Noninterest Income
|
7,478 | 11,140 |
11,273
|
||||||
|
Noninterest Expense:
|
|||||||||
|
Salaries and employee benefits
|
14,368 | 13,668 |
12,529
|
||||||
|
Occupancy and equipment expense
|
3,949 | 3,713 |
3,473
|
||||||
|
Other
|
12,670 | 13,780 |
12,819
|
||||||
|
Total Noninterest Expense
|
30,987 | 31,161 |
28,821
|
||||||
|
Income Before Income Taxes
|
13,723 | 17,920 |
11,756
|
||||||
|
Less: Provision for income taxes
|
4,577 | 5,861 |
3,723
|
||||||
|
Net Income
|
$ | 9,146 | $ | 12,059 | $ |
8,033
|
|||
|
Preferred stock dividends
|
(713 | ) | (1,972 | ) |
(1,976
|
) | |||
|
Income Available to Common Shareholders
|
$ | 8,433 |
$
|
10,087 | $ |
6,057
|
|||
|
Per Common Share:
|
|||||||||
|
Earnings
|
$ | 1.34 |
$
|
1.60 | $ |
0.98
|
|||
|
Cash dividends paid
|
$ | 0.64 |
$
|
0.64 | $ |
0.58
|
|||
|
Weighted Average Common Shares Outstanding
|
6,291,332 | 6,292,855 |
6,205,652
|
||||||
|
See Notes to Consolidated Financial Statements
|
|||||||||
52
| FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY | |||||||||
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
|
|||||||||
| Years Ended December 31, | |||||||||
| (in thousands) | 2013 | 2012 | 2011 | ||||||
| Net Income | $ | 9,146 | $ | 12,059 | $ | 8,033 | |||
| Other comprehensive (loss) income: | |||||||||
| Unrealized (losses) gains on securities: | |||||||||
| Unrealized holding (losses) gains arising during the period | (21,432 | ) | 7,263 | 10,692 | |||||
| Reclassification adjustments for net gains included in net income | (1,571 | ) | (4,868 | ) | (3,531 | ) | |||
| Change in unrealized (losses) gains on securities | (23,003 | ) | 2,395 | 7,161 | |||||
| Tax impact | 7,821 | (814 | ) | (2,435 | ) | ||||
| Other comprehensive (loss) income | (15,182 | ) | 1,581 | 4,726 | |||||
| Comprehensive (Loss) Income | $ | (6,036 | ) | $ | 13,640 | $ | 12,759 | ||
| See Notes to Consolidated Financial Statements | |||||||||
53
| FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY | |||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | |||||||||||||||||||||||||||
| Series A | Series B | Series C | Accumulated | ||||||||||||||||||||||||
| Preferred | Preferred | Preferred | Common | Other | |||||||||||||||||||||||
| Stock | Stock | Stock | Stock | Treasury | Retained | Comprehensive | |||||||||||||||||||||
| (in thousands, except 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
|
-
|
-
|
- |
-
|
-
|
- |
8,033
|
-
|
8,033
|
||||||||||||||||||
|
Change in unrealized loss on AFS securities, net of reclassification adjustments and taxes
|
-
|
-
|
- |
-
|
-
|
- |
-
|
4,726
|
4,726
|
||||||||||||||||||
| Common stock issued in acquisition, 179,036 shares | - | - | - | 178 | 3,147 | - | (294 | ) | - | 3,031 | |||||||||||||||||
| Preferred stock issued | - | - | 39,435 | - | - | - | - | - | 39,435 | ||||||||||||||||||
|
Cash dividends on common stock ($0.58 per share)
|
-
|
-
|
- |
-
|
-
|
- |
(3,610
|
)
|
-
|
(3,610
|
)
|
||||||||||||||||
|
Preferred stock repurchase, Series A & B
|
(20,030 | ) | (1,098 | ) | - | - | - | - | - | (21,128 | ) | ||||||||||||||||
|
Preferred stock dividends, amortization and accretion
|
171
|
(18
|
)
|
- |
-
|
-
|
- |
(1,976
|
)
|
-
|
(1,823
|
)
|
|||||||||||||||
|
Balance December 31, 2011
|
$
|
-
|
$
|
-
|
|
$ | 39,435 | $ |
6,294
|
|
$ |
39,387
|
|
$ | - | $ |
37,019
|
|
$ |
4,467
|
|
$ |
126,602
|
||||
| Net income | - | - | - | - | - | - | 12,059 | - | 12,059 | ||||||||||||||||||
|
Change in unrealized gain on AFS securities, net of reclassification adjustments and taxes
|
-
|
-
|
- |
-
|
-
|
- |
-
|
1,581
|
|
1,581
|
|
||||||||||||||||
| Treasury shares purchased, at cost, 2,895 shares | - | - | - | - | - | (54 | ) | - | - | (54 | ) | ||||||||||||||||
|
Cash dividends on common stock ($0.64 per share)
|
-
|
-
|
- |
-
|
-
|
- |
(4,035
|
)
|
-
|
(4,035
|
)
|
||||||||||||||||
|
Preferred stock dividends
|
-
|
-
|
|
- |
-
|
-
|
- |
(1,972
|
)
|
-
|
(1,972
|
)
|
|||||||||||||||
|
Balance December 31, 2012
|
$ | - | $ | - | $ | 39,435 | $ | 6,294 | $ | 39,387 | $ | (54 | ) | $ | 43,071 | $ | 6,048 | $ | 134,181 | ||||||||
|
Net income
|
- | - | - | - | - | - | 9,146 | - | 9,146 | ||||||||||||||||||
| Change in unrealized gain on AFS securities, net of reclassification adjustments and taxes | - | - | - | - | - | - | - | (15,182 | ) | (15,182 | ) | ||||||||||||||||
|
Cash dividends on common stock ($0.64 per share)
|
- | - | - | - | - | - | (4,027 | ) | - | (4,027 | ) | ||||||||||||||||
| Preferred stock dividends | - | - | - | - | - | - | (713 | ) | - | (713 | ) | ||||||||||||||||
| Balance December 31, 2013 | $ | - | $ | - | $ | 39,435 | $ | 6,294 | $ | 39,387 | $ | (54 | ) | $ | 47,477 | $ | (9,134 | ) | $ | 123,405 | |||||||
| See Notes to Consolidated Financial Statements | |||||||||||||||||||||||||||
54
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|||||||||
| Years Ended December 31, | |||||||||
| (in thousands) | 2013 |
2012
|
2011
|
||||||
|
Cash Flows From Operating Activities:
|
|||||||||
|
Net income
|
$ | 9,146 |
$
|
12,059
|
$
|
8,033
|
|||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|||||||||
|
Provision for loan losses
|
2,520 |
4,134
|
10,187
|
||||||
|
Depreciation and amortization
|
2,111 |
2,096
|
1,718
|
||||||
|
Net amortization of investments
|
2,141 |
1,962
|
1,109
|
||||||
| Gain on acquisition | - | - | (1,665 | ) | |||||
|
Gain on sale/call of securities
|
(1,571 | ) |
(4,868
|
) |
(3,531
|
) | |||
|
Loss (gain) on sale of assets
|
61 |
259
|
(116
|
) | |||||
|
Other than temporary impairment charge on securities
|
- |
-
|
97
|
||||||
|
ORE writedowns and loss on disposition
|
335 |
1,480
|
764
|
||||||
|
FHLB stock dividends
|
(4 | ) |
(4
|
) |
(5
|
) | |||
| Net decrease (increase) in loans held for sale | 469 | (557 | ) | - | |||||
|
Change in other assets and liabilities, net
|
1,958 |
338
|
1,379
|
||||||
|
Net cash provided by operating activities
|
17,166 |
16,899
|
17,970
|
||||||
|
Cash Flows From Investing Activities:
|
|||||||||
|
Proceeds from maturities and calls of HTM securities
|
16,184 |
144,640
|
227,565
|
||||||
|
Proceeds from maturities, calls and sales of AFS securities
|
626,433 |
782,706
|
490,661
|
||||||
|
Funds invested in HTM securities
|
(107,616 | ) |
(65,873
|
) |
(190,125
|
) | |||
|
Funds Invested in AFS securities
|
(533,320 | ) |
(884,258
|
)
|
(668,616
|
) | |||
| Proceeds from sale/redemption of Federal Home Loan Bank stock | 3,268 | 4,030 | 2,483 | ||||||
| Funds invested in Federal Home Loan Bank stock | (3,825 | ) | (4,658 | ) | (1,440 | ) | |||
| Funds invested in time deposits with banks | - | (747 | ) | - | |||||
|
Net (increase) decrease in loans
|
(78,777 | ) | (63,864 | ) |
50,099
|
||||
|
Purchases of premises and equipment
|
(1,757 | ) |
(1,566
|
)
|
(2,337
|
) | |||
| Proceeds from sales of premises and equipment | - | 178 | 24 | ||||||
|
Proceeds from sales of other real estate owned
|
1,306 |
6,632
|
2,230
|
||||||
| Cash received in excess of cash paid in acquisition | - | - | 4,992 | ||||||
|
Net cash used in investing activities
|
(78,104 | ) |
(82,780
|
) |
(84,464
|
) | |||
|
Cash Flows From Financing Activities:
|
|||||||||
|
Net increase in deposits
|
50,487 |
45,310
|
121,891
|
||||||
|
Net (decrease) increase in federal funds purchased and short-term borrowings
|
(8,958 | ) |
2,523
|
(366
|
) | ||||
| Proceeds from long-term borrowings | - | - | 3,500 | ||||||
|
Repayment of long-term borrowings
|
(600 | ) |
(2,100
|
) |
(3,800
|
) | |||
| Repurchase of preferred stock | - | - | (21,128 | ) | |||||
| Repurchase of common stock | - | (54 | ) | - | |||||
| Proceeds from issuance of preferred stock | - | - | 39,435 | ||||||
|
Dividends paid
|
(4,740 | ) |
(6,007
|
)
|
(5,433
|
) | |||
|
Net cash provided by financing activities
|
36,189 |
39,672
|
134,099
|
||||||
|
Net (decrease) increase in cash and cash equivalents
|
(24,749 | ) |
(26,209
|
) |
67,605
|
||||
|
Cash and cash equivalents at the beginning of the period
|
86,233 |
112,442
|
44,837
|
||||||
|
Cash and cash equivalents at the end of the period
|
$ | 61,484 |
$
|
86,233
|
$
|
112,442
|
|||
|
Noncash activities:
|
|||||||||
|
Loans transferred to foreclosed assets
|
$ | 2,604 |
$
|
4,793
|
$
|
5,817
|
|||
| Common stock issued in acquisition (179,036 shares) | $ | - | $ | - | $ | 3,031 | |||
|
Cash paid during the period:
|
|||||||||
|
Interest on deposits and borrowed funds
|
$ | 11,610 |
$
|
13,789
|
$
|
15,148
|
|||
|
Income taxes
|
$ | 2,850 |
$
|
5,800
|
$
|
2,850
|
|||
| See Notes to the Consolidated Financial Statements. | |||||||||
Note 1. Business and Summary of Significant Accounting Policies
Business
First Guaranty Bancshares, Inc. (the “Company”) is a Louisiana corporation headquartered in Hammond, LA. The Company owns all of the outstanding shares of common stock of First Guaranty Bank. First Guaranty Bank (the “Bank”) is a Louisiana state-chartered commercial bank that provides a diversified range of financial services to consumers and businesses in the communities in which it operates. These services include consumer and commercial lending, mortgage loan origination, the issuance of credit cards and retail banking services. The Bank also maintains an investment portfolio comprised of government, government agency, corporate, and municipal securities. The Bank has twenty-one banking offices, including one drive-up banking facility, and twenty-seven automated teller machines (ATMs) in Southeast, Southwest and North Louisiana.
Summary of significant accounting policies
The accounting and reporting policies of the Company conform to generally accepted accounting principles and to predominant accounting practices within the banking industry. The more significant accounting and reporting policies are as follows:
Consolidation
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. Certain amounts reported in prior periods have been reclassified to conform to the current period presentation.
Acquisition Accounting
Acquisitions are accounted for under the purchase method of accounting. Purchased assets, including identifiable intangibles, and assumed liabilities are recorded at their respective acquisition date fair values. If the fair value of net assets purchased exceeds the consideration given, a gain on acquisition is recognized. If the consideration given exceeds the fair value of the net assets received, goodwill is recognized. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. See Acquired Loans section below for accounting policy regarding loans acquired in a business combination.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expense during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the valuation of goodwill, intangible assets and other purchase accounting adjustments. In connection with the determination of the allowance for loan losses and real estate owned, the Company obtains independent appraisals for significant properties.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents are defined as cash, due from banks, interest-bearing demand deposits with banks and federal funds sold with maturities of three months or less.
Securities
The Company reviews its financial position, liquidity and future plans in evaluating the criteria for classifying investment securities. Debt securities that Management has the ability and intent to hold to maturity are classified as held to maturity and carried at cost, adjusted for amortization of premiums and accretion of discounts using methods approximating the interest method. Securities available for sale are stated at fair value. The unrealized difference, if any, between amortized cost and fair value of these AFS securities is excluded from income and is reported, net of deferred taxes, in accumulated other comprehensive income as a part of stockholders’ equity. Details of other comprehensive income are reported in the consolidated statements of comprehensive income. Realized gains and losses on securities are computed based on the specific identification method and are reported as a separate component of other income.
Any security that has experienced a decline in value, which Management believes is deemed other than temporary, is reduced to its estimated fair value by a charge to operations. In estimating other-than-temporary impairment losses, Management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) 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. Amortization of premiums and discounts is included in interest income. Discounts and premiums related to debt securities are amortized using the effective interest rate method.
56
Loans held for sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Loans held for sale have primarily been fixed rate single-family residential mortgage loans under contract to be sold in the secondary market. In most cases, loans in this category are sold within thirty days. Buyers generally have recourse to return a purchased loan under limited circumstances. Recourse conditions may include early payment default, breach of representations or warranties and documentation deficiencies. Mortgage loans held for sale are generally sold with the mortgage servicing rights released. Gains or losses on sales of mortgage loans are recognized based on the differences between the selling price and the carrying value of the related mortgage loans sold.
Loans
Loans are stated at the principal amounts outstanding, net of unearned income and deferred loan fees. In addition to loans issued in the normal course of business, overdrafts on customer deposit accounts are considered to be loans and reclassified as such. Interest income on all classifications of loans is calculated using the simple interest method on daily balances of the principal amount outstanding.
Accrual of interest is discontinued on a loan when Management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that reasonable doubt exists as to the full and timely collection of principal and interest. This evaluation is made for all loans that are 90 days or more contractually past due. When a loan is placed in nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of interest and principal is probable. Loans are returned to accrual status when, in the judgment of Management, all principal and interest amounts contractually due are reasonably assured to be collected within a reasonable time frame and when the borrower has demonstrated payment performance of cash or cash equivalents; generally for a period of six months. All loans, except mortgage loans, are considered past due if they are past due 30 days. Mortgage loans are considered past due when two consecutive payments have been missed. Loans that are past due 90-120 days and deemed uncollectible are charged-off. The loan charge off is a reduction of the allowance for loan losses.
Credit Quality
The Company’s credit quality indicators are pass, special mention, substandard, and doubtful.
Loans included in the pass category are performing loans with satisfactory debt coverage ratios, collateral, payment history, and documentation requirements.
Special mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Nonfinancial reasons include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices.
A substandard loan is inadequately protected by the paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. These loans require more intensive supervision. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigates. For some substandard loans, the likelihood of full collection of interest and principal may be in doubt and interest is no longer accrued. For consumer loans that are 90 days or more past due or that are nonaccrual are considered substandard.
Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values.
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. 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.
57
Acquired Loans
Acquired loans are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. Acquired loans are segregated between those with deteriorated credit quality at acquisition and those deemed as performing. To make this determination, Management considers such factors as past due status, nonaccrual status, credit risk ratings, interest rates and collateral position. The fair value of acquired loans deemed performing is determined by discounting cash flows, both principal and interest, for each pool at prevailing market interest rates as well as consideration of inherent potential losses. The difference between the fair value and principal balances due at acquisition date, the fair value discount, is accreted into income over the estimated life of each loan pool.
Purchased loans acquired in a business combination are recorded at their estimated fair value on their purchase date with no carryover of the related allowance for loan losses. Performing acquired loans are subsequently evaluated for any required allowance at each reporting date. An allowance for loan losses is calculated using a similar methodology for originated loans.
Loan fees and costs
Nonrefundable loan origination and commitment fees and direct costs associated with originating loans are deferred and recognized over the lives of the related loans as an adjustment to the loans' yield using the level yield method.
Allowance for loan losses
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when Management believes that the collectability of the principal is unlikely. The allowance, which is based on evaluation of the collectability of loans and prior loan loss experience, is an amount that, in the opinion of Management, reflects the risks inherent in the existing loan portfolio and exists at the reporting date. The evaluations take into consideration a number of subjective factors including changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect a borrower’s ability to pay, adequacy of loan collateral and other relevant factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require additional recognition of losses based on their judgments about information available to them at the time of their examination.
The following are general credit risk factors that affect the Company's loan portfolio segments. These factors do not encompass all risks associated with each loan category. Construction and land development loans have risks associated with interim construction prior to permanent financing and repayment risks due to the future sale of developed property. Farmland and agricultural loans have risks such as weather, government agricultural policies, fuel and fertilizer costs, and market price volatility. 1-4 family, multi-family, and consumer credits are strongly influenced by employment levels, consumer debt loads and the general economy. Non-farm non-residential loans include both owner occupied real estate and non-owner occupied real estate. Common risks associated with these properties is the ability to maintain tenant leases and keep lease income at a level able to service required debt and operating expenses. Commercial and industrial loans generally have non-real estate secured collateral which requires closer monitoring than real estate collateral.
Although Management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values and future cash flows on impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term. However, the amount of the change that is reasonably possible cannot be estimated. The evaluation of the adequacy of loan collateral is often based upon estimates and appraisals. Because of changing economic conditions, the valuations determined from such estimates and appraisals may also change. Accordingly, the Company may ultimately incur losses that vary from Management's current estimates. Adjustments to the allowance for loan losses will be reported in the period such adjustments become known or can be reasonably estimated. All loan losses are charged to the allowance for loan losses when the loss actually occurs or when the collectability of the principal is unlikely. Recoveries are credited to the allowance at the time of recovery.
The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, and impaired. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Also, a specific reserve is allocated for our syndicated loans. The general component covers non-classified loans and special mention loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect the estimate of probable losses.
The allowance for loan losses is reviewed on a monthly basis. The monitoring of credit risk also extends to unfunded credit commitments, such as unused commercial credit lines and letters of credit. A reserve is established as needed for estimates of probable losses on such commitments.
58
Goodwill and intangible assets
Goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. The Company’s goodwill is tested for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. If the implied fair value is less than the carrying amount, a loss would be recognized in other non-interest expense to reduce the carrying amount to implied fair value of goodwill. The goodwill impairment test includes two steps that are preceded by a, “step zero”, qualitative test. The qualitative test allows Management to assess whether qualitative factors indicate that it is more likely than not that impairment exists. If it is not more likely than not that impairment exists, then no impairment exists and the two step quantitative test would not be necessary. These qualitative indicators include factors such as earnings, share price, market conditions, etc. If the qualitative factors indicate that it is more likely than not that impairment exists, then the two step quantitative test would be necessary. Step one is used to identify potential impairment and compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit’s goodwill, an impairment loss is recognized in an amount equal to that excess.
Identifiable intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or legal rights or because the assets are capable of being sold or exchanged either on their own or in combination with the related contract, asset or liability. The Company’s intangible assets primarily relate to core deposits. These core deposit intangibles are amortized on a straight-line basis over terms ranging from seven to fifteen years. Management periodically evaluates whether events or circumstances have occurred that impair this deposit intangible.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the respective assets as follows:
Buildings and improvements 10-40 years
Equipment, fixtures and automobiles 3-10 years
Expenditures for renewals and betterments are capitalized and depreciated over their estimated useful lives. Repairs, maintenance and minor improvements are charged to operating expense as incurred. Gains or losses on disposition, if any, are recorded as a separate line item in noninterest income on the Statements of Income.
Other real estate
Other real estate includes properties acquired through foreclosure or acceptance of deeds in lieu of foreclosure. These properties are recorded at the lower of the recorded investment in the property or its fair value less the estimated cost of disposition. Any valuation adjustments required prior to foreclosure are charged to the allowance for loan losses. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged to current period earnings as other real estate expense. Costs of operating and maintaining the properties are charged to other real estate expense as incurred. Any subsequent gains or losses on dispositions are credited or charged to income in the period of disposition.
Off-balance sheet financial instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commitments to fund commercial real estate, construction and land development loans secured by real estate, and performance standby letters of credit. Such financial instruments are recorded when they are funded.
Income taxes
The Company and its subsidiary file a consolidated federal income tax return on a calendar year basis. In lieu of Louisiana state income tax, the Bank is subject to the Louisiana bank shares tax, which is included in noninterest expense in the Company’s consolidated financial statements. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations for years before 2010. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the deferred tax assets or liabilities are expected to be settled or realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be utilized.
59
Comprehensive income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items along with net income, are components of comprehensive income. The components of other comprehensive income and related tax effects are presented in the Statements of Comprehensive Income.
Fair Value Measurements
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. See Note 22 for a detailed description of fair value measurements.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Earnings per common share
Earnings per share represent income available to common shareholders divided by the weighted average number of common shares outstanding during the period. In February of 2012, the Company issued a pro rata, 10% common stock dividend. The shares issued for the stock dividend have been retrospectively factored into the calculation of earnings per share as well as cash dividends paid on common stock and represented on the face of the financial statements. No convertible shares of the Company’s stock are outstanding.
Operating Segments
All of the Company’s operations are considered by management to be aggregated into one reportable operating segment. While the chief decision-makers monitor the revenue streams of the various products and services, the identifiable segments are not material. Operations are managed and financial performance is evaluated on a Company-wide basis.
Note 2. Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (AOCI).” The amendment requires an entity to present the reclassification adjustments out of AOCI and into net income for each component reported. This update is intended to supplement changes made in 2012 to increase the prominence of items reported in other comprehensive income. The standard became effective for the Company on January 1, 2013. The adoption of this guidance resulted in the disclosures in Note 14 below and did not have a material impact upon the Company’s financial statements.
60
Note 3. Acquisition Activity
On July 1, 2011 the Company completed a merger with Greensburg Bancshares, Inc. ("Greensburg") and its wholly owned subsidiary Bank of Greensburg, located in Greensburg, LA. The Company purchased 100% of the outstanding stock in Greensburg for a total consideration of $5.3 million. The total consideration includes 179,036 shares of the Company's stock issued at a market value of $16.93 per share for a total of $3.0 million and cash for Greensburg shares of $2.3 million. In addition, the Company assumed $3.5 million of debt to Greensburg shareholders and repaid the debt at the time of the acquisition. The merger with Greensburg allowed the Company to enter new markets, gain market share in locations where both entities previously existed, take advantage of operating efficiencies and build upon the Company's core deposit base.
The acquired assets and liabilities at fair value are presented in the following table. The table also includes intangible assets other than goodwill created in the acquisition, namely, core deposit intangible assets.
| (in thousands) | As Recorded by First Guaranty Bancshares | ||
| Cash and cash equivalents | $ | 7,270 | |
| Investment securities | 11,109 | ||
| Loans | 63,001 | ||
| Premises and equipment | 2,934 | ||
| Core deposit intangible | 1,353 | ||
| Other real estate owned | 2,309 | ||
| Other assets | 1,410 | ||
| Interest-bearing deposits | (61,880 | ) | |
| Noninterest-bearing deposits | (16,148 | ) | |
| Long-term debt | (3,500 | ) | |
| Deferred tax liability | (253 | ) | |
| Other liabilities | (632 | ) | |
| Gain on acquisition | (1,665 | ) | |
| Total purchase price | $ | 5,308 | |
The Company based the allocation of the purchase price on the fair values of the assets acquired and the liabilities assumed. The net gain represents the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed less the total consideration given. The gain of $1.7 million was recognized as a gain on acquisition in the noninterest income section of the Company’s Consolidated Statements of Income. This acquisition was an open market, arms-length transaction. The gain was driven by an inactive market for the stock of Greensburg Bancshares, Inc.
Note 4. Cash and Due from Banks
Certain reserves are required to be maintained at the Federal Reserve Bank. The requirement as of December 31, 2013 and 2012 was $32.0 million and $27.9 million, respectively. At December 31, 2013 the Company did not have accounts at correspondent banks, excluding the Federal Reserve Bank, that exceeded the FDIC insurable limit of $250,000. In 2012, the Company had accounts at correspondent banks, excluding the Federal Reserve Bank, that exceeded the FDIC insurable limit of $250,000 totaling $0.6 million.
61
Note 5. Securities
A summary comparison of securities by type at December 31, 2013 and 2012 is shown below.
|
December 31, 2013
|
December 31, 2012
|
|||||||||||||||||||||||
| (in thousands) |
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
| U.S Treasuries | $ | 36,000 | $ | - | $ | - | $ | 36,000 | $ | 20,000 | $ | - | $ | - | $ | 20,000 | ||||||||
|
U.S. Government Agencies
|
302,816 |
|
-
|
|
(16,117
|
)
|
|
286,699
|
|
392,616
|
751
|
|
(278
|
)
|
393,089
|
|||||||||
|
Corporate debt securities
|
142,580 |
3,729
|
(1,828
|
)
|
144,481
|
159,488
|
8,024
|
(401
|
)
|
167,111
|
||||||||||||||
|
Mutual funds or other equity securities
|
564 |
-
|
(8
|
)
|
556
|
564
|
23
|
-
|
|
587
|
||||||||||||||
|
Municipal bonds
|
16,091 |
384
|
-
|
|
16,475
|
18,481
|
1,032
|
-
|
|
19,513
|
||||||||||||||
|
Total available-for-sale securities
|
|
498,051
|
|
4,113
|
|
(17,953
|
)
|
|
484,211
|
|
591,149
|
|
9,830
|
|
(679
|
)
|
|
600,300
|
||||||
|
Held to maturity:
|
||||||||||||||||||||||||
|
U.S. Government Agencies
|
|
86,927
|
|
-
|
|
(5,971
|
)
|
|
80,956
|
|
58,943
|
|
175
|
|
(179
|
)
|
|
58,939
|
||||||
| Mortgage-backed securities | 63,366 | - | (2,680 | ) | 60,686 | - | - | - | - | |||||||||||||||
|
Total held to maturity securities
|
$
|
150,293
|
$
|
-
|
$
|
(8,651
|
)
|
$
|
141,642
|
$
|
58,943
|
$
|
175
|
$
|
(179
|
)
|
$
|
58,939
|
||||||
The scheduled maturities of securities at December 31, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to call or prepayments. Mortgage-backed securities are not due at a single maturity because of amortization and potential prepayment of the underlying mortgages. For this reason they are presented separately in the maturity table below.
|
December 31, 2013
|
||||||
| (in thousands) |
Amortized Cost
|
Fair Value
|
||||
|
Available-for-sale:
|
||||||
|
Due in one year or less
|
$
|
45,610
|
$
|
45,738
|
||
|
Due after one year through five years
|
190,239
|
189,238
|
||||
|
Due after five years through 10 years
|
221,356
|
211,724
|
||||
|
Over 10 years
|
40,846
|
37,511
|
||||
|
Total available-for-sale securities
|
|
498,051
|
|
484,211
|
||
|
Held to maturity:
|
||||||
|
Due in one year or less
|
|
-
|
|
-
|
||
|
Due after one year through five years
|
-
|
-
|
||||
|
Due after five years through 10 years
|
86,927
|
80,956
|
||||
|
Over 10 years
|
-
|
-
|
||||
| Subtotal | 86,927 | 80,956 | ||||
| Mortgage-backed Securities | 63,366 | 60,686 | ||||
|
Total held to maturity securities
|
$
|
150,293
|
$
|
141,642
|
||
62
The following is a summary of the fair value of securities with gross unrealized losses and an aging of those gross unrealized losses:
| At December 31, 2013 | ||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| (in thousands) | Number of Securities |
Fair Value
|
Gross Unrealized Losses
|
Number of Securities |
Fair Value
|
Gross Unrealized Losses
|
Number of Securities |
Fair Value
|
Gross Unrealized Losses
|
|||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
| U.S. Treasuries | 3 | $ | 26,000 | $ | - | - | $ | - | $ | - | 3 | $ | 26,000 | $ | - | |||||||||
|
U.S. Government agencies
|
65 |
218,047
|
(11,110
|
) | 21 |
68,652
|
|
(5,007
|
) | 86 |
286,699
|
(16,117
|
) | |||||||||||
|
Corporate debt securities
|
154 |
39,555
|
(1,378
|
) | 22 |
5,173
|
(450
|
) | 176 |
44,728
|
(1,828
|
) | ||||||||||||
|
Mutual funds or other equity securities
|
1 | 492 | (8 | ) | - | - | - | 1 | 492 | (8 | ) | |||||||||||||
|
Total available-for-sale securities
|
223 |
284,094
|
|
(12,496
|
) | 43 |
|
73,825
|
|
(5,457
|
) | 266 |
|
357,919
|
(17,953
|
) | ||||||||
|
Held to maturity:
|
||||||||||||||||||||||||
|
U.S. Government agencies
|
14 |
|
50,520
|
(3,743
|
) | 7 |
30,436
|
|
(2,228
|
) | 21 |
|
80,956
|
|
(5,971
|
) | ||||||||
| Mortgage-backed securities | 26 | 60,686 | (2,680 | ) | - | - | - | 26 | 60,686 | (2,680 | ) | |||||||||||||
|
Total held to maturity securities
|
40 |
$
|
111,206
|
$
|
(6,423
|
) | 7 |
$
|
30,436
|
$
|
(2,228
|
) | 47 |
$
|
141,642
|
$
|
(8,651
|
) | ||||||
The following is a summary of the fair value of securities with gross unrealized losses and an aging of those gross unrealized losses:
.
| At December 31, 2012 | ||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| (in thousands) | Number of Securities |
Fair Value
|
Gross Unrealized Losses
|
Number of Securities |
Fair Value
|
Gross Unrealized Losses
|
Number of Securities |
Fair Value
|
Gross Unrealized Losses
|
|||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
| U.S. Treasuries | 1 | $ | 20,000 | $ | - | - | $ | - | $ | - | 1 | $ | 20,000 | $ | - | |||||||||
|
U.S. Government agencies
|
34 |
119,952
|
(278
|
) | - |
-
|
-
|
34 |
119,952
|
(278
|
) | |||||||||||||
|
Corporate debt securities
|
59 |
13,222
|
(183
|
) | 7 |
2,211
|
(218
|
) | 66 |
15,433
|
(401
|
) | ||||||||||||
|
Total available-for-sale securities
|
94 |
153,174
|
|
(461
|
) | 7 |
|
2,211
|
|
(218
|
) | 101 |
|
155,385
|
(679
|
) | ||||||||
|
Held to maturity:
|
||||||||||||||||||||||||
|
U.S. Government agencies
|
6 |
|
24,118
|
(179
|
) | - |
-
|
|
-
|
6 |
|
24,118
|
|
(179
|
) | |||||||||
|
Total held to maturity securities
|
6 |
$
|
24,118
|
$
|
(179
|
) | - |
$
|
-
|
$
|
-
|
6 |
$
|
24,118
|
$
|
(179
|
) | |||||||
63
At December 31, 2013 and 2012 the carrying value of pledged securities totaled $503.1 million and $476.5 million, respectively. Gross realized gains on sales of securities were $1.4 million, $4.4 million and $3.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. Gross realized losses were $0, $7,000 and $0 for the years ended December 31, 2013, 2012 and 2011. The tax applicable to these transactions amounted to $0.5 million, $1.7 million, and $1.2 million for 2013, 2012 and 2011, respectively. Proceeds from sales of securities classified as available-for-sale amounted to $18.6 million, $77.9 million and $39.6 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Net unrealized losses on available-for-sale securities included in accumulated other comprehensive income (loss) ("AOCI"), net of applicable income taxes, totaled $9.1 million at December 31, 2013. At December 31, 2012 net unrealized gains included in AOCI, net of applicable income taxes, totaled $6.0 million. During 2013 and 2012 gains, net of tax, reclassified out of AOCI into earnings totaled $1.0 million and $3.2 million, respectively.
Securities are evaluated for other-than-temporary impairment at least quarterly and more frequently when economic or market conditions warrant. 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.
Investment securities issued by the U.S. Government and Government sponsored agencies with unrealized losses and the amount of unrealized losses on those investment securities are the result of changes in market interest rates. The Company has the ability and intent to hold these securities until recovery, which may not be until maturity.
Corporate debt securities consist primarily of corporate bonds issued by businesses in the financial, insurance, utility, manufacturing, industrial, consumer products and oil and gas industries. The Company believes that each of the issuers will be able to fulfill the obligations of these securities based on evaluations described above. The Company has the ability and intent to hold these securities until they recover, which could be at their maturity dates.
The Company believes that the securities with unrealized losses reflect impairment that is temporary and there are currently no securities with other-than-temporary impairment. There were no impairments recognized on securities in 2013 or 2012. In 2011 the Company recognized a $0.1 million security impairment on BBC Capital Trust bonds. In August of 2011 these bonds were sold and $45,000 of the write-down was recovered and recognized as a gain on sale of securities in other noninterest income.
|
At December 31, 2013
|
||||||
| (in thousands) |
Amortized Cost
|
Fair Value
|
||||
|
U.S. Treasuries
|
$
|
36,000
|
$
|
36,000
|
||
| Federal Home Loan Bank (FHLB) |
142,043
|
133,042
|
||||
|
Federal Home Loan Mortgage Corporation (Freddie Mac-FHLMC)
|
50,859
|
47,769
|
||||
|
Federal National Mortgage Association (Fannie Mae-FNMA)
|
138,563
|
132,031
|
||||
|
Federal Farm Credit Bank (FFCB)
|
121,643 | 115,498 | ||||
|
Total
|
$
|
489,108
|
$
|
464,340
|
||
64
Note 6. Loans
The following table summarizes the components of the Company's loan portfolio as of the dates indicated:
|
December 31, 2013
|
December 31, 2012
|
|||||||||
| (in thousands except for %) |
Balance
|
As % of Category
|
Balance
|
As % of Category
|
||||||
|
Real Estate:
|
||||||||||
|
Construction & land development
|
$
|
47,550
|
6.7
|
%
|
$
|
44,856
|
7.1
|
%
|
||
|
Farmland
|
9,826
|
1.4
|
%
|
11,182
|
1.8
|
%
|
||||
|
1- 4 Family
|
103,764
|
14.7
|
%
|
87,473
|
13.8
|
%
|
||||
|
Multifamily
|
13,771
|
2.0
|
%
|
14,855
|
2.4
|
%
|
||||
|
Non-farm non-residential
|
336,071
|
47.7
|
%
|
312,716
|
49.6
|
%
|
||||
|
Total Real Estate
|
510,982
|
72.5
|
%
|
471,082
|
74.7
|
%
|
||||
| Non-real Estate: | ||||||||||
|
Agricultural
|
21,749
|
3.1
|
%
|
18,476
|
2.9
|
%
|
||||
|
Commercial and industrial
|
151,087
|
21.4
|
%
|
117,425
|
18.6
|
%
|
||||
|
Consumer and other
|
20,917
|
3.0
|
%
|
23,758
|
3.8
|
%
|
||||
| Total Non-real Estate | 193,753 | 27.5 | % | 159,659 | 25.3 | % | ||||
|
Total loans before unearned income
|
704,735
|
100.0
|
%
|
630,741
|
100.0
|
%
|
||||
|
Unearned income
|
(1,569
|
)
|
(1,241
|
)
|
||||||
|
Total loans net of unearned income
|
$
|
703,166
|
$
|
629,500
|
||||||
The following table summarizes fixed and floating rate loans by contractual maturity, excluding nonaccrual loans, as of December 31, 2013 and December 31, 2012 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.
|
December 31, 2013
|
December 31, 2012 | |||||||||||||||||
| (in thousands) |
Fixed
|
Floating
|
Total
|
Fixed | Floating | Total | ||||||||||||
|
One year or less
|
$
|
60,642
|
$
|
70,602
|
$
|
131,244
|
$ | 89,117 | $ | 107,176 | $ | 196,293 | ||||||
|
One to five years
|
220,490
|
209,587
|
430,077
|
147,896 | 175,743 | 323,639 | ||||||||||||
|
Five to 15 years
|
71,655
|
26,076
|
97,731
|
33,770 | 42,595 | 76,365 | ||||||||||||
|
Over 15 years
|
8,503
|
22,695
|
31,198
|
7,829 | 5,927 | 13,756 | ||||||||||||
|
Subtotal
|
$
|
361,290
|
$ |
328,960
|
690,250
|
$ | 278,612 | $ | 331,441 | 610,053 | ||||||||
|
Nonaccrual loans
|
14,485
|
20,688 | ||||||||||||||||
|
Total loans before unearned income
|
704,735
|
630,741 | ||||||||||||||||
|
Unearned income
|
(1,569
|
)
|
(1,241 | ) | ||||||||||||||
|
Total loans net of unearned income
|
$
|
703,166
|
$ | 629,500 | ||||||||||||||
As of December 31, 2013 $209.5 million of floating rate loans were at their interest rate floor. At December 31, 2012 $231.7 million of floating rate loans were at the floor rate. Nonaccrual loans have been excluded from these totals.
65
The following tables present the age analysis of past due loans for the periods indicated:
|
As of December 31, 2013
|
||||||||||||||||||
|
(in thousands)
|
30-89 Days Past Due
|
90 Days or Greater Past Due
|
Total Past Due
|
Current
|
Total Loans
|
Recorded Investment 90 Days Accruing
|
||||||||||||
|
Real Estate:
|
||||||||||||||||||
|
Construction & land development
|
$
|
100
|
$
|
73
|
$
|
173
|
$
|
47,377
|
$
|
47,550
|
$
|
- | ||||||
|
Farmland
|
-
|
130
|
130
|
9,696
|
9,826
|
- | ||||||||||||
|
1 - 4 family
|
3,534
|
4,662
|
8,196
|
95,568
|
103,764
|
414 | ||||||||||||
|
Multifamily
|
-
|
-
|
-
|
13,771
|
13,771
|
- | ||||||||||||
|
Non-farm non-residential
|
154
|
7,539
|
7,693
|
328,378
|
336,071
|
- | ||||||||||||
|
Total Real Estate
|
3,788
|
12,404
|
16,192
|
494,790
|
510,982
|
414 | ||||||||||||
| Non-Real Estate: | ||||||||||||||||||
|
Agricultural
|
-
|
526
|
526
|
21,223
|
21,749
|
- | ||||||||||||
|
Commercial and industrial
|
63
|
1,946
|
2,009
|
149,078
|
151,087
|
- | ||||||||||||
|
Consumer and other
|
123
|
23
|
146
|
20,771
|
20,917
|
- | ||||||||||||
| Total Non-Real Estate | 186 | 2,495 | 2,681 | 191,072 | 193,753 | - | ||||||||||||
|
Total loans before unearned income
|
$
|
3,974
|
$
|
14,899
|
$
|
18,873
|
$
|
685,862
|
|
704,735
|
$
|
414 | ||||||
|
Unearned income
|
(1,569
|
)
|
||||||||||||||||
|
Total loans net of unearned income
|
$
|
703,166
|
||||||||||||||||
|
As of December 31, 2012
|
||||||||||||||||||
|
(in thousands)
|
30-89 Days Past Due
|
90 Days or Greater Past Due
|
Total Past Due
|
Current
|
Total Loans
|
Recorded Investment 90 Days Accruing
|
||||||||||||
|
Real Estate:
|
||||||||||||||||||
|
Construction & land development
|
$
|
228
|
$
|
854
|
$
|
1,082
|
$
|
43,774
|
$
|
44,856
|
$
|
- | ||||||
|
Farmland
|
96
|
312
|
408
|
10,774
|
11,182
|
- | ||||||||||||
|
1 - 4 family
|
4,895
|
5,058
|
9,953
|
77,520
|
87,473
|
455 | ||||||||||||
|
Multifamily
|
156
|
-
|
156
|
14,699
|
14,855
|
- | ||||||||||||
|
Non-farm non-residential
|
1,137
|
11,571
|
12,708
|
300,008
|
312,716
|
- | ||||||||||||
|
Total Real Estate
|
6,512
|
17,795
|
24,307
|
446,775
|
471,082
|
455 | ||||||||||||
| Non-Real Estate: | ||||||||||||||||||
|
Agricultural
|
-
|
512
|
512
|
17,964
|
18,476
|
- | ||||||||||||
|
Commercial and industrial
|
60
|
2,831
|
2,891
|
114,534
|
117,425
|
- | ||||||||||||
|
Consumer and other
|
115
|
5
|
120
|
23,638
|
23,758
|
- | ||||||||||||
| Total Non-Real Estate | 175 | 3,348 | 3,523 | 156,136 | 159,659 | - | ||||||||||||
|
Total loans before unearned income
|
$
|
6,687
|
$
|
21,143
|
$
|
27,830
|
$
|
602,911
|
630,741
|
$
|
455 | |||||||
|
Unearned income
|
(1,241
|
)
|
||||||||||||||||
|
Total loans net of unearned income
|
$
|
629,500
|
||||||||||||||||
The tables above include $14.5 million and $20.7 million of nonaccrual loans for December 31, 2013 and 2012, respectively. See the tables below for more detail on nonaccrual loans.
66
The following is a summary of nonaccrual loans by class for the periods indicated:
| As of December 31, | ||||||
|
(in thousands)
|
2013
|
2012 | ||||
|
Real Estate:
|
||||||
|
Construction & land development
|
$
|
73
|
$ | 854 | ||
|
Farmland
|
130
|
312 | ||||
|
1 - 4 family
|
4,248
|
4,603 | ||||
|
Multifamily
|
-
|
- | ||||
|
Non-farm non-residential
|
7,539
|
11,571 | ||||
|
Total Real Estate
|
11,990
|
17,340 | ||||
| Non-Real Estate: | ||||||
|
Agricultural
|
526
|
512 | ||||
|
Commercial and industrial
|
1,946
|
2,831 | ||||
|
Consumer and other
|
23
|
5 | ||||
| Total Non-Real Estate | 2,495 | 3,348 | ||||
|
Total Nonaccrual Loans
|
$
|
14,485
|
$ | 20,688 | ||
The following table identifies the credit exposure of the loan portfolio by specific credit ratings for the periods indicated:
|
As of December 31, 2013
|
As of December 31, 2012 | |||||||||||||||||||||||||||||
|
(in thousands)
|
Pass
|
Special Mention
|
Substandard
|
Doubtful |
Total
|
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||||||
|
Real Estate:
|
||||||||||||||||||||||||||||||
|
Construction & land development
|
$
|
40,286
|
$
|
1,330
|
$
|
5,934
|
$ | - |
$
|
47,550
|
$ | 29,654 | $ | 5,595 | $ | 9,607 | $ | - | $ | 44,856 | ||||||||||
|
Farmland
|
9,631
|
85
|
110
|
- |
9,826
|
11,059 | - | 123 | - | 11,182 | ||||||||||||||||||||
|
1 - 4 family
|
89,623
|
4,060
|
10,081
|
- |
103,764
|
71,240 | 7,117 | 9,116 | - | 87,473 | ||||||||||||||||||||
|
Multifamily
|
5,884
|
5,936
|
1,951
|
- |
13,771
|
6,746 | 806 | 7,303 | - | 14,855 | ||||||||||||||||||||
|
Non-farm non-residential
|
305,992
|
9,196
|
20,883
|
- |
336,071
|
274,970 | 10,605 | 27,141 | - | 312,716 | ||||||||||||||||||||
|
Total Real Estate
|
451,416
|
20,607
|
38,959
|
- |
510,982
|
393,669 | 24,123 | 53,290 | - | 471,082 | ||||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||||||||
|
Agricultural
|
21,486
|
11
|
252
|
- |
21,749
|
17,969 | 75 | 432 | - | 18,476 | ||||||||||||||||||||
|
Commercial and industrial
|
149,930
|
592
|
565
|
- |
151,087
|
108,590 | 3,834 | 5,001 | - | 117,425 | ||||||||||||||||||||
|
Consumer and other
|
20,720
|
117
|
80
|
- |
20,917
|
23,560 | 140 | 58 | - | 23,758 | ||||||||||||||||||||
| Total Non-Real Estate | 192,136 | 720 | 897 | - | 193,753 | 150,119 | 4,049 | 5,491 | - | 159,659 | ||||||||||||||||||||
|
Total loans before unearned income
|
$
|
643,552
|
$
|
21,327
|
$
|
39,856
|
$ | - |
|
704,735
|
$ | 543,788 | $ | 28,172 | $ | 58,781 | $ | - | 630,741 | |||||||||||
|
Unearned income
|
(1,569
|
)
|
(1,241 | ) | ||||||||||||||||||||||||||
|
Total loans net of unearned income
|
$
|
703,166
|
$ | 629,500 | ||||||||||||||||||||||||||
67
Note 7. Allowance for Loan Losses
A summary of changes in the allowance for loan losses, by loan type, for the year ended December 31, 2013, 2012 and 2011 are as follows:
| As of December, | ||||||||||||||||||||||||||||||
|
2013
|
2012 | |||||||||||||||||||||||||||||
|
(in thousands)
|
Beginning
Allowance (12/31/12)
|
Charge-offs
|
Recoveries
|
Provision |
Ending
Allowance (12/31/13)
|
Beginning
Allowance (12/31/11)
|
Charge-offs
|
Recoveries
|
Provision |
Ending Allowance(12/31/12)
|
||||||||||||||||||||
|
Real Estate:
|
||||||||||||||||||||||||||||||
|
Construction & land development
|
$
|
1,098
|
$
|
(233
|
) |
$
|
10
|
$ | 655 |
$
|
1,530
|
$ |
1,002
|
$ |
(65
|
) | $ |
15
|
$ | 146 | $ |
1,098
|
||||||||
|
Farmland
|
50
|
(31
|
) |
140
|
(142 | ) |
17
|
65
|
- |
1
|
(16 | ) |
50
|
|||||||||||||||||
|
1 - 4 family
|
2,239
|
(220
|
) |
49
|
(94 | ) |
1,974
|
1,917
|
(1,409
|
) |
35
|
1,696 |
2,239
|
|||||||||||||||||
|
Multifamily
|
284
|
-
|
-
|
92 |
376
|
780
|
(187
|
) |
-
|
(309 | ) |
284
|
||||||||||||||||||
|
Non-farm non-residential
|
3,666
|
(1,148
|
) |
8
|
1,081 |
3,607
|
2,980
|
(459
|
) |
116
|
1,029 |
3,666
|
||||||||||||||||||
|
Total Real Estate
|
7,337
|
(1,632
|
) |
207
|
1,592 |
7,504
|
6,744
|
(2,120
|
) |
167
|
2,546 |
7,337
|
||||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||||||||
|
Agricultural
|
64
|
(41
|
) |
5
|
18 |
46
|
125
|
(49
|
) |
1
|
(13 | ) |
64
|
|||||||||||||||||
|
Commercial and industrial
|
2,488
|
(1,098
|
) |
71
|
715 |
2,176
|
1,407
|
(809
|
) |
329
|
1,561 |
2,488
|
||||||||||||||||||
|
Consumer and other
|
233
|
(262
|
) |
243
|
(6 | ) |
208
|
314
|
(473
|
) |
283
|
109 |
233
|
|||||||||||||||||
| Unallocated | 220 |
-
|
- | 201 | 421 | 289 | - | - | (69 | ) | 220 | |||||||||||||||||||
| Total Non-Real Estate | 3,005 |
(1,401
|
) | 319 | 928 | 2,851 | 2,135 | (1,331 | ) | 613 | 1,588 | 3,005 | ||||||||||||||||||
|
Total
|
$
|
10,342
|
$
|
(3,033
|
) |
$
|
526
|
$ | 2,520 |
$
|
10,355
|
$ |
8,879
|
$ |
(3,451
|
) | $ |
780
|
$ | 4,134 | $ |
10,342
|
||||||||
| As of December, | |||||||||||||||
| 2011 | |||||||||||||||
|
(in thousands)
|
Beginning
Allowance (12/31/10)
|
Charge-offs
|
Recoveries
|
Provision |
Ending Allowance(12/31/11)
|
||||||||||
|
Real Estate:
|
|||||||||||||||
|
Construction & land development
|
$ |
977
|
$ |
(1,093
|
) | $ |
1
|
$ | 1,117 | $ |
1,002
|
||||
|
Farmland
|
46
|
(144 | ) |
-
|
163 |
65
|
|||||||||
|
1 - 4 family
|
1,891
|
(1,613
|
) |
118
|
1,521 |
1,917
|
|||||||||
|
Multifamily
|
487
|
-
|
-
|
293 |
780
|
||||||||||
|
Non-farm non-residential
|
3,423
|
(5,193
|
) |
13
|
4,737 |
2,980
|
|||||||||
|
Total Real Estate
|
6,824
|
(8,043
|
) |
132
|
7,831 |
6,744
|
|||||||||
| Non-Real Estate: | |||||||||||||||
|
Agricultural
|
80
|
(23
|
) |
2
|
66 |
125
|
|||||||||
|
Commercial and industrial
|
510
|
(1,638
|
) |
371
|
2,164 |
1,407
|
|||||||||
|
Consumer and other
|
390
|
(653
|
) |
227
|
350 |
314
|
|||||||||
| Unallocated | 513 | - | - | (224 | ) | 289 | |||||||||
| Total Non-Real Estate | 1,493 | (2,314 | ) | 600 | 2,356 | 2,135 | |||||||||
|
Total
|
$ |
8,317
|
$ |
(10,357
|
) | $ |
732
|
$ | 10,187 | $ |
8,879
|
||||
Negative provisions are caused by changes in the composition and credit quality of the loan portfolio. The result is an allocation of the loan loss reserve from one category to another.
68
A summary of the allowance and loans individually and collectively evaluated for impairment are as follows:
| As of December 31, 2013 | ||||||||||||||||||
|
(in thousands)
|
Allowance Individually Evaluated for Impairment
|
Allowance Collectively Evaluated for Impairment |
Total Allowance for Credit Losses
|
Loans
Individually Evaluated for Impairment
|
Loans
Collectively Evaluated for Impairment
|
Total Loans before Unearned Income
|
||||||||||||
|
Real Estate:
|
||||||||||||||||||
|
Construction & land development
|
$
|
1,166
|
$ | 364 |
$
|
1,530
|
$ |
5,777
|
$ | 41,773 | $ |
47,550
|
||||||
|
Farmland
|
-
|
17 |
17
|
-
|
9,826 |
9,826
|
||||||||||||
|
1 - 4 family
|
25
|
1,949 |
1,974
|
2,868
|
100,896 |
103,764
|
||||||||||||
|
Multifamily
|
304
|
72 |
376
|
1,951
|
11,820 |
13,771
|
||||||||||||
|
Non-farm non-residential
|
1,053
|
2,554 |
3,607
|
19,279
|
316,792 |
336,071
|
||||||||||||
|
Total Real Estate
|
2,548
|
4,956 |
7,504
|
29,875
|
481,107 |
510,982
|
||||||||||||
| Non-Real Estate: | ||||||||||||||||||
|
Agricultural
|
-
|
46 |
46
|
-
|
21,749 |
21,749
|
||||||||||||
|
Commercial and industrial
|
-
|
2,176 |
2,176
|
-
|
151,087 |
151,087
|
||||||||||||
|
Consumer and other
|
-
|
208 |
208
|
-
|
20,917 |
20,917
|
||||||||||||
| Unallocated | - | 421 | 421 | |||||||||||||||
| Total Non-Real Estate | - | 2,851 | 2,851 | - | 193,753 | 193,753 | ||||||||||||
|
Total
|
$
|
2,548
|
$ | 7,807 |
$
|
10,355
|
$ |
29,875
|
$ | 674,860 |
704,735
|
|||||||
| Unearned Income | (1,569 | ) | ||||||||||||||||
| Total loans net of unearned income | $ | 703,166 | ||||||||||||||||
| As of December 31, 2012 | ||||||||||||||||||
|
(in thousands)
|
Allowance Individually Evaluated for Impairment
|
Allowance Collectively Evaluated for Impairment |
Total Allowance for Credit Losses
|
Loans
Individually Evaluated for Impairment
|
Loans
Collectively Evaluated for Impairment
|
Total Loans before Unearned Income
|
||||||||||||
|
Real Estate:
|
||||||||||||||||||
|
Construction & land development
|
$
|
713
|
$ | 385 |
$
|
1,098
|
$ |
8,865
|
$ | 35,991 | $ |
44,856
|
||||||
|
Farmland
|
-
|
50 |
50
|
-
|
11,182 |
11,182
|
||||||||||||
|
1 - 4 family
|
91
|
2,148 |
2,239
|
2,126
|
85,347 |
87,473
|
||||||||||||
|
Multifamily
|
244
|
40 |
284
|
7,302
|
7,553 |
14,855
|
||||||||||||
|
Non-farm non-residential
|
1,535
|
2,131 |
3,666
|
25,904
|
286,812 |
312,716
|
||||||||||||
|
Total Real Estate
|
2,583
|
4,754 |
7,337
|
44,197
|
426,885 |
471,082
|
||||||||||||
| Non-Real Estate: | ||||||||||||||||||
|
Agricultural
|
-
|
64 |
64
|
-
|
18,476 |
18,476
|
||||||||||||
|
Commercial and industrial
|
507
|
1,981 |
2,488
|
4,390
|
113,035 |
117,425
|
||||||||||||
|
Consumer and other
|
-
|
233 |
233
|
-
|
23,758 |
23,758
|
||||||||||||
| Unallocated | - | 220 | 220 | |||||||||||||||
| Total Non-Real Estate | 507 | 2,498 | 3,005 | 4,390 | 155,269 | 159,659 | ||||||||||||
|
Total
|
$
|
3,090
|
$ | 7,252 |
$
|
10,342
|
$ |
48,587
|
$ | 582,154 |
630,741
|
|||||||
| Unearned Income | (1,241 | ) | ||||||||||||||||
| Total loans net of unearned income | $ | 629,500 | ||||||||||||||||
As of December 31, 2013, 2012 and 2011, the Company had loans totaling $14.5 million, $20.7 million and $22.5 million, respectively, not accruing interest. As of December 31, 2013, 2012 and 2011, the Company had loans past due 90 days or more and still accruing interest totaling $0.4 million, $0.5 million and $0.7 million, respectively. The average outstanding balance of nonaccrual loans in 2013 was $17.3 million compared to $22.1 million in 2012 and $24.9 million in 2011.
69
The following is a summary of impaired loans by class at December 31, 2013:
|
As of December 31, 2013
|
||||||||||||||||||
| (in thousands) |
Recorded Investment
|
Unpaid Principal Balance
|
Related Allowance
|
Average Recorded Investment
|
Interest Income Recognized
|
Interest Income Cash Basis | ||||||||||||
|
Impaired Loans with no related allowance:
|
||||||||||||||||||
|
Real Estate:
|
||||||||||||||||||
|
Construction & land development
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
599
|
$
|
35
|
$ | 36 | ||||||
|
Farmland
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
|
1 - 4 family
|
441
|
441
|
-
|
472
|
28
|
35 | ||||||||||||
|
Multifamily
|
607
|
607
|
-
|
5,890
|
359
|
382 | ||||||||||||
|
Non-farm non-residential
|
4,722
|
5,456
|
-
|
7,579
|
425
|
527 | ||||||||||||
|
Total Real Estate
|
5,770
|
6,504
|
-
|
14,540
|
847
|
980 | ||||||||||||
| Non-Real Estate: | ||||||||||||||||||
|
Agricultural
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
|
Commercial and industrial
|
-
|
-
|
-
|
1,472
|
134
|
162 | ||||||||||||
|
Consumer and other
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
| Total Non-Real Estate | - | - | - | 1,472 | 134 | 162 | ||||||||||||
| Total Impaired Loans with no related allowance | 5,770 | 6,504 | - | 16,012 | 981 | 1,142 | ||||||||||||
|
Impaired Loans with an allowance recorded:
|
||||||||||||||||||
|
Real estate:
|
||||||||||||||||||
|
Construction & land development
|
5,777
|
5,777
|
1,166
|
6,345
|
383
|
360 | ||||||||||||
|
Farmland
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
|
1 - 4 family
|
2,427
|
2,620
|
25
|
1,643
|
121
|
107 | ||||||||||||
|
Multifamily
|
1,344
|
1,344
|
304
|
1,348
|
89
|
96 | ||||||||||||
|
Non-farm non-residential
|
14,557
|
17,469
|
1,053
|
14,868
|
775
|
573 | ||||||||||||
|
Total Real Estate
|
24,105
|
27,210
|
2,548
|
24,204
|
1,368
|
1,136 | ||||||||||||
| Non-Real Estate: | ||||||||||||||||||
|
Agricultural
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
|
Commercial and industrial
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
|
Consumer and other
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
| Total Non-Real Estate | - | - | - | - | - | - | ||||||||||||
| Total Impaired Loans with an allowance recorded | 24,105 | 27,210 | 2,548 | 24,204 | 1,368 | 1,136 | ||||||||||||
|
Total Impaired Loans
|
$
|
29,875
|
$
|
33,714
|
$
|
2,548
|
$
|
40,216
|
$
|
2,349
|
$ | 2,278 | ||||||
70
The following is a summary of impaired loans by class at December 31, 2012:
|
As of December 31, 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
|
$
|
3,177
|
$
|
3,177
|
$
|
-
|
$
|
4,012
|
$
|
414
|
$ | 404 | ||||||
|
Farmland
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
|
1 - 4 family
|
1,516
|
2,176
|
-
|
2,102
|
162
|
73 | ||||||||||||
|
Multifamily
|
1,351
|
1,351
|
-
|
1,355
|
103
|
110 | ||||||||||||
|
Non-farm non-residential
|
2,936
|
2,982
|
-
|
5,963
|
427
|
287 | ||||||||||||
|
Total Real Estate
|
8,980
|
9,686
|
-
|
13,432
|
1,106
|
874 | ||||||||||||
| Non-Real Estate: | ||||||||||||||||||
|
Agricultural
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
|
Commercial and industrial
|
3,734
|
3,734
|
-
|
1,098
|
117
|
87 | ||||||||||||
|
Consumer and other
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
| Total Non-Real Estate | 3,734 | 3,734 | - | 1,098 | 117 | 87 | ||||||||||||
| Total Impaired Loans with no related allowance | 12,714 | 13,420 | - | 14,530 | 1,223 | 961 | ||||||||||||
|
Impaired Loans with an allowance recorded:
|
||||||||||||||||||
|
Real Estate:
|
||||||||||||||||||
|
Construction & land development
|
5,688
|
5,688
|
713
|
3,677
|
406
|
418 | ||||||||||||
|
Farmland
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
|
1 - 4 family
|
610
|
776
|
91
|
732
|
70
|
67 | ||||||||||||
|
Multifamily
|
5,951
|
5,951
|
244
|
5,998
|
597
|
593 | ||||||||||||
|
Non-farm non-residential
|
22,968
|
25,720
|
1,535
|
24,669
|
2,616
|
2,711 | ||||||||||||
|
Total Real Estate
|
35,217
|
38,135
|
2,583
|
35,076
|
3,689
|
3,789 | ||||||||||||
| Non-Real Estate: | ||||||||||||||||||
|
Agricultural
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
|
Commercial and industrial
|
656
|
656
|
507
|
786
|
94
|
- | ||||||||||||
|
Consumer and other
|
-
|
-
|
-
|
-
|
-
|
- | ||||||||||||
| Total Non-Real Estate | 656 | 656 | 507 | 786 | 94 | - | ||||||||||||
| Total Impaired Loans with an allowance recorded | 35,873 | 38,791 | 3,090 | 35,862 | 3,783 | 3,789 | ||||||||||||
|
Total Impaired Loans
|
$
|
48,587
|
$
|
52,211
|
$
|
3,090
|
$
|
50,392
|
$
|
5,006
|
$ | 4,750 | ||||||
71
Troubled Debt Restructurings
A Troubled Debt Restructuring ("TDR") is a debt restructuring in which 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. In 2013, there were no loans restructured in a troubled debt restructuring.
The following table is an age analysis of TDRs as of December 31, 2013 and December 31, 2012:
| Troubled Debt Restructurings | December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||
| 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 | $ | - | $ | - | $ | - | $ | - | $ | 2,602 | $ | - | $ | - | $ | 2,602 | ||||||||
| Farmland | - | - | - | - | - | - | - | - | ||||||||||||||||
| 1 - 4 Family | - | - | - | - | - | - | 1,296 | 1,296 | ||||||||||||||||
| Multifamily | - | - | - | - | 5,951 | - | - | 5,951 | ||||||||||||||||
| Non-farm non residential | 3,006 | - | 230 | 3,236 | 6,103 | - | 678 | 6,781 | ||||||||||||||||
| Total Real Estate | 3,006 | - | 230 | 3,236 | 14,656 | - | 1,974 | 16,630 | ||||||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||
| Agricultural | - | - | - | - | - | - | - | - | ||||||||||||||||
| Commercial and industrial | - | - | - | - | - | - | - | - | ||||||||||||||||
| Consumer and other | - | - | - | - | - | - | - | - | ||||||||||||||||
| Total Non-Real Estate | - | - | - | - | - | - | - | - | ||||||||||||||||
| Total | $ | 3,006 | $ | - | $ | 230 | $ | 3,236 | $ | 14,656 | $ | - | $ | 1,974 | $ | 16,630 | ||||||||
The following table discloses TDR activity for the twelve months ended December 31, 2013.
| Trouble Debt Restructured Loans Activity | ||||||||||||||||||||||||
|
Twelve Months Ended December 31, 2013
|
||||||||||||||||||||||||
| (in thousands) |
Beginning balance
(December 31, 2012)
|
New TDRs
|
Charge-offs post-modification
|
Transferred to ORE
|
Paydowns
|
Construction to permanent financing
|
Restructured to market terms |
Ending balance
(December 31, 2013)
|
||||||||||||||||
|
Real Estate:
|
||||||||||||||||||||||||
|
Construction & land development
|
$
|
2,602
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$ | - | $ | (2,602 | ) | $ | - | |||||||
|
Farmland
|
-
|
-
|
-
|
-
|
-
|
- | - | - | ||||||||||||||||
|
1 - 4 family
|
1,296
|
-
|
-
|
(1,075
|
) |
-
|
- | (221 | ) | - | ||||||||||||||
|
Multifamily
|
5,951
|
-
|
-
|
-
|
(16
|
) | - | (5,935 | ) | - | ||||||||||||||
|
Non-farm non-residential
|
6,781
|
-
|
(355
|
) |
-
|
(95
|
) | - | (3,095 | ) | 3,236 | |||||||||||||
|
Total Real Estate
|
16,630
|
-
|
(355
|
) |
(1,075
|
) |
(111
|
) | - | (11,853 | ) | 3,236 | ||||||||||||
| Non-Real Estate: | ||||||||||||||||||||||||
|
Agricultural
|
-
|
-
|
-
|
-
|
-
|
- | - | - | ||||||||||||||||
|
Commercial and industrial
|
-
|
-
|
-
|
-
|
-
|
- | - | - | ||||||||||||||||
|
Consumer and other
|
-
|
-
|
-
|
-
|
-
|
- | - | - | ||||||||||||||||
| Total Non-Real Estate | - | - | - | - | - | - | - | - | ||||||||||||||||
| Total Impaired Loans with no related allowance | $ | 16,630 | $ | - | $ | (355 | ) | $ | (1,075 | ) | $ | (111 | ) | $ | - | $ | (11,853 | ) | $ | 3,236 | ||||
There were no commitments to lend additional funds to debtors whose terms have been modified in a troubled debt restructuring at December 31, 2013.
72
Note 8. Premises and Equipment
The components of premises and equipment at December 31, 2013 and 2012 are as follows:
| (in thousands) |
December 31, 2013
|
December 31, 2012
|
||||
|
Land
|
$
|
6,251
|
$
|
5,928
|
||
|
Bank premises
|
18,051
|
17,485
|
||||
|
Furniture and equipment
|
19,753
|
16,889
|
||||
|
Construction in progress
|
195
|
122
|
||||
|
Acquired value
|
44,250
|
40,424
|
||||
|
Less: accumulated depreciation
|
24,638
|
20,860
|
||||
|
Net book value
|
$
|
19,612
|
$
|
19,564
|
||
Depreciation expense amounted to $1.7 million, $1.6 million and $1.4 million for 2013, 2012 and 2011, respectively.
Note 9. Goodwill and Other Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to impairment testing. Other intangible assets continue to be amortized over their useful lives. Goodwill represents the purchase price over the fair value of net assets acquired from the Homestead Bancorp in 2007. No impairment charges have been recognized since acquisition. Goodwill totaled $2.0 million at December 31, 2013 and 2012.
| December 31, 2013 | December 31, 2012 | |||||||||||||||||
|
(in thousands)
|
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||
| Core deposit intangibles | $ | 9,350 | $ | 7,412 | $ | 1,938 | $ | 9,350 | $ | 7,093 | $ | 2,257 | ||||||
| Mortgage servicing rights | 267 | 132 | 135 | 267 | 111 | 156 | ||||||||||||
| Total | $ | 9,617 | $ | 7,544 | $ | 2,073 | $ | 9,617 | $ | 7,204 | $ | 2,413 | ||||||
The core deposits intangible reflect the value of deposit relationships, including the beneficial rates, which arose from acquisitions. The weighted-average amortization period remaining for the core deposit intangibles is 6.3 years.
Amortization expense relating to purchase accounting intangibles totaled $0.3 million, $0.4 million, and $0.3 million for the year ended December 31, 2013, 2012, and 2011, respectively.
Amortization expense of the core deposit intangible assets for the next five years is as follows:
|
For the Years Ended
|
Estimated Amortization Expense (in thousands)
|
||
|
December 31, 2014
|
$
|
320
|
|
|
December 31, 2015
|
$
|
320
|
|
|
December 31, 2016
|
$
|
320
|
|
|
December 31, 2017
|
$
|
320
|
|
|
December 31, 2018
|
$
|
320
|
|
Note 10. Other Real Estate
Other real estate owned consists of the following:
|
(in thousands)
|
December 31, 2013 | December 31, 2012 | ||||
| Real Estate Owned Acquired by Foreclosure: | ||||||
| Residential | $ | 1,803 | $ | 1,186 | ||
| Construction & land development | 754 | 1,083 | ||||
| Non-farm non-residential | 800 | 125 | ||||
| Total Other Real Estate Owned and Foreclosed Property | $ | 3,357 | $ | 2,394 | ||
73
Note 11. Deposits
Time deposits maturing in the next five years are as follows:
|
(in thousands)
|
December 31, 2013 | ||
|
2014
|
$ | 405,031 | |
|
2015
|
135,032 | ||
|
2016
|
51,982 | ||
| 2017 | 23,009 | ||
| 2018 and thereafter | 26,959 | ||
|
Total
|
$ | 642,013 | |
The table above includes, for December 31, 2013, brokered deposits totaling $21.2 million. The aggregate amount of jumbo time deposits, each with a minimum denomination of $100,000 totaled $433.1 million and $425.0 million at December 31, 2013 and 2012, respectively.
Note 12. Borrowings
Short-term borrowings are summarized as follows:
| (in thousands) |
December 31, 2013
|
December 31, 2012
|
||||
|
Securities sold under agreements to repurchase
|
$
|
3,988
|
$
|
12,946
|
||
| Line of credit | 1,800 | 1,800 | ||||
|
Total short-term borrowings
|
$
|
5,788
|
$
|
14,746
|
||
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature daily. Interest rates on repurchase agreements are set by Management and are generally based on the 91-day Treasury bill rate. Repurchase agreement deposits are fully collateralized and monitored daily.
Available lines of credit totaled $210.6 million at December 31, 2013 and $175.6 million at December 31, 2012.
The following schedule provides certain information about the Company’s short-term borrowings for the periods indicated:
| December 31, | |||||||||
| (in thousands except for %) | 2013 |
2012
|
2011
|
||||||
|
Outstanding at year end
|
$ | 5,788 |
$
|
14,746
|
$
|
12,223
|
|||
|
Maximum month-end outstanding
|
$ | 57,302 | $ |
31,850
|
$ |
22,493
|
|||
|
Average daily outstanding
|
$ | 21,387 | $ |
14,560
|
$ |
11,030
|
|||
|
Weighted average rate during the year
|
0.98 | % |
0.25
|
%
|
0.18
|
%
|
|||
|
Average rate at year end
|
1.51 | % |
0.75
|
%
|
0.21
|
%
|
|||
The Company's senior long-term debt, priced at Wall Street Journal Prime plus 75 basis points (4.00%), totaled $0.5 million at December 31, 2013. The Company pays $50,000 principal plus interest monthly. This loan has a contractual maturity date of April 22, 2017 but will pay out in October 2014 due to advanced principal payments made in 2012. This long-term debt is secured by a pledge of 13.2% (735,745 shares) of the Company's interest in First Guaranty Bank (a wholly owned subsidiary) under Commercial Pledge Agreement dated June 22, 2012.
The Company maintains a revolving line of credit for $2.5 million with an availability of $0.7 million at December 31, 2013. This line of credit is secured by the same collateral as the term loan and is priced at 4.50%.
At December 31, 2013, letters of credit issued by the FHLB totaling $90.0 million were outstanding and carried as off-balance sheet items, all of which expire in 2014. At December 31, 2012, letters of credit issued by the FHLB totaling $50.0 million were outstanding and carried as off-balance sheet items, all of which expired in 2013. The letters of credit are solely used for pledging towards public fund deposits. The FHLB has a blanket lien on substantially all of the loans in the Company’s portfolio which is used to secure borrowing availability from the FHLB. The Company has obtained a subordination agreement from the FHLB on the Company’s farmland, agricultural, and commercial and industrial loans. These loans are available to be pledged for additional reserve liquidity.
As of December 31, 2013 maturities on long-term debt were as follows:
| (in thousands) | Long-term debt | ||
|
2014
|
$ | 500 | |
|
2015
|
- | ||
|
2016
|
- | ||
|
2017
|
- | ||
|
2018 and thereafter
|
- | ||
| Total | $ | 500 | |
74
Note 13. Preferred Stock
On September 22, 2011, the Company received $39.4 million in funds from the U.S. Treasury's Small Business Lending Fund program. $21.1 million of the funds were used to redeem the Company's Series A and B Preferred Stock issued to the U.S. Treasury under the Capital Purchase Program. The Preferred Series C shares will receive quarterly dividends and the initial dividend rate was 5.00%. The dividend rate is based on qualified loan growth two quarters in arrears. During 2013 the Company achieved the growth in qualified loans required to achieve the 1.0% dividend rate. The 1.0% rate is locked in until December 31, 2015. During 2013 the Company paid $0.7 million in preferred stock dividends compared to $2.0 million in 2012 and 2011. After 4.5 years in the program, the dividend rate will increase to 9.00% if the Preferred Series C shares have not been repurchased by that time.
Note 14. Accumulated Other Comprehensive (Loss) Income
The following table details the changes in the single component of accumulated other comprehensive (loss) income for the twelve months ended December 31, 2013:
|
(in thousands)
|
Unrealized (Loss) Gain on Securities Available for Sale | ||
| Accumulated Other Comprehensive (Loss) Income: | |||
|
Balance December 31, 2012
|
$ | 6,048 | |
| Reclassification adjustments to net income: | |||
| Realized gains on securities | (1,571 | ) | |
| Provision for income taxes | 534 | ||
| Unrealized losses arising during the period, net of tax | (14,145 | ) | |
| Balance December 31, 2013 | $ | (9,134 | ) |
The following table details the changes in the single component of accumulated other comprehensive income for the twelve months ended December 31, 2012:
|
(in thousands)
|
Unrealized Gain on Securities Available for Sale | ||
| Accumulated Other Comprehensive Income: | |||
|
Balance December 31, 2011
|
$ | 4,467 | |
| Reclassification adjustments to net income: | |||
| Realized gains on securities | (4,868 | ) | |
| Provision for income taxes | 1,655 | ||
| Unrealized gains arising during the period, net of tax | 4,794 | ||
| Balance December 31, 2012 | $ | 6,048 | |
The following table details the changes in the single component of accumulated other comprehensive income for the twelve months ended December 31, 2011:
|
(in thousands)
|
Unrealized (Loss) Gain on Securities Available for Sale | ||
| Accumulated Other Comprehensive Income: | |||
|
Balance December 31, 2010
|
$ | (259 | ) |
| Reclassification adjustments to net income: | |||
| Realized gains on securities | (3,531 | ) | |
| Provision for income taxes | 1,200 | ||
| Unrealized gains arising during the period, net of tax | 7,057 | ||
| Balance December 31, 2011 | $ | 4,467 | |
75
Note 15. Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 2013 and 2012, that the Company and the Bank met all capital adequacy requirements.
As of December 31, 2013, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notification that Management believes have changed the Bank’s category. The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2013 and 2012 are presented in the following table.
| Actual | Minimum Capital Requirements | Minimum to be Well Capitalized Under Action Provisions | ||||||||||
| (in thousands except for %) | Amount |
Ratio
|
Amount |
Ratio
|
Amount |
Ratio
|
||||||
| December 31, 2013 | ||||||||||||
|
Total Risk-based Capital:
|
||||||||||||
|
Consolidated
|
$ |
138,958
|
14.71
|
% | $ |
75,594
|
8.00
|
% |
N/A
|
N/A
|
||
|
Bank
|
$ |
139,234
|
14.76
|
% | $ |
75,462
|
8.00
|
% | $ |
94,328
|
10.00
|
% |
|
Tier 1 Capital:
|
||||||||||||
|
Consolidated
|
$ |
128,603
|
13.61
|
% | $ |
37,797
|
4.00
|
% |
N/A
|
N/A
|
||
|
Bank
|
$ |
128,879
|
13.66
|
% | $ |
37,731
|
4.00
|
% | $ |
56,597
|
6.00
|
% |
|
Tier 1 Leverage Capital:
|
||||||||||||
|
Consolidated
|
$ |
128,603
|
9.14
|
% | $ |
56,307
|
4.00
|
% |
N/A
|
N/A
|
||
|
Bank
|
$ |
128,879
|
9.17
|
% | $ |
56,236
|
4.00
|
% | $ |
70,295
|
5.00
|
% |
|
December 31, 2012
|
||||||||||||
|
Total Risk-based Capital:
|
||||||||||||
|
Consolidated
|
$ |
134,229
|
15.31
|
% | $ |
70,133
|
8.00
|
% |
N/A
|
N/A
|
||
|
Bank
|
$ |
135,590
|
15.47
|
% | $ |
70,095
|
8.00
|
% | $ |
87,619
|
10.00
|
% |
|
Tier 1 Capital:
|
||||||||||||
|
Consolidated
|
$ |
123,877
|
14.13
|
% | $ |
35,066
|
4.00
|
% |
N/A
|
N/A
|
||
|
Bank
|
$ |
125,238
|
14.29
|
% | $ |
35,048
|
4.00
|
% | $ |
52,571
|
6.00
|
% |
|
Tier 1 Leverage Capital:
|
||||||||||||
|
Consolidated
|
$ |
123,877
|
9.24
|
% | $ |
53,649
|
4.00
|
% |
N/A
|
N/A
|
||
|
Bank
|
$ |
125,238
|
9.34
|
% | $ |
53,644
|
4.00
|
% | $ |
67,055
|
5.00
|
% |
76
Note 16. Dividend Restrictions
The Federal Reserve Bank ("FRB") has stated that, generally, a bank holding company should not maintain a rate of distributions to shareholders unless its available net income has been sufficient to fully fund the distributions, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition. As a Louisiana corporation, the Company is restricted under the Louisiana corporate law from paying dividends under certain conditions.
First Guaranty Bank may not pay dividends or distribute capital assets if it is in default on any assessment due to the FDIC. First Guaranty Bank is also subject to regulations that impose minimum regulatory capital and minimum state law earnings requirements that affect the amount of cash available for distribution. In addition, under the Louisiana Banking Law, dividends may not be paid if it would reduce the unimpaired surplus below 50% of outstanding capital stock in any year.
The Bank is restricted under applicable laws in the payment of dividends to an amount equal to current year earnings plus undistributed earnings for the immediately preceding year, unless prior permission is received from the Commissioner of Financial Institutions for the State of Louisiana. Dividends payable by the Bank in 2014 without permission will be limited to 2014 earnings plus the undistributed earnings of $4.8 million from 2013.
Accordingly, at January 1, 2014, $118.9 million of the Company’s equity in the net assets of the Bank was restricted. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.
Under the requirements of the United States Treasury’s Small Business Lending Fund, the Company is permitted to pay dividends on its common stock, provided that: (i) the Company’s Tier 1 capital would be at least 90% of the amount of Tier 1 capital existing immediately after receipt of SBLF funds; and (ii) the SBLF Dividends have been declared and paid to Treasury as of the most recent applicable dividend period. The Company has met each SBLF dividend obligation in a timely manner since receipt of SBLF funds. After two years from receipt, the 90% limitation will decrease by 10% for every 1% increase in qualified small business lending. See Note 13 for disclosure on the Company’s SBLF Preferred Stock Series C.
Note 17. Related Party Transactions
In the normal course of business, the Company and its subsidiary, First Guaranty Bank, have loans, deposits and other transactions with its executive officers, directors and certain business organizations and individuals with which such persons are associated. These transactions are completed with terms no less favorable than current market rates. An analysis of the activity of loans made to such borrowers during the year ended December 31, 2013 and 2012 follows:
| December 31, | ||||||
| (in thousands) |
2013
|
2012
|
||||
|
Balance, beginning of year
|
$
|
33,148
|
$
|
27,352
|
||
|
Net Increase
|
16,803
|
5,796
|
||||
|
Balance, end of year
|
$
|
49,951
|
$
|
33,148
|
||
Unfunded commitments to the Company and Bank directors and executive officers totaled $17.9 million and $17.2 million at December 31, 2013 and 2012, respectively. At December 31, 2013 the Company and the Bank had deposits from directors and executives totaling $34.1 million. There were no participations in loans purchased from affiliated financial institutions included in the Company’s loan portfolio in 2013 or 2012.
During the years ended 2013, 2012 and 2011, the Company paid approximately $0.5 million, $0.6 million and $0.6 million, respectively, for printing services and supplies and office furniture and equipment to Champion Industries, Inc., of which Mr. Marshall T. Reynolds, the Chairman of the Company’s Board of Directors, is President, Chief Executive Officer, Chairman of the Board of Directors and holder of 53.7% of Champion's common stock as of October 31, 2013.
The Company paid insurance expenses of $2.4 million, $1.7 million and $1.5 million for 2013, 2012 and 2011, respectively for participation in an employee medical benefit plan in which several entities under common ownership of the Company's Chairman participate. The Company retains certain risks associated with the plan.
The Company paid travel expenses to Sabre Transportation, Inc. of $49,000, $0.2 million and $0.2 million for 2013, 2012 and 2011, respectively. These expenses include the utilization of an aircraft, fuel, air crew and ramp fees. The Harrah and Reynolds Corporation, of which Mr. Reynolds is President and Chief Executive Officer and sole shareholder, has controlling interest in Sabre Transportation, Inc.
77
Note 18. Employee Benefit Plans
The Company has an employee savings plan to which employees, who meet certain service requirements, may defer 1% to 20% of their base salaries, 6% of which may be matched up to 100%, at its sole discretion. Contributions to the savings plan were $81,000, $67,000 and $66,000 in 2013, 2012 and 2011, respectively. The Company has an Employee Stock Ownership Plan (“ESOP”) which was frozen in 2010. No contributions were made to the ESOP for the years 2013, 2012 or 2011. As of December 31, 2013, the ESOP held 16,927 shares. The Company does not plan to make future contributions to this plan.
Note 19. Other Expenses
The following is a summary of the significant components of other noninterest expense:
| December 31, | |||||||||
|
(in thousands)
|
2013 |
2012
|
2011 | ||||||
|
Other noninterest expense:
|
|||||||||
|
Legal and professional fees
|
$ | 2,347 |
$
|
1,990
|
$ | 2,208 | |||
|
Data processing
|
1,269 |
1,225
|
1,230 | ||||||
|
Marketing and public relations
|
638 |
697
|
654 | ||||||
|
Taxes - sales, capital and franchise
|
584 |
661
|
640 | ||||||
|
Operating supplies
|
487 |
581
|
574 | ||||||
|
Travel and lodging
|
563 |
523
|
492 | ||||||
| Telephone | 206 | 220 | 197 | ||||||
| Amortization of core deposits | 320 | 350 | 285 | ||||||
| Donations | 294 | 195 | 297 | ||||||
|
Net costs from other real estate and repossessions
|
941 |
2,083
|
1,317 | ||||||
|
Regulatory assessment
|
1,784 |
1,471
|
1,663 | ||||||
|
Other
|
3,237 |
3,784
|
3,262 | ||||||
|
Total other noninterest expense
|
$ | 12,670 |
$
|
13,780
|
$ | 12,819 | |||
The Company does not capitalize advertising costs. They are expensed as incurred and are included in other noninterest expense on the Consolidated Statements of Income. Advertising expense was $0.4 million, $0.4 million and $0.3 million for 2013, 2012 and 2011, respectively.
78
Note 20. Income Taxes
The following is a summary of the provision for income taxes included in the Statements of Income:
| December 31, | |||||||||
|
(in thousands)
|
2013
|
2012
|
2011
|
||||||
|
Current
|
$
|
4,748
|
$
|
6,366
|
$
|
3,673
|
|||
|
Deferred
|
(171
|
) |
(505
|
) |
50
|
|
|||
|
Total
|
$
|
4,577
|
$
|
5,861
|
$
|
3,723
|
|||
The difference between income taxes computed by applying the statutory federal income tax rate and the provision for income taxes in the financial statements is reconciled as follows:
| December 31, | |||||||||
| (in thousands except for %) |
2013
|
2012
|
2011
|
||||||
|
Statutory tax rate
|
35.0
|
%
|
35.0
|
%
|
34.0
|
%
|
|||
|
Federal income taxes at statutory rate
|
$
|
4,803 |
$
|
6,272
|
$
|
4,001
|
|||
| Tax exempt gain on acquisition | - | - | (566 | ) | |||||
| Tax exempt municipal income | (133 | ) | (156 | ) | (36 | ) | |||
|
Other
|
(93 | ) |
(255
|
)
|
324
|
|
|||
|
Total
|
$
|
4,577
|
$
|
5,861
|
$
|
3,723
|
|||
Deferred taxes are recorded based upon differences between the financial statement and tax basis of assets and liabilities, and available tax credit carry forwards. Temporary differences between the financial statement and tax values of assets and liabilities give rise to deferred taxes. The significant components of deferred taxes classified in the Company's Consolidated Balance Sheets at December 31, 2013 and 2012 are as follows:
| December 31, | ||||||
| (in thousands) |
2013
|
2012
|
||||
|
Deferred tax assets:
|
||||||
|
Allowance for loan losses
|
$
|
3,521
|
$
|
3,516
|
||
|
Other real estate owned
|
485
|
455
|
||||
|
Impairment writedown on securities
|
-
|
168
|
||||
|
Unrealized losses on available for sale securities
|
4,706 | - | ||||
|
Other
|
425
|
540
|
||||
|
Gross deferred tax assets
|
9,137
|
4,679
|
||||
|
Deferred tax liabilities:
|
||||||
|
Depreciation and amortization
|
(2,517
|
)
|
(2,642
|
)
|
||
|
Unrealized gains on available for sale securities
|
-
|
(3,114
|
)
|
|||
|
Other
|
(328
|
)
|
(220
|
)
|
||
|
Gross deferred tax liabilities
|
(2,845
|
)
|
(5,976
|
)
|
||
|
Net deferred tax assets (liabilities)
|
$
|
6,292
|
$
|
(1,297
|
) | |
As of December 31, 2013 and 2012, there were no net operating loss carryforwards for income tax purposes.
ASC 740-10, Income Taxes, clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold and measurement attribute for the consolidated financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company does not believe it has any unrecognized tax benefits included in its consolidated financial statements. The Company has not had any settlements in the current period with taxing authorities, nor has it recognized tax benefits as a result of a lapse of the applicable statute of limitations. The Company recognizes interest and penalties accrued related to unrecognized tax benefits, if applicable, in noninterest expense. During the years ended December 31, 2013, 2012 and 2011, the Company did not recognize any interest or penalties in its consolidated financial statements, nor has it recorded an accrued liability for interest or penalty payments.
79
Note 21. 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. 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 December 31, 2013 and December 31, 2012:
|
(in thousands)
|
December 31, 2013 | December 31, 2012 | ||||
| Contract Amount | ||||||
| Commitments to Extend Credit | $ | 30,516 | $ | 26,775 | ||
| Unfunded Commitments under lines of credit | $ | 115,311 | $ | 71,423 | ||
| Commercial and Standby letters of credit | $ | 7,695 | $ | 5,470 | ||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on Management's credit evaluation of the counterpart. Collateral requirements vary but may include accounts receivable, inventory, property, plant and equipment, residential real estate and commercial properties.
Standby and commercial letters of credit are conditional commitments to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The majority of these guarantees are short-term, one year or less; however, some guarantees extend for up to three years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities. Collateral requirements are the same as on-balance sheet instruments and commitments to extend credit.
There were no losses incurred on off-balance sheet commitments in 2013, 2012 or 2011.
80
Note 22. Fair Value Measurements
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 as of December 31, 2013 include municipal bonds and an equity security.
Impaired loans. Loans are measured for impairment using the methods permitted by ASC Topic 310. Fair value of impaired loans is measured by either the 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 December 31, 2013 are determined by sales agreement or appraisal, and costs to sell are based on estimation per the terms and conditions of the sales agreement or amounts commonly used in real estate transactions. Inputs include appraisal values or recent sales activity for similar assets in the property’s market; thus OREO measured at fair value would be classified within 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 December 31, 2013 and 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| (in thousands) | December 31, 2013 | December 31, 2012 | ||||
|
Available for Sale Securities Fair Value Measurements Using:
|
||||||
|
Level 1: Quoted Prices in Active Markets For Identical Assets
|
$
|
36,492
|
$
|
20,522
|
||
|
Level 2: Significant Other Observable Inputs
|
|
441,885
|
573,071
|
|||
|
Level 3: Significant Unobservable Inputs
|
|
5,834
|
6,707
|
|||
| Securities available for sale measured at fair value | $ | 484,211 | $ | 600,300 | ||
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.
There were no transfers into Level 1 during 2013. One Government Agency security totaling $10.0 million was transferred from Level 1 to Level 2 because the security did not trade on the pricing date and quoted pricing for a similar asset in an active market was used.
The change in Level 3 securities available for sale from December 31, 2012 was due to principal payments on municipal bonds totaling $0.9 million.
81
The following table reconciles assets measured at fair value on a recurring basis using unobservable inputs (Level 3):
| Level 3 Changes | ||||||
| (in thousands) | December 31, 2013 | December 31, 2012 | ||||
|
Balance, beginning of year
|
$ | 6,707 |
$
|
7,516
|
||
|
Total gains or losses (realized/unrealized):
|
||||||
|
Included in earnings
|
- |
-
|
||||
|
Included in other comprehensive income
|
- |
-
|
||||
|
Purchases, sales, issuances and settlements, net
|
(873 | ) |
(873
|
)
|
||
|
Transfers in and/or out of Level 3
|
- |
64
|
||||
|
Balance as of end of year
|
$ | 5,834 | $ |
6,707
|
||
There were no gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held as of December 31, 2013.
The following table measures financial assets and financial liabilities measured at fair value on a non-recurring basis as of December 31, 2013, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
|
(in thousands)
|
At December 31, 2013
|
At December 31, 2012
|
||||
|
Fair Value Measurements Using: Impaired Loans
|
||||||
|
Level 1: Quoted Prices in Active Markets For Identical Assets
|
$
|
- |
$
|
- | ||
|
Level 2: Significant Other Observable Inputs
|
|
9,282 |
|
8,563 | ||
|
Level 3: Significant Unobservable Inputs
|
|
14,823 |
|
27,310 | ||
| Impaired loans measured at fair value | $ | 24,105 | $ | 35,873 | ||
|
Fair Value Measurements Using: Other Real Estate Owned
|
||||||
|
Level 1: Quoted Prices in Active Markets For Identical Assets
|
$
|
- |
$
|
- | ||
|
Level 2: Significant Other Observable Inputs
|
|
3,357 |
|
2,394 | ||
|
Level 3: Significant Unobservable Inputs
|
|
- | - | |||
| Other real estate owned measured at fair value | $ | 3,357 | $ | 2,394 | ||
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.
82
Note 23. Financial Instruments
Fair value estimates are generally subjective in nature and are dependent upon a number of significant assumptions associated with each instrument or group of similar instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows and relevant available market information. Fair value information is intended to represent an estimate of an amount at which a financial instrument could be exchanged in a current transaction between a willing buyer and seller engaging in an exchange transaction. However, since there are no established trading markets for a significant portion of the Company’s financial instruments, the Company may not be able to immediately settle financial instruments; as such, the fair values are not necessarily indicative of the amounts that could be realized through immediate settlement. In addition, the majority of the financial instruments, such as loans and deposits, are held to maturity and are realized or paid according to the contractual agreement with the customer.
Quoted market prices are used to estimate fair values when available. However, due to the nature of the financial instruments, in many instances quoted market prices are not available. Accordingly, estimated fair values have been estimated based on other valuation techniques, such as discounting estimated future cash flows using a rate commensurate with the risks involved or other acceptable methods. Fair values are estimated without regard to any premium or discount that may result from concentrations of ownership of financial instruments, possible income tax ramifications or estimated transaction costs. The fair value estimates are subjective in nature and involve matters of significant judgment and, therefore, cannot be determined with precision. Fair values are also estimated at a specific point in time and are based on interest rates and other assumptions at that date. As events change the assumptions underlying these estimates, the fair values of financial instruments will change.
Disclosure of fair values is not required for certain items such as lease financing, investments accounted for under the equity method of accounting, obligations of pension and other postretirement benefits, premises and equipment, other real estate, prepaid expenses, the value of long-term relationships with depositors (core deposit intangibles) and other customer relationships, other intangible assets and income tax assets and liabilities. Fair value estimates are presented for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses have not been considered in the estimates. Accordingly, the aggregate fair value amounts presented do not purport to represent and should not be considered representative of the underlying market or franchise value of the Company.
Because the standard permits many alternative calculation techniques and because numerous assumptions have been used to estimate the fair values, reasonable comparison of the fair value information with other financial institutions' fair value information cannot necessarily be made. The methods and assumptions used to estimate the fair values of financial instruments are as follows:
Cash and due from banks, interest-bearing deposits with banks, federal funds sold and federal funds purchased.
These items are generally short-term and the carrying amounts reported in the consolidated balance sheets are a reasonable estimation of the fair values.
Investment Securities.
Fair values are principally based on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or the use of discounted cash flow analyses.
Loans Held for Sale.
Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices. These loans are classified within level 3 of the fair value hierarchy.
Loans, net.
Market values are computed present values using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. These loans are classified within level 3 of the fair value hierarchy.
Accrued interest receivable.
The carrying amount of accrued interest receivable approximates its fair value.
Deposits.
Market values are actually computed present values using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. Deposits are classified within level 3 of the fair value hierarchy.
Accrued interest payable.
The carrying amount of accrued interest payable approximates its fair value.
83
Borrowings.
The carrying amount of federal funds purchased and other short-term borrowings approximate their fair values. The fair value of the Company’s long-term borrowings is computed using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. Borrowings are classified within level 3 of the fair value hierarchy.
Other Unrecognized Financial Instruments.
The fair value of commitments to extend credit is estimated using the fees charged to enter into similar legally binding agreements, taking into account the remaining terms of the agreements and customers' credit ratings. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Noninterest-bearing deposits are held at cost. The fair values of letters of credit are based on fees charged for similar agreements or on estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 2013 and 2012 the fair value of guarantees under commercial and standby letters of credit was not material.
The estimated fair values and carrying values of the financial instruments at December 31, 2013 and 2012 are presented in the following table:
| December 31, | ||||||||||||
|
2013
|
2012
|
|||||||||||
| (in thousands) |
Carrying Value
|
Estimated Fair Value
|
Carrying Value
|
Estimated Fair Value
|
||||||||
|
Assets
|
||||||||||||
|
Cash and cash equivalents
|
$
|
61,484
|
$
|
61,484
|
$
|
86,233
|
$
|
86,233
|
||||
|
Securities, available for sale
|
$ |
484,211
|
$ |
484,211
|
$ |
600,300
|
$ |
600,300
|
||||
|
Securities, held to maturity
|
$ |
150,293
|
$ |
141,642
|
$ |
58,943
|
$ |
58,939
|
||||
|
Federal Home Loan Bank stock
|
$ |
1,835
|
$ |
1,835
|
$ |
1,275
|
$ |
1,275
|
||||
|
Loans, net
|
$ |
703,166
|
$ |
703,025
|
$ |
629,500
|
$ |
634,042
|
||||
|
Accrued interest receivable
|
$ |
6,258
|
$ |
6,258
|
$ |
6,711
|
$ |
6,711
|
||||
|
Liabilities
|
||||||||||||
|
Deposits
|
$
|
1,303,099
|
$
|
1,265,898
|
$
|
1,252,612
|
$
|
1,235,526
|
||||
|
Borrowings
|
$ |
6,288
|
$ |
6,288
|
$ |
15,846
|
$ |
15,846
|
||||
|
Accrued interest payable
|
$ |
2,364
|
$ |
2,364
|
$ |
2,840
|
$ |
2,840
|
||||
There is no material difference between the contract amount and the estimated fair value of off-balance sheet items that are primarily comprised of short-term unfunded loan commitments that are generally at market prices.
Note 24. Concentrations of Credit and Other Risks
The Company monitors loan portfolio concentrations by region, collateral type, loan type, and industry on a monthly basis and has established maximum thresholds as a percentage of its capital to ensure that the desired mix and diversification of its loan portfolio is achieved. The Company is compliant with the established thresholds as of December 31, 2013. Personal, commercial and residential loans are granted to customers, most of who reside in northern and southern areas of Louisiana. Although the Company has a diversified loan portfolio, significant portions of the loans are collateralized by real estate located in Tangipahoa Parish and surrounding parishes in Southeast Louisiana. Declines in the Louisiana economy could result in lower real estate values which could, under certain circumstances, result in losses to the Company.
The distribution of commitments to extend credit approximates the distribution of loans outstanding. Commercial and standby letters of credit were granted primarily to commercial borrowers. Generally, credit is not extended in excess of $10.0 million to any single borrower or group of related borrowers.
Approximately 38.6% of the Company’s deposits are derived from local governmental agencies at December 31, 2013. These governmental depositing authorities are generally long-term customers. A number of the depositing authorities are under contractual obligation to maintain their operating funds exclusively with the Company. In most cases, the Company is required to pledge securities or letters of credit issued by the Federal Home Loan Bank to the depositing authorities to collateralize their deposits. Under certain circumstances, the withdrawal of all of, or a significant portion of, the deposits of one or more of the depositing authorities may result in a temporary reduction in liquidity, depending primarily on the maturities and/or classifications of the securities pledged against such deposits and the ability to replace such deposits with either new deposits or other borrowings. Public fund deposits totaled $503.5 million of total deposits at December 31, 2013.
Note 25. Litigation
The Company is subject to various legal proceedings in the normal course of its business. It is Management’s belief that the ultimate resolution of such claims will not have a material adverse effect on the Company’s financial position or results of operations.
84
Note 26. Condensed Parent Company Information
The following condensed financial information reflects the accounts and transactions of First Guaranty Bancshares, Inc. for the dates indicated:
|
First Guaranty Bancshares, Inc.
|
||||||
|
Condensed Balance Sheets
|
||||||
| December 31, | ||||||
| (in thousands) | 2013 | 2012 | ||||
|
Assets
|
||||||
|
Cash
|
$
|
433
|
$
|
1,291
|
||
|
Investment in bank subsidiary
|
123,681
|
135,538
|
||||
| Investment securities: | ||||||
| Available for sale, at fair value | 64 | 64 | ||||
|
Other assets
|
1,748
|
407
|
||||
|
Total Assets
|
$
|
125,926
|
$
|
137,300
|
||
|
Liabilities and Stockholders' Equity
|
||||||
| Short-term debt | $ | 1,800 | $ | 1,800 | ||
| Long-term debt | 500 | 1,100 | ||||
|
Other liabilities
|
221
|
219
|
||||
| Total Liabilities | 2,521 | 3,119 | ||||
|
Stockholders' Equity
|
123,405
|
134,181
|
||||
|
Total Liabilities and Stockholders' Equity
|
$
|
125,926
|
$
|
137,300
|
||
|
First Guaranty Bancshares, Inc.
|
|||||||||
|
Condensed Statements of Income
|
|||||||||
| December 31, | |||||||||
| (in thousands) | 2013 | 2012 | 2011 | ||||||
| Operating Income | |||||||||
|
Dividends received from bank subsidiary
|
$
|
4,669
|
$
|
6,400
|
$
|
4,600
|
|||
|
Other income
|
90 |
1
|
32
|
||||||
|
Total operating income
|
4,759
|
6,401
|
4,632
|
||||||
|
Operating Expenses
|
|||||||||
|
Interest expense
|
115
|
91
|
166
|
||||||
|
Salaries & Benefits
|
88
|
101
|
85
|
||||||
|
Other expenses
|
449
|
667
|
927
|
||||||
|
Total operating expenses
|
652
|
859
|
1,178
|
||||||
|
Income before income tax benefit and increase in equity in undistributed earnings of subsidiary
|
4,107
|
5,542
|
3,454
|
||||||
|
Income tax benefit
|
212
|
373
|
200
|
||||||
|
Income before increase in equity in undistributed earnings of subsidiary
|
4,319
|
5,915
|
3,654
|
||||||
|
Increase in equity in undistributed earnings of subsidiary
|
4,827
|
6,144
|
4,379
|
|
|||||
|
Net Income
|
$ |
9,146
|
$ |
12,059
|
$ |
8,033
|
|||
|
Less preferred stock dividends
|
(713
|
)
|
(1,972
|
)
|
(1,976
|
) | |||
|
Net income available to common shareholders
|
$
|
8,433
|
$
|
10,087
|
$
|
6,057
|
|||
85
|
First Guaranty Bancshares, Inc.
|
|||||||||
|
Condensed Statements of Cash Flow
|
|||||||||
| December 31, | |||||||||
| (in thousands) |
2013
|
2012
|
2011
|
||||||
|
Cash flows from operating activities:
|
|||||||||
|
Net income
|
$
|
9,146
|
$
|
12,059
|
$
|
8,033
|
|||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|||||||||
|
(Increase) in equity in undistributed earnings of subsidiary
|
(4,827
|
)
|
(6,144
|
)
|
(4,379
|
) | |||
| Loss on sale of securities |
-
|
2 | - | ||||||
|
Net change in other liabilities
|
2
|
32
|
|
(349
|
) | ||||
|
Net change in other assets
|
161
|
(122
|
) |
(250
|
)
|
||||
|
Net cash provided by operating activities
|
4,482
|
5,827
|
3,055
|
||||||
|
Cash flows from investing activities:
|
|||||||||
|
Proceeds from maturities, calls and sales of AFS securities
|
- | 248 | - | ||||||
|
Funds Invested in AFS securities
|
- | (41 | ) | - | |||||
|
Payments for investments in and advances to subsidiary
|
-
|
- |
|
(19,331
|
) | ||||
| Cash paid in excess of cash received in acquisition | - | - | (2,203 | ) | |||||
|
Net cash provided by (used in) investing activities
|
-
|
207
|
|
(21,534
|
) | ||||
|
Cash flows from financing activities:
|
|||||||||
| Proceeds from short-term debt | - | 1,800 | - | ||||||
| Proceeds from long-term debt | - | - | 3,500 | ||||||
|
Repayment of long-term debt
|
(600
|
) |
(2,100
|
) |
(3,800
|
)
|
|||
|
Proceeds from issuance of preferred stock
|
-
|
-
|
39,435
|
||||||
| Repurchase of preferred stock | - | - | (21,128 | ) | |||||
| Repurchase of common stock | - | (54 | ) | - | |||||
|
Dividends paid
|
(4,740
|
)
|
(6,007
|
)
|
(5,433
|
)
|
|||
|
Net cash (used in) provided by financing activities
|
(5,340
|
)
|
(6,361
|
) |
12,574
|
|
|||
|
Net decrease in cash and cash equivalents
|
(858
|
) |
(327
|
) |
(5,905
|
) | |||
|
Cash and cash equivalents at the beginning of the period
|
1,291
|
1,618
|
7,523
|
||||||
|
Cash and cash equivalents at the end of the period
|
$
|
433
|
$
|
1,291
|
$
|
1,618
|
|||
There were no changes in or disagreements with accountants on accounting and financial disclosures for the year ended December 31, 2013.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer (Principal Executive Officer) and its Chief Financial Officer (Principal Financial Officer), of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chairman and Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective. See Exhibits 31.1 and 31.2 for the Certification statements.
For further information, see “Management’s annual report on internal control over financial reporting” below. There was no change in the Firm’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the twelve months ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
The Management of First Guaranty Bancshares, Inc. has prepared the consolidated financial statements and other information in our Annual Report in accordance with accounting principles generally accepted in the United States of America and is responsible for its accuracy. The financial statements necessarily include amounts that are based on Management’s best estimates and judgments. In meeting its responsibility, Management relies on internal accounting and related control systems. The internal control systems are designed to ensure that transactions are properly authorized and recorded in our financial records and to safeguard our assets from material loss or misuse. Such assurance cannot be absolute because of inherent limitations in any internal control system.
Management is responsible for establishing and maintaining the adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13 – 15(f). Under the supervision and with the participation of Management, including our principal executive officers and principal financial officer, we conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This section relates to Management’s evaluation of internal control over financial reporting including controls over the preparation of the schedules equivalent to the basic financial statements and compliance with laws and regulations. Our evaluation included a review of the documentation of controls, evaluations of the design of the internal control system and tests of the effectiveness of internal controls.
Based on our evaluation under the framework in Internal Control – Integrated Framework, Management concluded that internal control over financial reporting was effective as of December 31, 2013.
None
Item 10 – Directors, Executive Officers and Corporate Governance
Pursuant to General Instruction G (3), information on directors and executive officers of the Registrant will be incorporated by reference from the Company’s Definitive Proxy Statement.
Item 11 - Executive Compensation
Pursuant to General Instruction G (3), information on directors and executive officers of the Registrant will be incorporated by reference from the Company’s Definitive Proxy Statement.
Item 12 - Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters
Pursuant to General Instruction G (3), information on directors and executive officers of the Registrant will be incorporated by reference from the Company’s Definitive Proxy Statement.
Item 13 - Certain Relationships and Related Transactions and Director Independence
Pursuant to General Instruction G (3), information on directors and executive officers of the Registrant will be incorporated by reference from the Company’s Definitive Proxy Statement.
Item 14 - Principal Accountant Fees and Services
Pursuant to General Instruction G (3), information on directors and executive officers of the Registrant will be incorporated by reference from the Company’s Definitive Proxy Statement.
88
Part IV
Item 15 - Exhibits and Financial Statement Schedules
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(a) 1
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Consolidated Financial Statements
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Item
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Page
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First Guaranty Bancshares, Inc. and Subsidiary
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Report of Independent Registered Accounting Firm
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50
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Consolidated Balance Sheets - December 31, 2013 and 2012
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51
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Consolidated Statements of Income – Years Ended December 31, 2013, 2012 and 2011
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52
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Consolidated Statements of Comprehensive Income – Years Ended December 31, 2013, 2012 and 2011
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53 | |
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Consolidated Statements of Changes in Stockholders’ Equity - December 31, 2013, 2012 and 2011
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54
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Consolidated Statements of Cash Flows - Years Ended December 31, 2013, 2012 and 2011
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55
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Notes to Consolidated Financial Statements
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56
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| 2 |
Consolidated Financial Statement Schedules
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All schedules to the consolidated financial statements of First Guaranty Bancshares, Inc. and its subsidiary have been omitted because they are not required under the related instructions or are inapplicable, or because the required information has been provided in the consolidated financial statements or the notes thereto.
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Exhibits
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The exhibits required by Regulation S-K are set forth in the following list and are filed either by incorporation by reference from previous filings with the Securities and Exchange Commission or by attachment to this Annual Report on Form 10-K as indicated below.
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Exhibit Number
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Exhibit
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3.1
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Restatement of Articles of Incorporation of First Guaranty Bancshares, Inc. dated July 27, 2007 (filed as Exhibit 3.1 on Form 8-K12G3 dated August 2, 2007 and incorporated herein by reference).
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3.2
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Bylaws of First Guaranty Bancshares, Inc. dated January 4, 2007 (filed as Exhibit 3.2 on Form 8-K12G3 dated August 2, 2007 and incorporated herein by reference).
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3.3
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Amendment to Bylaws of First Guaranty Bancshares, Inc., dated May 17, 2007 (filed as exhibit 3.3 on Form 8-K12G3 dated August 2, 2007 and incorporated herein by reference).
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| 3.4 | Articles of Amendment establishing Series C Preferred Stock dated September 15, 2011. | |
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14.3
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First Guaranty Bancshares, Inc. and Subsidiary Code of Conduct and Ethics for Employees, Officers and Directors adopted January 16, 2014.
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14.4
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First Guaranty Bancshares, Inc. Code of Ethics for Senior Financial Officers adopted January 16, 2014.
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21
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Subsidiaries of the First Guaranty Bancshares, Inc. (filed as Exhibit 21 on the Company’s Form 8-K dated November 8, 2007 and incorporated herein by reference).
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24
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Power of attorney
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31.1
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Certification of principal executive officer pursuant to Exchange Act Rule 13(a)-15(e) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of principal financial officer pursuant to Exchange Act Rule 13(a)-15(e) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.3
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Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.4
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Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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| 101.SCH | XBRL Taxonomy Extension Schema. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. | |
| 101.INS | XBRL Instance Document |
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST GUARANTY BANCSHARES, INC.
Dated: March 27, 2014
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
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/s/ Alton B. Lewis
Alton B. Lewis
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Principal Executive Officer and
Director
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March 27, 2014
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/s/ Eric J. Dosch
Eric J. Dosch
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Principal Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
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March 27, 2014
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*___________________________
Marshall T. Reynolds
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Chairman of the Board
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March 27, 2014
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*___________________________
William K. Hood
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Director
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March 27, 2014
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*___________________________
Glenda B. Glover
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Director
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March 27, 2014
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*By: /s/ Alton B. Lewis
Alton B. Lewis
Under Power of Attorney
90