First Guaranty Bancshares, Inc. - Quarter Report: 2013 June (Form 10-Q)

form10q63013.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2013

Commission File Number 000-52748

FIRST GUARANTY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Louisiana	26-0513559
(State or other jurisdiction incorporation or organization)	(I.R.S. Employer Identification Number)

400 East Thomas Street
Hammond, Louisiana	70401
(Address of principal executive office)	(Zip Code)

(985) 345-7685
(Telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of August 13, 2013 the registrant had 6,291,332 shares of $1 par value common stock outstanding.

Table of Contents

		Page
Part I.	Financial Information

Item 1.	Financial Statements (unaudited)	3

	Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012	3

	Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012	4

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012	5

	Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2013 and 2012	6

	Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012	7

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	35

Part II.	Other Information	35

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Exhibits	35

Signatures		36

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share data)	June 30, 2013			December 31, 2012
Assets
Cash and cash equivalents:
Cash and due from banks	$	53,214		$	83,330
Interest-earning demand deposits with banks		9			12
Federal funds sold		1,064			2,891
Cash and cash equivalents		54,287			86,233

Interest-earning time deposits with banks		997			747

Investment securities:
Available for sale, at fair value		491,552			602,300
Held to maturity, at cost (estimated fair value of $149,627 and $58,939, respectively)		155,493			58,943
Investment securities		647,045			661,243

Federal Home Loan Bank stock, at cost		1,277			1,275
Loans held for sale		-			557

Loans, net of unearned income		685,857			629,500
Less: allowance for loan losses		10,177			10,342
Net loans		675,680			619,158

Premises and equipment, net		19,824			19,564
Goodwill		1,999			1,999
Intangible assets, net		2,241			2,413
Other real estate, net		4,138			2,394
Accrued interest receivable		6,179			6,711
Other assets		8,868			5,009
Total Assets	$	1,422,535		$	1,407,303

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing demand	$	190,727		$	192,232
Interest-bearing demand		354,113			348,870
Savings		64,279			63,062
Time		653,729			648,448
Total deposits		1,262,848			1,252,612

Short-term borrowings		29,385			14,746
Accrued interest payable		2,963			2,840
Long-term borrowings		800			1,100
Other liabilities		2,460			1,824
Total Liabilities		1,298,456			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		44,793			43,071
Accumulated other comprehensive (loss) income		(5,776	)		6,048
Total Stockholders' Equity		124,079			134,181
Total Liabilities and Stockholders' Equity	$	1,422,535		$	1,407,303

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except share data)	2013			2012			2013			2012
Interest Income:
Loans (including fees)	$	9,189		$	8,862		$	18,285		$	17,634
Loans held for sale		-			-			-			1
Deposits with other banks		51			21			91			36
Securities (including FHLB stock)		3,236			5,308			6,604			10,938
Federal funds sold		-			4			1			7
Total Interest Income		12,476			14,195			24,981			28,616

Interest Expense:
Demand deposits		319			357			682			700
Savings deposits		11			13			25			27
Time deposits		2,485			2,950			4,991			6,123
Borrowings		38			34			75			73
Total Interest Expense		2,853			3,354			5,773			6,923

Net Interest Income		9,623			10,841			19,208			21,693
Less: Provision for loan losses		800			904			1,704			2,104
Net Interest Income after Provision for Loan Losses		8,823			9,937			17,504			19,589

Noninterest Income:
Service charges, commissions and fees		1,171			1,196			2,322			2,385
Net gains on securities		767			755			1,544			1,483
Net (losses) gains on sale of loans		(3	)		1			2			(27	)
Other		346			437			673			810
Total Noninterest Income		2,281			2,389			4,541			4,651

Noninterest Expense:
Salaries and employee benefits		3,616			3,361			7,173			6,731
Occupancy and equipment expense		1,005			935			1,985			1,855
Other		3,209			3,581			6,408			6,541
Total Noninterest Expense		7,830			7,877			15,566			15,127

Income Before Income Taxes		3,274			4,449			6,479			9,113
Less: Provision for income taxes		1,142			1,486			2,258			3,098
Net Income		2,132			2,963			4,221			6,015
Preferred Stock Dividends		(203	)		(502	)		(486	)		(986	)
Income Available to Common Shareholders	$	1,929		$	2,461		$	3,735		$	5,029

Per Common Share:
Cash dividends paid	$	0.16		$	0.16		$	0.32		$	0.32
Earnings	$	0.31		$	0.39		$	0.59		$	0.80

Weighted Average Common Shares Outstanding		6,291,332			6,293,436			6,291,332			6,294,004

See Notes to Consolidated Financial Statements

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012
Net Income	$	2,132		$	2,963		$	4,221		$	6,015
Other comprehensive income:
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during the period		(15,820	)		8,583			(16,371	)		4,258
Reclassification adjustments for gains included in net income		(767	)		(755	)		(1,544	)		(1,483	)
Change in unrealized gains (losses) on securities		(16,587	)		7,828			(17,915	)		2,775
Tax impact		5,640			(2,662	)		6,091			(944	)
Other comprehensive (loss) income, net of tax		(10,947	)		5,166			(11,824	)		1,831
Comprehensive (Loss) Income	$	(8,815	)	$	8,129		$	(7,603	)	$	7,846

See Notes to Consolidated Financial Statements

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)

	Series C												Accumulated
	Preferred		Common										Other
	Stock		Stock				Treasury			Retained			Comprehensive
	$1,000 Par		$1 Par		Surplus		Stock			Earnings			Income/(Loss)			Total
(in thousands, except per share data)
Balance December 31, 2011	$	39,435	$	6,294	$	39,387	$	-		$	37,019		$	4,467		$	126,602
Net income		-		-		-		-			6,015			-			6,015
Other comprehensive income		-		-		-		-			-			1,831			1,831
Cash dividends on common stock ($0.32 per share)		-		-		-		-			(2,022	)		-			(2,022	)
Treasury shares purchased, at cost, 1,160 shares		-		-		-		(21	)		-			-			(21	)
Preferred stock dividend		-		-		-		-			(986	)		-			(986	)
Balance June 30, 2012 (unaudited)	$	39,435	$	6,294	$	39,387	$	(21	)	$	40,026		$	6,298		$	131,419

Balance December 31, 2012	$	39,435	$	6,294	$	39,387	$	(54	)	$	43,071		$	6,048		$	134,181
Net income		-		-		-		-			4,221			-			4,221
Other comprehensive income		-		-		-		-			-			(11,824	)		(11,824	)
Cash dividends on common stock ($0.32 per share)		-		-		-		-			(2,013	)		-			(2,013	)
Preferred stock dividend		-		-		-		-			(486	)		-			(486	)
Balance June 30, 2013 (unaudited)	$	39,435	$	6,294	$	39,387	$	(54	)	$	44,793		$	(5,776	)	$	124,079

See Notes to Consolidated Financial Statements

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Six Months Ended June 30,
(in thousands)	2013			2012
Cash Flows From Operating Activities
Net income	$	4,221		$	6,015
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,704			2,104
Depreciation and amortization		1,051			1,035
Amortization/Accretion of investments		1,027			864
Gain on calls and sales of securities		(1,544	)		(1,483	)
Gain (loss) on sale of assets		(17	)		59
ORE write downs and loss on disposition		113			549
FHLB stock dividends		(2	)		(1	)
Net decrease (increase) in loans held for sale		557			(441	)
Change in other assets and liabilities, net		3,502			403
Net Cash Provided By Operating Activities		10,612			9,104

Cash Flows From Investing Activities
Funds invested in certificates of deposits		(250	)		(747	)
Proceeds from maturities and calls of HTM securities		11,089			120,640
Proceeds from maturities, calls and sales of AFS securities		419,934			286,243
Funds invested in HTM securities		(107,616	)		(40,901	)
Funds Invested in AFS securities		(326,597	)		(414,776	)
Proceeds from sale/redemption of Federal Home Loan Bank stock		720			1,244
Funds invested in Federal Home Loan Bank stock		(720	)		(1,687	)
Net increase in loans		(60,496	)		(28,640	)
Purchase of premises and equipment		(1,111	)		(831	)
Proceeds from sales of premises and equipment		-			223
Proceeds from sales of other real estate owned		413			1,637
Net Cash Used In Investing Activities		(64,634	)		(77,595	)

Cash Flows From Financing Activities
Net increase (decrease) in deposits		10,236			(1,556	)
Net increase in federal funds purchased and short-term borrowings		14,639			7,182
Repayment of long-term borrowings		(300	)		(1,800	)
Purchase of treasury stock		-			(21	)
Dividends paid		(2,499	)		(3,008	)
Net Cash Provided By Financing Activities		22,076			797

Net Decrease In Cash and Cash Equivalents		(31,946	)		(67,694	)
Cash and Cash Equivalents at the Beginning of the Period		86,233			112,442
Cash and Cash Equivalents at the End of the Period	$	54,287		$	44,748

Noncash Activities:
Loans transferred to foreclosed assets	$	2,270		$	3,328

Cash Paid During The Period:
Interest on deposits and borrowed funds	$	5,651		$	7,023
Income taxes	$	750		$	3,400

See Notes to the Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements and the footnotes of First Guaranty Bancshares, Inc. (the “Company”) thereto should be read in conjunction with the audited financial statements and note disclosures for the Company previously filed with the Securities and Exchange Commission in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2012.

The consolidated financial statements include the accounts of First Guaranty Bancshares, Inc. and its wholly owned subsidiary First Guaranty Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the consolidated financial statements. Those adjustments are of a normal recurring nature. The results of operations for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results expected for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are susceptible to significant change in the near term are the allowance for loan losses, valuation of goodwill, intangible assets and other purchase accounting adjustments.

Note 2. Recent Accounting Pronouncements

In 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 9 below and did not have a material impact upon the Company’s financial statements.

Note 3. Securities

A summary comparison of securities by type at June 30, 2013 and December 31, 2012 is shown below.

	June 30, 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	$	33,000	$	-	$	-		$	33,000	$	20,000	$	-	$	-		$	20,000
U.S. Government Agencies		302,795		-		(11,594	)		291,201		392,616		751		(278	)		393,089
Corporate debt securities		146,052		3,804		(1,482	)		148,374		159,488		8,024		(401	)		167,111
Mutual funds or other equity securities		2,064		2		-			2,066		2,564		23		-			2,587
Municipal bonds		16,397		514		-			16,911		18,481		1,032		-			19,513
Total available for sale securities	$	500,308	$	4,320	$	(13,076	)	$	491,552	$	593,149	$	9,830	$	(679	)	$	602,300

Held to maturity:
U.S. Government Agencies	$	89,467	$	46	$	(4,012	)	$	85,501	$	58,943	$	175	$	(179	)	$	58,939
Mortgage-backed securities		66,026		-		(1,900	)		64,126		-		-		-			-
Total held to maturity securities	$	155,493	$	46	$	(5,912	)	$	149,627	$	58,943	$	175	$	(179	)	$	58,939

The scheduled maturities of securities at June 30, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to call or prepayments.

	June 30, 2013
(in thousands)	Amortized Cost		Fair Value
Available For Sale:
Due in one year or less	$	41,196	$	41,290
Due after one year through five years		166,030		165,557
Due after five years through 10 years		249,549		242,877
Over 10 years		43,533		41,828
Total available for sale securities	$	500,308	$	491,552

Held to Maturity:
Due in one year or less	$	-	$	-
Due after one year through five years		-		-
Due after five years through 10 years		89,467		85,501
Over 10 years		66,026		64,126
Total held to maturity securities	$	155,493	$	149,627

At June 30, 2013 $512.5 million of the Company's securities were pledged to secure public fund deposits.

The following is a summary of the fair value of securities with gross unrealized losses and an aging of those gross unrealized losses at June 30, 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	$	21,000	$	-		-	$	-	$	-		3	$	21,000	$	-
U.S. Government agencies	85		288,395		(11,400	)	1		2,806		(194	)	86		291,201		(11,594	)
Corporate debt securities	159		42,253		(1,427	)	5		1,081		(55	)	164		43,334		(1,482	)
Mutual funds or other equity securities	-		-		-		-		-		-		-		-		-
Municipals	-		-		-		-		-		-		-		-		-
Total available for sale	247	$	351,648	$	(12,827	)	6	$	3,887	$	(249	)	253	$	355,535	$	(13,076	)

Held to maturity:
U.S. Government agencies	20	$	80,454	$	(4,012	)	-	$	-	$	-		20	$	80,454	$	(4,012	)
Mortgage-backed securities	26		64,126		(1,900	)	-		-		-		26		64,126		(1,900	)
Total held to maturity	46	$	144,580	$	(5,912	)	-	$	-	$	-		46	$	144,580	$	(5,912	)

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	)
Mutual funds or other equity securities	-		-		-		-		-		-		-		-		-
Municipals	-		-		-		-		-		-		-		-		-
Total available for sale	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	)
Mortgage-backed securities	-		-		-		-		-		-		-		-		-
Total held to maturity	6	$	24,118	$	(179	)	-	$	-	$	-		-	$	24,118	$	(179	)

Securities are evaluated for other-than-temporary impairment at least quarterly and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the recovery of contractual principal and interest and (iv) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

The amount of investment securities issued by U.S. Government and Government sponsored agencies with unrealized losses and the amount of unrealized losses on those investment securities are the result of changes in market interest rates. The Company has the ability and intent to hold these securities in its current portfolio until recovery, which may be until maturity.

The corporate debt securities consist primarily of corporate bonds issued by financial, insurance, utility, manufacturing, industrial, consumer products and oil and gas organizations. The Company believes that each of the issuers will be able to fulfill the obligations of these securities based on evaluations described above. The Company has the ability and intent to hold these securities until they recover, which could be at their maturity dates.

The Company believes that the securities with unrealized losses reflect impairment that is temporary and there are currently no securities with other-than-temporary impairment.

At June 30, 2013, the Company's exposure to bond issuers that exceeded 10% of stockholders’ equity is below:

	At June 30, 2013
(in thousands)	Amortized Cost		Fair Value
U.S Treasury	$	33,000	$	33,000
Federal Home Loan Bank (FHLB)		144,579		138,650
Federal Home Loan Mortgage Corporation (Freddie Mac-FHLMC)		51,760		49,592
Federal National Mortgage Association (Fannie Mae-FNMA)		140,311		135,461
Federal Farm Credit Bank (FFCB)		121,638		117,124
Total	$	491,288	$	473,827

Note 4. Loans

The following table summarizes the components of the Company's loan portfolio as of June 30, 2013 and December 31, 2012:

	June 30, 2013					December 31, 2012
(in thousands except for %)	Balance			As % of Category		Balance			As % of Category
Real Estate:
Construction & land development	$	50,770		7.4	%	$	44,856		7.1	%
Farmland		9,652		1.4	%		11,182		1.8	%
1- 4 Family		93,528		13.6	%		87,473		13.8	%
Multifamily		13,950		2.0	%		14,855		2.4	%
Non-farm non-residential		332,460		48.4	%		312,716		49.6	%
Total Real Estate		500,360		72.8	%		471,082		74.7	%
Non-Real Estate:
Agricultural		27,244		4.0	%		18,476		2.9	%
Commercial and industrial		136,177		19.8	%		117,425		18.6	%
Consumer and other		23,483		3.4	%		23,758		3.8	%
Total Non-Real Estate		186,904		27.2	%		159,659		25.3	%
Total loans before unearned income		687,264		100.0	%		630,741		100.0	%
Unearned income		(1,407	)				(1,241	)
Total loans net of unearned income	$	685,857				$	629,500

The following table summarizes fixed and floating rate loans by contractual maturity as of June 30, 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.

	June 30, 2013							December 31, 2012
(in thousands)	Fixed		Floating		Total			Fixed		Floating		Total
One year or less	$	75,717	$	104,657	$	180,374		$	89,117	$	107,176	$	196,293
One to five years		184,239		182,048		366,287			147,896		175,743		323,639
Five to 15 years		60,659		32,531		93,190			33,770		42,595		76,365
Over 15 years		6,927		22,289		29,216			7,829		5,927		13,756
Subtotal	$	327,542	$	341,525		669,067		$	278,612	$	331,441		610,053
Nonaccrual loans						18,197							20,688
Total loans before unearned income						687,264							630,741
Unearned income						(1,407	)						(1,241	)
Total loans net of unearned income					$	685,857						$	629,500

The majority of floating rate loans have interest rate floors. As of June 30, 2013 and December 31, 2012 floating rate loans at the floor rate were $233.6 million and $231.7 million, respectively. Nonaccrual loans have been excluded from the calculation.

The following tables present the age analysis of past due loans at June 30, 2013 and December 31, 2012:

	As of June 30, 2013
(in thousands)	30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Loans			Recorded Investment 90 Days Accruing
Real Estate:
Construction & land development	$	115	$	122	$	237	$	50,533	$	50,770		$	-
Farmland		16		341		357		9,295		9,652			-
1 - 4 family		1,369		5,217		6,586		86,942		93,528			336
Multifamily		154		80		234		13,716		13,950			-
Non-farm non-residential		2,407		10,320		12,727		319,733		332,460			283
Total Real Estate		4,061		16,080		20,141		480,219		500,360			619
Non-Real Estate:
Agricultural		-		621		621		26,623		27,244			-
Commercial and industrial		256		2,091		2,347		133,830		136,177			-
Consumer and other		66		24		90		23,393		23,483			-
Total Non-Real Estate		322		2,736		3,058		183,846		186,904			-
Total loans before unearned income	$	4,383	$	18,816	$	23,199	$	664,065	$	687,264		$	619
Unearned income										(1,407	)
Total loans net of unearned income									$	685,857

	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

Credit quality of the Company’s loan portfolio is monitored on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan. Past due loans are reviewed on a monthly basis to identify loans for nonaccrual status.

The following is a summary of nonaccrual loans by class as of the dates indicated:

in thousands)	As of June 30, 2013		As of December 31, 2012
Real Estate:
Construction & land development	$	122	$	854
Farmland		341		312
1 - 4 family		4,881		4,603
Multifamily		80		-
Non-farm non-residential		10,037		11,571
Total Real Estate		15.461		17,340
Non-Real Estate:
Agricultural		621		512
Commercial and industrial		2,091		2,831
Consumer and other		24		5
Total Non-Real Estate		2,736		3,348
Total Nonaccrual Loans	$	18,197	$	20,688

The Company’s credit quality indicators are pass, special mention, substandard, and doubtful.

Loans included in the Pass category are performing loans with satisfactory debt coverage ratios, collateral, payment history, and meet documentation requirements.

Special mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Nonfinancial reasons include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices.

A substandard loan is inadequately protected by the paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. These loans require more intensive supervision. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigates. For some substandard loans, the likelihood of full collection of interest and principal may be in doubt and interest is no longer accrued. For consumer loans that are 90 days or more past due or that are nonaccrual are considered substandard.

Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values.

The following table identifies the credit exposure of the loan portfolio by specific credit ratings as of the dates indicated:

	As of June 30, 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	$	39,386	$	4,783	$	6,601	$	-	$	50,770		$	29,654	$	5,595	$	9,607	$	-	$	44,856
Farmland		9,535		85		32		-		9,652			11,059		-		123		-		11,182
1 - 4 family		79,540		4,136		9,852		-		93,528			71,240		7,117		9,116		-		87,473
Multifamily		5,845		154		7,951		-		13,950			6,746		806		7,303		-		14,855
Non-farm non-residential		301,334		7,848		23,278		-		332,460			274,970		10,605		27,141		-		312,716
Total Real Estate		435,640		17,006		47,714		-		500,360			393,669		24,123		53,290		-		471,082
Non-Real Estate:
Agricultural		26,743		23		478		-		27,244			17,969		75		432		-		18,476
Commercial and industrial		133,420		2,205		552		-		136,177			108,590		3,834		5,001		-		117,425
Consumer and other		23,337		53		93		-		23,483			23,560		140		58		-		23,758
Total Non-Real Estate		183,500		2,281		1,123		-		186,904			150,119		4,049		5,491		-		159,659
Total loans before unearned income	$	619,140	$	19,287	$	48,837	$	-	$	687,264		$	543,788	$	28,172	$	58,781	$	-	$	630,741
Unearned income										(1,407	)										(1,241	)
Total loans net of unearned income									$	685,857										$	629,500

Note 5. Allowance for Loan Losses

The allowance for loan losses is reviewed by on a monthly basis and additions thereto are recorded pursuant to the results of such reviews. In assessing the allowance, several internal and external factors that might impact the performance of individual loans are considered. These factors include, but are not limited to, economic conditions and their impact upon borrowers' ability to repay loans, respective industry trends, borrower estimates and independent appraisals. Periodic changes in these factors impact the assessment of each loan and its overall impact on the allowance for loan losses.

The monitoring of credit risk also extends to unfunded credit commitments, such as unused commercial credit lines and letters of credit. A reserve is established as needed for estimates of probable losses on such commitments.

A summary of changes in the allowance for loan losses, by loan type, for the six months ended June 30, 2013 and 2012 are as follows:

	Allowance for Credit Losses
	As of June 30,
	2013												2012
(in thousands)	Beginning Allowance (12/31/12)		Charge-offs			Recoveries		Provision			Ending Allowance (6/30/13)		Beginning Allowance (12/31/11)		Charge-offs			Recoveries		Provision			Ending Allowance(6/30/12)
Real Estate:
Construction & land development	$	1,098	$	(233	)	$	1	$	374		$	1,240	$	1,002	$	(53	)	$	7	$	294		$	1,250
Farmland		50		-			61		(78	)		33		65		-			1		(17	)		49
1 - 4 family		2,239		(161	)		28		35			2,141		1,917		(951	)		21		833			1,820
Multifamily		284		-			-		292			576		780		-			-		79			859
Non-farm non-residential		3,666		(947	)		2		555			3,276		2,980		(459	)		106		504			3,131
Total real estate		7,337		(1,341	)		92		1,178			7,266		6,744		(1,463	)		135		1,693			7,109
Non-Real Estate:
Agricultural		64		(21	)		3		25			71		125		(25	)		1		(41	)		60
Commercial and industrial		2,488		(679	)		57		411			2,277		1,407		(424	)		59		534			1,576
Consumer and other		233		(124	)		144		(33	)		220		314		(266	)		141		122			311
Unallocated		220		-			-		123			343		289		-			-		(204	)		85
Total Non-Real Estate		3,005		(824	)		204		526			2,911		2,135		(715	)		201		411			2,032
Total	$	10,342	$	(2,165	)	$	296	$	1,704		$	10,177	$	8,879	$	(2,178	)	$	336	$	2,104		$	9,141

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.

The following table presents the allowance and loans, by loan type, that are individually and collectively evaluated for impairment for the period indicated.

	Allowance for Impaired Loans
	As of June 30, 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	$	911	$	329	$	1,240	$	6,452	$	44,318	$	50,770
Farmland		-		33		33		-		9,652		9,652
1 - 4 family		22		2,119		2,141		2,882		90,646		93,528
Multifamily		547		29		576		7,951		5,999		13,950
Non-farm non-residential		751		2,525		3,276		22,070		310,390		332,460
Total Real Estate		2,231		5,035		7,266		39,355		461,005		500,360
Non-Real Estate:
Agricultural		-		71		71		-		27,244		27,244
Commercial and industrial		-		2,277		2,277		-		136,177		136,177
Consumer and other		-		220		220		-		23,483		23,483
Unallocated		-		343		343
Total Non-Real Estate		-		2,911		2,911		-		186,904		186,904
Total	$	2,231	$	7,946	$	10,177	$	39,355	$	647,909	$	687,264
Unearned Income												(1,407	)
Total loans net of unearned income											$	685,857

The following table presents the allowance and loans, by loan type, that are individually and collectively evaluated for impairment for the period indicated.

	Allowance for Impaired Loans
	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

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Payment status, collateral value and the probability of collecting scheduled principal and interest payments when due are considered in evaluating loan impairment. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

The significance of payment delays and payment shortfalls are considered on a case-by-case basis; all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed are factors considered. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. This process is applied to impaired loan relationships in excess of $250,000.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures, unless such loans are the subject of a restructuring agreement.

The following is a summary of impaired loans by class as of the date indicated:

	As of June 30, 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	$	1,386	$	1,386	$	-	$	2,594	$	80	$	73
Farmland		-		-		-		-		-		-
1 - 4 family		2,190		2,190		-		784		51		25
Multifamily		650		650		-		409		44		38
Non-farm non-residential		4,039		4,411		-		6,896		162		75
Total Real Estate		8,265		8,637		-		10,683		337		211
Non-Real Estate:
Agricultural		-		-		-		-		-		-
Commercial and industrial		-		-		-		2,968		53		80
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate		-		-		-		2,968		53		80
Total Impaired Loans with no related allowance		8,265		8,637		-		13,651		390		291

Impaired Loans with an allowance recorded:
Real Estate:
Construction & land development		5,066		5,066		911		4,969		112		93
Farmland		-		-		-		-		-		-
1 - 4 family		692		873		22		558		18		21
Multifamily		7,301		7,301		547		7,302		167		175
Non-farm non-residential		18,031		21,060		751		16,682		436		322
Total Real Estate		31,090		34,300		2,231		29,511		733		611
Non-Real Estate:
Agricultural		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate		-		-		-		-		-		-
Total Impaired Loans with an allowance recorded		31,090		34,300		2,231		29,511		733		611

Total Impaired Loans	$	39,355	$	42,937	$	2,231	$	43,162	$	1,123	$	902

The following is a summary of impaired loans by class as of the date indicated:

	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

Troubled Debt Restructurings

A Troubled Debt Restructuring ("TDR") is considered such if the creditor for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. The modifications to the Company's TDRs were concessions on the interest rate charged. The effect of the modifications to the Company was a reduction in interest income. These loans have an allocated reserve in the Company's reserve for loan losses. The Company has not restructured any loans that are considered troubled debt restructurings in the prior twelve months.

The following table identifies the Troubled Debt Restructurings as of June 30, 2013 and December 31, 2012:

Troubled Debt Restructurings	June 30, 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		5,951		-		-		5,951
Non-farm non residential		3,007		-		324		3,331		6,103		-		678		6,781
Total Real Estate		8,958		-		324		9,282		14,656		-		1,974		16,630
Non-Real Estate:
Agricultural		-		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-		-		-
Total Non-Real Estate		-		-		-		-		-		-		-		-
Total	$	8,958	$	-	$	324	$	9,282	$	14,656	$	-	$	1,974	$	16,630

The following table discloses TDR activity for the six months ended June 30, 2013.

	Six Months Ended June 30, 2013
(in thousands)	Beginning balance of TDRs		New TDRs		Charge-offs post-modification			Transferred to ORE			Paydowns		Construction to permanent financing		Restructured to market terms			Ending balance of TDRs
	December 31, 2012																	June 30, 2013
Real Estate:
Construction & land development	$	2,602	$	-	$	-		$	-		$	-	$	-	$	(2,602	)	$	-
Farmland		-		-		-			-			-		-		-			-
1 - 4 family		1,296		-		-			(1,075	)		-		-		(221	)		-
Multifamily		5,951		-		-			-			-		-		-			5,951
Non-farm non-residential		6,781		-		(355	)		-			-		-		(3,095	)		3,331
Total Real Estate		16,630		-		(355	)		(1,075	)		-		-		(5,918	)		9,282
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	)	$	-	$	-	$	(5,918	)	$	9,282

Note 6. Goodwill and Other Intangible Assets

Goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to impairment testing. Other intangible assets continue to be amortized over their useful lives. The Company's goodwill is the difference in purchase price over the fair value of net assets acquired from its acquisition of Homestead Bancorp in 2007. Goodwill totaled $2.0 million at June 30, 2013 and December 31, 2012. No impairment charges have been recognized on the Company's intangible assets. Mortgage servicing rights totaled $0.1 million at June 30, 2013 compared to $0.2 million at December 31, 2012. Other intangible assets recorded include core deposit intangibles, which are subject to amortization. The weighted-average amortization period remaining for the Company's core deposit intangibles is 6.8 years. The core deposits intangible reflect the value of deposit relationships, including the beneficial rates, which arose from acquisitions.

Note 7. Other Real Estate (ORE)

Other real estate owned consists of the following at the dates indicated:

(in thousands)	June 30, 2013		December 31, 2012
Real Estate Owned Acquired by Foreclosure:
Residential	$	1,950	$	1,186
Construction & land development		949		1,083
Non-farm non-residential		1,239		125
Total Other Real Estate Owned and Foreclosed Property	$	4,138	$	2,394

The increase in other real estate owned is due to the additions of a $1.1 million residential property, a $0.3 million non-farm non-residential property, and a $0.8 million commercial property. The additions to other real estate were partially offset by sales of $0.4 million and write-downs of $0.1 million.

Note 8. Commitments and Contingencies

Off-balance sheet commitments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of the involvement in particular classes of financial instruments.

The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual notional amount of those instruments. The same credit policies are used in making commitments and conditional obligations as it does for balance sheet instruments. Unless otherwise noted, collateral or other security is not required to support financial instruments with credit risk.

Below is a summary of the notional amounts of the financial instruments with off-balance sheet risk at June 30, 2013 and December 31, 2012:

Contract Amount
(in thousands)	June 30, 2013		December 31, 2012
Commitments to Extend Credit	$	20,353	$	26,775
Unfunded Commitments under lines of credit	$	88,903	$	71,423
Commercial and Standby letters of credit	$	5,579	$	5,470

Litigation

The nature of the Company’s business ordinarily results in a certain amount of claims, litigation and legal and administrative cases, all of which are considered incidental to the normal conduct of business. When the Company determines it has defenses to the claims asserted, it defends itself. The Company will consider settlement of cases when it is in the best interests of both the Company and its shareholders.

While the final outcome of legal proceedings is inherently uncertain, based on information currently available, any incremental liability arising from the Company’s legal proceedings will not have a material adverse effect on the Company’s financial position.

Note 9. Accumulated Other Comprehensive Income

The following table details the changes in the single component of accumulated other comprehensive income for the six months ended June 30, 2013:

(in thousands)	Unrealized Gain (Loss) on Securities Available for Sale
Accumulated Other Comprehensive Income:
Balance December 31, 2012	$	6,048
Reclassification adjustments to net income:
Realized gains on securities		(1,544	)
Provision for income taxes		538
Unrealized losses arising during the period, net of tax		(10,818	)
Balance June 30, 2013	$	(5,776	)

Note 10. Fair Value

The fair value of a financial instrument is the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Valuation techniques use certain inputs to arrive at fair value. Inputs to valuation techniques are the assumptions that market participants would use in pricing the asset or liability. They may be observable or unobservable. The Company uses a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds or credit risks) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value follows, as well as the classification of such instruments within the valuation hierarchy.

Securities available for sale. Securities are classified within Level 1 where quoted market prices are available in an active market. Inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are unavailable, fair value is estimated using quoted prices of securities with similar characteristics, at which point the securities would be classified within Level 2 of the hierarchy. Securities classified within Level 3 in the Company's portfolio as of June 30, 2013 include municipal bonds and one preferred equity security.

Impaired loans. Loans are measured for impairment using the methods permitted by ASC Topic 310. Fair value of impaired loans is measured by either the loan's obtainable market price, if available (Level 1), the fair value of the collateral if the loan is collateral dependent (Level 2), or the present value of expected future cash flows, discounted at the specific loan's effective interest rate (Level 3). Fair value of the collateral is determined by appraisals or by independent valuation.

Other real estate owned. Properties are recorded at the balance of the loan or at estimated fair value less estimated selling costs, whichever is less, at the date acquired. Fair values of other real estate owned ("OREO") are determined by sales agreement or appraisal, and costs to sell are based on estimation per the terms and conditions of the sales agreement or amounts commonly used in real estate transactions. Inputs include appraisal values on the properties or recent sales activity for similar assets in the property’s market, and thus OREO measured at fair value would be classified within Level 2 of the hierarchy.

Certain non-financial assets and non-financial liabilities are measured at fair value on a non-recurring basis including assets and liabilities related to reporting units measured at fair value in the testing of goodwill impairment, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

The following table summarizes financial assets measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

(in thousands)	June 30, 2013		December 31, 2012
Fair Value Measurements Using: Available for Sale Securities
Quoted Prices in Active Markets For Identical Assets (Level 1)	$	33,502	$	20,522
Significant Other Observable Inputs (Level 2)		450,717		573,071
Significant Unobservable Inputs (Level 3)		7,333		8,707
Securities available for sale measured at fair value	$	491,552	$	602,300

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 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 out of or into Level 1 during the first six months of 2013.

The change in Level 3 securities available for sale from December 31, 2012 was due to the sale of a Level 3 security totaling $0.5 million and principal payments on municipal bonds totaling $0.9 million.

The following table measures financial assets and financial liabilities measured at fair value on a non-recurring basis as of June 30, 2013 and December 31, 2012, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:

(in thousands)	At June 30, 2013		At December 31, 2012
Fair Value Measurements Using: Impaired Loans
Quoted Prices in Active Markets For Identical Assets (Level 1)	$	-	$	-
Significant Other Observable Inputs (Level 2)		9,886		8,563
Significant Unobservable Inputs (Level 3)		18,836		27,310
Impaired loans measured at fair value	$	28,722	$	35,873

Fair Value Measurements Using: Other Real Estate Owned
Quoted Prices in Active Markets For Identical Assets (Level 1)	$	-	$	-
Significant Other Observable Inputs (Level 2)		4,138		2,394
Significant Unobservable Inputs (Level 3)		-		-
Other real estate owned measured at fair value	$	4,138	$	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, and as such has not included any gains or losses in earnings for the six months ended June 30, 2013.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management discussion and analysis is intended to highlight the significant factors affecting the Company's financial condition and results of operations presented in the consolidated financial statements included in this Form 10-Q. This discussion is designed to provide readers with a more comprehensive view of the operating results and financial position than would be obtained from reading the consolidated financial statements alone. Reference should be made to those statements for an understanding of the following review and analysis. The financial data at June 30, 2013 and for the six months ended June 30, 2013 and 2012 have been derived from unaudited consolidated financial statements and include, in the opinion of management, all adjustments (consisting of normal recurring accruals and provisions) necessary to present fairly the Company's financial position and results of operations for such periods.

First Guaranty Bancshares, Inc. is a bank holding company headquartered in Hammond, LA with one wholly owned subsidiary, First Guaranty Bank. First Guaranty Bank is a Louisiana state chartered commercial bank with 21 banking facilities including one drive-up only facility, located throughout Southeast, Southwest and North Louisiana. The Company emphasizes personal relationships and localized decision making to ensure that products and services are matched to customer needs. The Company competes for business principally on the basis of personal service to customers, customer access to officers and directors and competitive interest rates and fees.

Special Note Regarding Forward-Looking Statements

Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company's anticipated future financial performance. This act provides a safe harbor for such disclosure, which protects us from unwarranted litigation, if actual results are different from Management expectations. This discussion and analysis contains forward-looking statements and reflects Management’s current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of factors and uncertainties, including, changes in general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities, if any; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans; changes in our financial condition or results of operations that reduce capital available to pay dividends; and changes in the financial condition or future prospects of issuers of securities that we own, which could cause our actual results and experience to differ from the anticipated results and expectations, expressed in such forward-looking statements.

Second Quarter and Six Months Ended 2013 Financial Overview

Financial highlights for the second quarter and six months of 2013 and 2012 are as follows:

●	Net income for the second quarter of 2013 and 2012 was $2.1 million and $3.0 million, respectively. Net income for the six months ended June 30, 2013 was $4.2 million compared to $6.0 million for the six months ended June 30, 2012. The decrease in net income for 2013 was primarily the result of lower interest income on securities from the shortening of the maturity of the portfolio. The decrease in securities interest income was partially offset by decreased interest expense.

●	Net income available to common shareholders after preferred stock dividends was $1.9 million and $2.5 million for the second quarter of 2013 and 2012, respectively. Net income available to common shareholders after preferred stock dividends was $3.7 million and $5.0 million for the six months ended June 30, 2013 and 2012, respectively. The dividends on preferred stock decreased $0.5 million to $0.5 million for the six months ended June 30, 2013 when compared to $1.0 million for the same period in 2012. This decrease is the result of the Company qualifying for a lower dividend rate due to the increase in qualified small business loans as a part of the U.S. Treasury’s Small Business Lending Fund (“SBLF”) program.

●	Earnings per common share were $0.31 and $0.39 for the second quarter of 2013 and 2012 and $0.59 and $0.80 for the six months ended June 30, 2013 and 2012, respectively.

●	Net interest income for the second quarter of 2013 was $9.6 million compared to $10.8 million for the same period in 2012. Net interest income for the six months ended June 30, 2013 was $19.2 million compared to $21.7 million for the same period in 2012.

●	Total assets at June 30, 2013 increased $15.2 million or 1.1% to $1.42 billion when compared to $1.41 billion at December 31, 2012. The increase in assets was from an increase in loans that was partially offset by a decrease in securities and cash.

●	Investment securities totaled $647.0 million at June 30, 2013, a decrease of $14.2 million when compared to $661.2 million at December 31, 2012. At June 30, 2013, available for sale securities, at fair value, totaled $491.6 million, a decrease of $110.7 million when compared to $602.3 million at December 31, 2012. At June 30, 2013, held to maturity securities, at amortized cost, totaled $155.5 million, an increase of $96.6 million when compared to $58.9 million at December 31, 2012. Of the $96.6 million increase in HTM securities, $66.0 million was from the addition of amortizing mortgage-backed securities.

●	The net loan portfolio at June 30, 2013 totaled $675.7 million, a net increase of $56.5 million from the December 31, 2012 net loan portfolio of $619.2 million. Net loans are reduced by the allowance for loan losses which totaled $10.2 million at June 30, 2013 and $10.3 million at December 31, 2012. Total loans net of unearned income were $685.9 million at June 30, 2013 compared to $629.5 million at December 31, 2012.

●	Total impaired loans decreased $9.2 million at June 30, 2013 to $39.4 million compared to $48.6 million at December 31, 2012.

●	Loans classified as Troubled Debt Restructurings ("TDRs") decreased $7.3 million to $9.3 million at June 30, 2013 from $16.6 million at December 31, 2012.

●	Other real estate increased $1.7 million to $4.1 million at June 30, 2013 from $2.4 million at December 31, 2012.

●	Return on average assets for the three months ended June 30, 2013 and June 30, 2012 was 0.61% and 0.88%, respectively. Return on average assets for the six months ended June 30, 2013 and June 30, 2012 was 0.61% and 0.89%, respectively. Return on average common equity for the three months ended June 30, 2013 and June 30, 2012 was 8.12% and 10.93%, respectively. Return on average common shareholders’ equity for the six months ended June 30, 2013 and June 30, 2012 was 7.91% and 11.25%, respectively. Return on average assets is calculated by dividing annualized net income before preferred dividends by average assets. Return on average common shareholders’ equity is calculated by dividing net income available to common shareholders by average common shareholders’ equity.

●	Book value per common share was $13.45 as of June 30, 2013 compared to $14.62 as of June 30, 2012. Book value per share was $15.06 at December 31, 2012. The decrease in book value is due to the change in accumulated other comprehensive income/loss (“AOCI”). Our AOCI is comprised of unrealized gains and losses on available for sale securities. The unrealized loss on available for sale securities at June 30, 2013 was $5.8 million compared to unrealized gains of $6.3 million and $6.0 million at June 30, 2012 and December 31, 2012, respectively.

●	The Company's Board of Directors declared cash dividends of $0.16 per common share in the second quarter of 2013 and 2012. Cash dividends declared for the six months ended June 30, 2013 and 2012 were $0.32 per common share.

Financial Condition

Changes in Financial Condition from December 31, 2012 to June 30, 2013

General.

Total assets at June 30, 2013 increased $15.2 million or 1.1% to $1.42 billion when compared to $1.41 billion at December 31, 2012. The increase in assets was from an increase in loans that was partially offset by a decrease in securities and cash.

Investment Securities.

Investment securities at June 30, 2013 totaled $647.0 million, a decrease of $14.2 million compared to $661.2 million at December 31, 2012. The decrease is primarily attributed to growth in the Company’s loan portfolio that was funded with surplus cash from sold, matured, and called securities. The investment portfolio consisted of available for sale securities at their fair market value total of $491.6 million and held to maturity securities at amortized cost total of $155.5 million.

The securities portfolio consisted principally of U.S. Government and Government agency securities, agency mortgage-backed securities, corporate debt securities and municipal bonds. The securities portfolio provides the Company with a balance to credit risk when compared to other categories of assets. Management monitors the securities portfolio for both credit and interest rate risk. The Company generally limits the purchase of corporate securities to individual issuers to manage concentration and credit risk. Corporate securities generally have a maturity of 10 years or less. U.S. Government securities consist of U.S. Treasury bills that have maturities of less than 30 days. Government agency securities generally have maturities of 15 years or less. Mortgage backed securities have stated final maturities of 15 to 20 years.

During the second quarter of 2013, the Company diversified its investment portfolio with agency mortgage backed securities as a strategy to increase cash flow and manage interest rate risk. A total of $66 million in mortgage backed securities were purchased and placed into the held to maturity category. These securities have a forecasted average life of 5 to 7 years and are used to collateralize public funds deposits. Management believes that the Company has the intent and ability to hold these securities to maturity.

At June 30, 2013, $41.2 million or 6.4% of the securities portfolio was scheduled to mature in less than one year. Securities with contractual maturity dates over 10 years totaled $107.9 million or 16.7% of the total portfolio. The weighted average contractual maturity of the securities portfolio was 7.5 years at June 30, 2013 compared to 7.0 years at December 31, 2012. The increase in contractual maturity from December 31, 2012 is mainly attributable to the purchase of longer dated mortgage-backed securities. The average maturity of the securities portfolio is affected by call options that may be exercised by the issuer of the securities and are influenced by market interest rates. Prepayments of mortgages that collateralize mortgage-backed securities also affect the maturity of the securities portfolio. Based on internal forecasts as of June 30, 2013, management believes that the securities portfolio has a forecasted weighted average life of approximately 5.5 years based on the current interest rate environment. A parallel interest rate shock of 400 basis points is forecasted to increase weighted average life of the portfolio to approximately 6.2 years.

Average securities as a percentage of average interest-earning assets were 46.8% for the six month period ended June 30, 2013 and 50.9 % for the same period in 2012. At June 30, 2013, the U.S Government and Government agency securities and municipal bonds qualified as securities available to collateralize repurchase agreements and public funds. Securities pledged totaled $512.5 million at June 30, 2013 and $476.5 million at December 31, 2012. See Note 3 of the Notes to Consolidated Financial Statements for more information on investment securities.

Loans.

Average loans as a percentage of average interest-earning assets were 47.6% for the six month period ended June 30, 2013 and 43.8% for the same period in 2012. Net loans increased $56.5 million or 9.1% to $675.7 million from $619.2 million at December 31, 2012. As we have increased our loans to qualified small businesses, as a part of the SBLF program, our preferred dividend on our SBLF capital has decreased to $0.2 million for the second quarter of 2013 from $0.5 million for the second quarter in 2012. Year to date 2013 the Company has paid $0.5 million on the SBLF capital compared to $1.0 million for the same period in 2012. We expect loans to increase and, consequently, our preferred dividend to continue to decrease throughout 2013. The dividend is expected to be $0.1 million for the third quarter of 2013. There are no significant concentrations of credit to any individual borrower. As of June 30, 2013, 72.8% of our loan portfolio was secured primarily or secondarily by real estate. The largest portion of our loan portfolio, at 48.4%, is non-farm non-residential loans secured by real estate.

Net loans are reduced by the allowance for loan losses which totaled $10.2 million at June 30, 2013 and $10.3 million at December 31, 2012. Loan charge-offs totaled $2.2 million during the first six months of 2013 and 2012. Recoveries totaled $0.3 million during the first six months of 2013 and 2012. See Note 4 of the Notes to Consolidated Financial Statements for more information on loans and Note 5 for information on the allowance for loan losses.

Nonperforming Assets.

Nonperforming assets consist of loans on which interest is no longer accrued and real estate acquired through foreclosure (other real estate). The accrual of interest is discontinued on loans when management believes there is reasonable uncertainty about the full collection of principal and interest or when the loan is contractually past due 90 days or more and not fully secured. If the principal amount of the loan is adequately secured, then interest income on such loans is recognized only in periods in which actual payments are received.

The table below sets forth the amounts and categories of our nonperforming assets and restructured loans where the interest rate or other terms have been renegotiated at the dates indicated.

(in thousands)	June 30, 2013			December 31, 2012
Nonaccrual loans:
Real Estate:
Construction and land development	$	122		$	854
Farmland		341			312
1 - 4 family residential		4,881			4,603
Multifamily		80			-
Non-farm non-residential		10,037			11,571
Total Real Estate		15,461			17,340
Non-Real Estate:
Agricultural		621			512
Commercial and industrial		2,091			2,831
Consumer and other		24			5
Total Non-Real Estate		2,736			3,348
Total nonaccrual loans		18,197			20,688

Loans 90 days and greater delinquent & accruing:
Real Estate:
Construction and land development		-			-
Farmland		-			-
1 - 4 family residential		336			455
Multifamily		-			-
Non-farm non-residential		283			-
Total Real Estate		619			455
Non-Real Estate:
Agricultural		-			-
Commercial and industrial		-			-
Consumer and other		-			-
Total Non-Real Estate		-			-
Total loans 90 days and greater delinquent & accruing		619			455

Total nonperforming loans	$	18,816		$	21,143

Real Estate Owned:
Real Estate Loans:
Construction and land development		949			1,083
Farmland		-			-
1 - 4 family residential		1,950			1,186
Multifamily		-			-
Non-farm non-residential		1,239			125
Total Real Estate		4,138			2,394
Non-Real Estate Loans:
Agricultural		-			-
Commercial and industrial		-			-
Consumer and other		-			-
Total Non-Real Estate		-			-
Total Real Estate Owned		4,138			2,394

Total nonperforming assets	$	22,954		$	23,537

Nonperforming assets to total loans		3.35	%		3.74	%
Nonperforming assets to total assets		1.61	%		1.67	%

(in thousands)	June 30, 2013		December 31, 2012
Restructured Loans:
In Compliance with Modified Terms	$	8,958	$	14,656
Past Due 30 through 89 days and still accruing		-		-
Past Due 90 days and greater and still accruing		-		-
Nonaccrual		324		221
Restructured Loans that subsequently defaulted		-		1,753
Total Restructured Loans	$	9,282	$	16,630

At June 30, 2013, nonperforming assets totaled $23.0 million compared to $23.5 million at December 31, 2012; a decrease of $0.6 million or 2.5%. Management has not identified additional information on any loans not already included in impaired loans or the nonperforming assets that indicates possible credit problems that could cause doubt as to the ability of borrowers to comply with the loan repayment terms in the future. Nonperforming assets consist of loans 90 days or greater delinquent and still accruing, nonaccrual loans, and other real estate.

At June 30, 2013 loans 90 days or greater delinquent and still accruing totaled $0.6 million; an increase of $0.2 million compared to the $0.5 million at December 31, 2012. This increase is due to the addition of $0.3 million of loans in the non-farm non-residential category that were 90 days or greater delinquent and still accruing and was partially offset by the reduction of $0.1 million in the 1-4 family category.

At June 30, 2013 nonaccrual loans totaled $18.2 million; a decrease of $2.5 million or 12.0% compared to nonaccrual loans of $20.7 million at December 31, 2012. Nonaccrual loans were concentrated in 3 credit relationships for a total of $9.2 million or 50.4% of nonaccrual loans at June 30, 2013.

Other real estate owned at June 30, 2013 totaled $4.1 million; an increase of $1.7 million from $2.4 million at December 31, 2012. The increase in other real estate owned is due to the additions of a $1.1 million residential property, a $0.3 million non-farm non-residential property, and a $0.8 million commercial property. The additions to other real estate were partially offset by sales of $0.4 million and write-downs of $0.1 million.

Allowance for Loan Losses.

The allowance for loan losses is maintained to absorb potential losses in the loan portfolio. The allowance is increased by the provision for anticipated loan losses as well as recoveries of previously charged off loans and is decreased by loan charge-offs. The provision is a charge to current expense to provide for current loan losses and to maintain the allowance commensurate with Management’s evaluation of the risks inherent in the loan portfolio. Various factors are taken into consideration when determining the amount of the provision and the adequacy of the allowance. These factors include but are not limited to:

●	past due and nonperforming assets;
●	specific internal analysis of loans requiring special attention;
●	the current level of regulatory classified and criticized assets and the associated risk factors with each;
●	changes in underwriting standards or lending procedures and policies;
●	charge off and recovery practices;
●	national and local economic and business conditions;
●	nature and volume of loans;
●	overall portfolio quality;
●	adequacy of loan collateral;
●	quality of loan review system and degree of oversight by its Board of Directors;
●	competition and legal and regulatory requirements on borrowers;
●	examinations of the loan portfolio by federal and state regulatory agencies and examinations; and
●	review by our internal loan review department and independent accountants.

The data collected from all sources in determining the adequacy of the allowance is evaluated on a regular basis by Management with regard to current national and local economic trends, prior loss history, underlying collateral values, credit concentrations and industry risks. An estimate of potential loss on specific loans is developed in conjunction with an overall risk evaluation of the total loan portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, and impaired. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Also, a specific reserve is allocated for our syndicated loans. The general component covers non-classified loans and special mention loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect the estimate of probable losses.

Provisions made pursuant to these processes totaled $1.7 million in the first six months of 2013 as compared to $2.1 million for the same period in 2012. The provisions made in the first six months of 2013 were taken to provide for current loan losses and to maintain the allowance proportionate to risks inherent in the loan portfolio. Total charge-offs were $2.2 million for first six months of 2013 and 2012. Recoveries totaled $0.3 million during the first six months of 2013 and 2012. For more information, see Note 5 to Consolidated Financial Statements.

Comparing June 30, 2013 to June 30, 2012, the decline in allowance provision is attributed to improvement in the credit quality of the loan portfolio and to the fact that the impaired loan portfolio did not suffer additional declines in estimated fair value. The credit quality improvements were across most loan portfolio types with the largest improvement in non-farm non-residential loans, commercial and industrial loans, and construction and land development.

The Company has charged off $2.2 million in loan balances during the first six months of 2013. The charged off loan balances were concentrated in 3 loan relationships which totaled $1.4 million or 63.6% of the total charged off amount. The details of the charged off loans in excess of $0.3 million are as follows:

1.	A $0.7 million charge-off was recorded for a commercial loan secured by accounts receivable and equipment. The loan had a balance of $0.7 million with a specific reserve of $0.5 million at December 31, 2012. Analysis of the credit indicated that additional charges were needed.
2.	A $0.4 million charge-off was recorded for a loan secured by real estate and accounts receivable. This loan had a recorded balance of $0.7 million at December 31, 2012 and a remaining recorded balance of $0.3 million as of June 30, 2013.
3.	A $0.3 million charge-off was recorded for a loan secured by owner occupied real estate that was foreclosed upon in the second quarter of 2013 and moved to other real estate owned. This loan had a recorded balance of $1.3 million at December 31, 2012. The balance in other real estate owned was $0.8 million as of June 30, 2013.

The remaining $0.8 million of charge-offs for the first six months of 2013 were comprised of smaller loans and overdrawn deposit accounts.

All accrued but uncollected interest related to a loan is deducted from income in the period the loan is placed on nonaccrual. During the period a loan is in nonaccrual status, any cash receipts are first applied to the principal balance. Once the principal balance has been fully recovered, any residual amounts are applied to expenses resulting from the collection of the payment and to the recovery of any reversed interest income and interest income that would have been due had the loan not been nonaccrual. As of June 30, 2013 and December 31, 2012 the Company had nonaccrual loans totaling $18.2 million and $20.7 million, respectively. The allowance for loan losses at June 30, 2013 was $10.2 million or 1.5% of total loans and 54.1% of nonperforming loans. See Note 4 and 5 of the Notes to Consolidated Financial Statements for more information on loans and the allowance for loan losses.

Other information relating to loans, the allowance for loan losses and other pertinent statistics follows.

(in thousands)	June 30, 2013			June 30, 2012
Loans:
Average outstanding balance	$	648,344		$	577,254
Balance at end of period	$	685,857		$	597,011

Allowance for Loan Losses:
Balance at beginning of year	$	10,342		$	8,879
Charge-offs		(2,165	)		(2,178	)
Recoveries		296			336
Provision		1,704			2,104
Balance at end of period	$	10,177		$	9,141

Deposits.

Managing the mix and pricing the maturities of deposit liabilities is an important factor affecting our ability to maximize our net interest margin. The strategies used to manage interest-bearing deposit liabilities are designed to adjust as the interest rate environment changes. In this regard, we regularly assess our funding needs, deposit pricing and interest rate outlooks. From December 31, 2012 to June 30, 2013, total deposits increased $10.2 million, or 0.8%, to $1.3 billion at June 30, 2013. Noninterest-bearing demand deposits decreased $1.5 million from December 31, 2012 to June 30, 2013. Interest-bearing demand deposits increased by $5.2 million when comparing June 30, 2013 to December 31, 2012. Time deposits increased $5.3 million, or 0.8% to $653.7 million at June 30, 2013, compared to $648.4 million at December 31, 2012.

At June 30, 2013, public fund deposits totaled $476.7 million compared to $476.5 million at December 31, 2012. The Company has developed a program for the development and management of public fund deposits. Since 2007, the Company has maintained public fund deposits in excess of $175.0 million. These deposits are from local government entities such as school districts, hospital districts, sheriff departments and other municipalities. Several of these accounts are under contracts with terms up to three years. Public funds deposit accounts are collateralized by FHLB letters of credit and by eligible Government and Government agency securities such as those issued by the FHLB, FFCB, FNMA, and FHLMC. Management believes that public funds provide a low cost and stable source of funding for the Company.

As of June 30, 2013, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $433.5 million. At June 30, 2013, approximately $243.3 million of the Company's certificates of deposit had a remaining term greater than one year.

As we seek to strengthen our net interest margin and improve our earnings, attracting core noninterest-bearing deposits will remain a primary emphasis. Management will continue to evaluate and update our product mix in its efforts to attract additional core customers. We currently offer a number of noninterest-bearing deposit products that are competitively priced and designed to attract and retain customers with primary emphasis on core deposits. We have also offered several different time deposit promotions in an effort to increase our core deposits and to increase liquidity.

The following table compares deposit categories for the periods indicated.

					Increase (Decrease)
(in thousands except for %)	June 30, 2013		December 31, 2012		Amount			Percent
Noninterest-bearing demand	$	190,727	$	192,232	$	(1,505	)	-0.8	%
Interest-bearing demand		354,113		348,870		5,243		1.5	%
Savings		64,279		63,062		1,217		1.9	%
Time		653,729		648,448		5,281		0.8	%
Total deposits	$	1,262,848	$	1,252,612	$	10,236		0.8	%

The following table sets forth the distribution of our time deposit accounts.

(in thousands)	June 30, 2013
Time deposits of less than $100,000	$	220,182
Time deposits of $100,000 through $250,000		168,590
Time deposits of more than $250,000		264,957
Total Time Deposits	$	653,729

The following table sets forth public funds as a percent of total deposits.

	June 30,			December 31,
(in thousands except for %)	2013			2012			2011			2010			2009
Total Public Funds	$	476,733		$	470,498		$	431,905		$	356,153		$	268,474
Total Deposits	$	1,262,848		$	1,252,612		$	1,207,302		$	1,007,383		$	799,746
Total Public Funds as a percent of Total Deposits		37.8	%		37.6	%		35.8	%		35.4	%		33.6	%

Borrowings.

The Company maintains borrowing relationships with other financial institutions as well as the Federal Home Loan Bank on a short and long-term basis to meet liquidity needs. At June 30, 2013, short-term borrowings totaled $29.4 million which is an increase of $14.6 million from December 31, 2012. Short-term borrowings consisted of repurchase agreements of $13.1 million, federal funds purchased of $14.5 million and a line of credit totaling $1.8 million. Overnight repurchase agreement balances are monitored daily for sufficient collateralization. The Company had long-term borrowings totaling $0.8 million as of June 30, 2013 and $1.1 million at December 31, 2012.

The average amount of total short-term borrowings as of June 30, 2013 totaled $15.2 million, compared to $13.0 million as of June 30, 2012. At June 30, 2013, the Company had $70.0 million in Federal Home Loan Bank letters of credit outstanding obtained solely for collateralizing public deposits.

Equity.

Stockholders’ equity provides a source of permanent funding, allows for future growth and the ability to absorb unforeseen adverse developments. Total equity decreased to $124.1 million at June 30, 2013 from $134.2 million at December 31, 2012. The decrease in stockholders' equity was the result of the other comprehensive loss for the six month period ended June 30, 2013 of $11.8 million. The other comprehensive loss is the result of the change from an unrealized gain on available for sale securities at December 31, 2012 to an unrealized loss on available for sale securities at June 30, 2013. The other comprehensive loss was partially offset by net income for the six month period ended June 30, 2013 of $4.2 million. Retained earnings are reduced by common dividends of $2.0 million and preferred dividends of $0.5 million for a total addition to the Company's retained earnings of $1.7 million.

Results of Operations for the Second Quarter and Six Months Ended June 30, 2013 and 2012

Net Income.

Net income for the quarter ending June 30, 2013 was $2.1 million, a decrease of $0.8 million from $3.0 million for the quarter ending June 30, 2012. Net income for the six months ended June 30, 2013 was $4.2 million, a decrease of $1.8 million or 29.8% from $6.0 million for the six months ended June 30, 2012. For the quarter ending June 30, 2013, the Company had net income available to common shareholders of $1.9 million, a decrease of $0.5 million from the same quarter in 2012 net income available to common shareholders of $2.5 million. Net income available to common shareholders for the six months ended June 30, 2013 was $3.7 million which is a decrease of $1.3 million from $5.0 million for the same period in 2012. The decrease in net income for 2013 was primarily the result of lower interest income on securities from the shortening of the maturity of the portfolio. The decrease in securities interest income was partially offset by decreased interest expense. Net gains on securities for the second quarter of 2013 and 2012 were $0.8 million. Net gains on securities for the first six months of 2013 and 2012 were $1.5 million. Earnings per common share for the second quarter ended June 30, 2012 was $0.31 per common share, a decrease of 21.6% or $0.08 per common share from $0.39 per common share for the second quarter ended June 30, 2012. Earnings per common share for the six months ended June 30, 2013 was $0.59 per common share, a decrease of 25.7% or $0.21 per common share from $0.80 per common share for the six months ended June 30, 2012.

Net Interest Income.

Net interest income is the largest component of our earnings, and is calculated by subtracting the cost of interest-bearing liabilities from the income earned on interest-earning assets. This represents the earnings from our primary business of gathering deposits, and making loans and investments. Our long-term objective is to manage this income to generate optimal income that balances interest rate risk, credit risk, and liquidity risks.

A financial institution’s asset and liability structure is substantially different from that of a non-financial company, in that virtually all assets and liabilities are monetary in nature. Accordingly, changes in interest rates, which are generally impacted by inflation rates, may have a significant impact on a financial institution’s performance. The impact of interest rate changes depends on the sensitivity to the change of our interest-earning assets and interest-bearing liabilities. The effects of the varying interest rate environment in recent years and our interest sensitivity position is discussed below.

Net interest income in the second quarter of 2013 was $9.6 million compared to $10.8 million for the second quarter of 2012. Net interest income for the first six months of 2013 and 2012 was $19.2 million and $21.7 million, respectively. Interest from loans represents the largest portion of interest income from the Company's interest-earning assets, and 49.8% of our total loans are floating rate loans which are primarily tied to the prime lending rate or the London Inter-Bank Offered Rate (LIBOR). Of the $341.5 million of loans that have floating rates, $233.6 million are currently at their floor rate. The lower cost of our interest-bearing liabilities reflects a lower cost of funds from the Company repricing deposits. As of June 30, 2013, time deposits represented 51.8% of total deposits, which is unchanged from December 31, 2012.

The average yield on interest-earning assets decreased from 4.36% at June 30, 2012 to 3.68% at June 30, 2013. The interest-bearing liabilities average yield decreased to 1.09% at June 30, 2013, compared to 1.32% at June 30, 2012. The net yield on interest-earning assets was 2.59% for the six months ended June 30, 2013, compared to 3.04% for the same period in 2012.

The net interest income yield shown below in the average balance sheet is calculated by dividing net interest income by average interest-earning assets and is a measure of the efficiency of the earnings from balance sheet activities. It is affected by changes in the difference between interest on interest-earning assets and interest-bearing liabilities and the percentage of interest-earning assets funded by interest-bearing liabilities.

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

	June 30, 2013						June 30, 2012
(in thousands except for %)	Average Balance		Interest		Yield/Rate		Average Balance		Interest		Yield/Rate
Assets
Interest-earning assets:
Interest-earning deposits with banks	$	73,166	$	91	0.25	%	$	38,899	$	36	0.19	%
Securities (including FHLB stock)		637,824		6,604	2.08	%		670,723		10,938	3.27	%
Federal funds sold		2,311		1	0.09	%		30,380		7	0.05	%
Loans, net of unearned income		648,344		18,285	5.66	%		577,254		17,635	6.13	%
Total interest-earning assets		1,361,645	$	24,981	3.68	%		1,317,256	$	28,616	4.36	%

Noninterest-earning assets:
Cash and due from banks		9,451						10,128
Premises and equipment, net		19,543						19,844
Other assets		7,273						13,484
Total Assets	$	1,397,912					$	1,360,712

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Demand deposits	$	331,453	$	682	0.41	%	$	309,945	$	700	0.45	%
Savings deposits		64,119		25	0.08	%		58,587		27	0.09	%
Time deposits		650,389		4,991	1.54	%		670,468		6,123	1.83	%
Borrowings		16,152		75	0.93	%		15,779		73	0.92	%
Total interest-bearing liabilities		1,062,113	$	5,773	1.09	%		1,054,779	$	6,923	1.32	%

Noninterest-bearing liabilities:
Demand deposits		195,603						170,811
Other		5,530						5,826
Total Liabilities		1,263,246						176,637

Stockholders' equity		134,666						129,296
Total Liabilities and Stockholders'	$	1,397,912					$	1,360,712
Net interest income			$	19,208					$	21,693

Net interest rate spread (1)					2.59	%					3.04	%
Net interest-earning assets (2)	$	299,532					$	262,477
Net interest margin (3)					2.83	%					3.30	%

Average interest-earning assets to interest-bearing liabilities					128.20	%					124.88	%

(1)	Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2)	Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(3)	Net interest margin represents net interest income divided by average total interest-earning assets.

Provision for Loan Losses.

The provision for loan losses was $0.8 million and $0.9 million for the second quarter of 2013 and 2012, respectively. For the six months ending June 30, 2013, the provision for loan loss was $1.7 million, a decrease from $2.1 million for the first six months of 2012. The allowance for loan losses at June 30, 2013 was $10.2 million, compared to $10.3 million at December 31, 2012, and was 1.5% and 1.6% of total loans, respectively. We believe that the allowance is adequate to cover losses in the loan portfolio given the current economic conditions, expected net charge-offs and nonperforming asset levels.

Noninterest Income.

For the quarters ending June 30, 2013 and 2012, noninterest income totaled $2.3 million and $2.4 million, respectively. Service charges, commissions and fees totaled $1.2 million for the second quarter ended June 30, 2013 and 2012. Net securities gains were $0.8 million for the second quarter of 2013 and 2012. Other noninterest income was $0.3 million for the second quarter ended June 30, 2013 and $0.4 million for the same period in 2012. Noninterest income totaled $4.5 million for the six months ended June 30, 2013; a decrease of $0.1 million when compared to $4.7 million for the six months ended June 30, 2012. Service charges, commissions and fees totaled $2.3 million for the six months ended June 30, 2013 and $2.4 million for the same period of 2012. Net securities gains were $1.5 million for the first six months of 2013 and 2012. Other noninterest income decreased by $0.1 million to $0.7 million in the first six months of 2013 compared to $0.8 million for the same period in 2012.

Noninterest Expense.

Noninterest expense includes salaries and employee benefits, occupancy and equipment expense and other types of expenses. Noninterest expense totaled $7.8 million in the second quarter of 2013 and $7.9 million in 2012. Noninterest expense increased from $15.1 million for the first six months of 2012 to $15.6 million for the first six months of 2013. Salaries and benefits totaled $3.6 million for the second quarter of 2013 compared to $3.4 million for the second quarter of 2012. For the first six months of 2013 and 2012, salaries and benefits totaled $7.2 million and $6.7 million, respectively. Occupancy and equipment expense totaled $1.0 million for the second quarter of 2013 and $0.9 million for the second quarter of 2012. Occupancy and equipment expense totaled $2.0 million for the first six months of 2013 and $1.9 million for the same period in 2012. Other noninterest expense totaled $3.2 million in the second quarter of 2013, compared to $3.6 million the second quarter of 2012. Other noninterest expense decreased by $0.1 million to $6.4 million for the six months ended June 30, 2013 from $6.5 million for the six months ended June 30, 2012.

The following is a summary of the significant components of other noninterest expense:

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2013		2012		2013		2012
Other noninterest expense:
Legal and professional fees	$	565	$	601	$	1,087	$	1,089
Data processing		319		703		651		1,365
Marketing and public relations		233		246		477		420
Taxes - sales, capital, and franchise		177		181		324		359
Operating supplies		128		131		287		275
Travel and lodging		151		155		296		285
Net costs from other real estate and repossessions		163		582		431		901
Regulatory assessment		483		293		959		497
Other		990		689		1,896		1,350
Total other expense	$	3,209	$	3,581	$	6,408	$	6,541

Income Taxes.

The provision for income taxes was $1.1 million and $1.5 million for the quarters ended June 30, 2013 and 2012. The provision for the six months ended June 30, 2013 and 2012 was $2.3 million and $3.1 million, respectively. The Company's statutory tax rate was 34.0% which was unchanged from the second quarter of 2012.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability Management and Market Risk

Asset/Liability Management.

Our asset/liability management (ALM) process consists of quantifying, analyzing and controlling interest rate risk (IRR) to maintain reasonably stable net interest income levels under various interest rate environments. The principal objective of ALM is to maximize net interest income while operating within acceptable limits established for interest rate risk and to maintain adequate levels of liquidity.

The majority of our assets and liabilities are monetary in nature. Consequently, one of our most significant forms of market risk is interest rate risk. Our assets, consisting primarily of loans secured by real estate and fixed rate securities in our investment portfolio, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Our Board of Directors has established two committees, the Management Asset Liability Committee and the Board Investment Committee, to oversee the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. The Management Asset Liability Committee is comprised of senior members of Management and meets as needed to review our asset liability policies and interest rate risk position. The Board Investment Committee is comprised of board members and meets monthly. Senior Management makes a monthly report to the Board Investment Committee.

The interest spread and liability funding discussed below are directly related to changes in asset and liability mixes, volumes, maturities and repricing opportunities for interest-earning assets and interest-bearing liabilities. Interest-sensitive assets and liabilities are those which are subject to repricing in the near term, including both floating or adjustable rate instruments and instruments approaching maturity. The interest sensitivity gap is the difference between total interest-sensitive assets and total interest-sensitive liabilities. Interest rates on our various asset and liability categories do not respond uniformly to changing market conditions. Interest rate risk is the degree to which interest rate fluctuations in the marketplace can affect net interest income.

The need for interest sensitivity gap management is most critical in times of rapid changes in overall interest rates. Because of the significant impact on net interest margin from mismatches in repricing opportunities, the asset-liability mix is monitored periodically depending upon Management’s assessment of current business conditions and the interest rate outlook. Exposure to interest rate fluctuations is maintained within prudent levels by the use of varying investment strategies.

The following interest sensitivity analysis is one measurement of interest rate risk and is set forth on the following table. This analysis reflects the maturity and repricing of the principal of assets and liabilities over various time periods. This analysis does not factor in prepayments or principal payments and includes floating rate loans with floor rates at June 30, 2013 totaling $233.6 million as floating loans. Considering these factors could have a significant impact on the report. The table excludes nonaccrual loans at June 30, 2013 totaling $18.2 million. The gap indicates whether more assets or liabilities are subject to repricing over a given time period. The interest sensitivity analysis at June 30, 2013 shown below reflects a liability-sensitive position with a negative cumulative gap on a one-year basis.

	June 30, 2013
	Interest Sensitivity Within
(in thousands except for %)	3 Months Or Less			Over 3 Months thru 12 Months			Total One Year			Over One Year		Total
Earning Assets:
Loans (including loans held for sale)	$	357,341		$	54,603		$	411,944		$	255,716	$	667,660
Securities (including FHLB stock)		42,567			6,222			48,789			599,533		648,322
Federal Funds Sold		1,064			-			1,064			-		1,064
Other earning assets		45,993			-			45,993			-		45,993
Total earning assets	$	446,965		$	60,825		$	507,790		$	855,249	$	1,363,039

Source of Funds:
Interest-bearing accounts:
Demand deposits	$	354,113		$	-		$	354,113		$	-	$	354,113
Savings deposits		64,279			-			64,279			-		64,279
Time deposits		173,150			237,312			410,462			243,267		653,729
Short-term borrowings		29,385			-			29,385			-		29,385
Long-term borrowings		150			450			600			200		800
Noninterest-bearing, net		-			-			-			260,733		260,733
Total source of funds	$	621,077		$	237,762		$	858,839		$	504,200	$	1,363,039

Period gap	$	(174,112	)	$	(176,937	)	$	(351,049	)	$	351,049
Cumulative gap	$	(174,112	)	$	(351,049	)	$	(351,049	)	$	-

Cumulative gap as a percent of earning assets		-12.8	%		-25.8	%		-25.8	%

Liquidity and Capital Resources

Liquidity.

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

Loans maturing within one year or less at June 30, 2013 totaled $180.4 million. At June 30, 2013, time deposits maturing within one year or less totaled $410.5 million. The Company’s held to maturity ("HTM") portfolio at June 30, 2013 was $155.5 million or 24% of the investment portfolio compared to $58.9 million or 8.9% at December 31, 2012. The securities in the held to maturity portfolio are used to collateralize public funds deposits and may also be used to secure borrowings with the Federal Home Loan Bank or Federal Reserve Bank. The agency securities in the HTM portfolio have maturities of 10 years or less. The mortgage backed securities have stated final maturities of 15 to 20 years at June 30, 2013. The HTM portfolio had a forecasted weighted average life of approximately 5.3 years based on current interest rates. Management regularly monitors the size and composition of the HTM portfolio to evaluate its effect on the Company’s liquidity. The Company’s available for sale portfolio was $491.6 million or 76% of the investment portfolio as of June 30, 2013. The majority of the AFS portfolio was comprised of U.S. Treasuries, U.S. Government Agencies, and investment grade corporate bonds. Management believes these securities are readily marketable and enhance the Company’s liquidity.

The Company maintained a net borrowing capacity at the Federal Home Loan Bank totaling $77.8 million and $99.0 million at June 30, 2013 and December 31, 2012, respectively. The Company also has a discount window line with the Federal Reserve Bank. We also maintain federal funds lines of credit at various correspondent banks with borrowing capacity of $70.5 million and a revolving line of credit for $2.5 million with an availability of $0.7 million as of June 30, 2013. Management believes there is sufficient liquidity to satisfy current operating needs.

Capital Resources.

The Company's capital position is reflected in stockholders’ equity, subject to certain adjustments for regulatory purposes. Further, our capital base allows us to take advantage of business opportunities while maintaining the level of resources we deem appropriate to address business risks inherent in daily operations.

Stockholders’ equity provides a source of permanent funding, allows for future growth and the ability to absorb unforeseen adverse developments. Total equity decreased to $124.1 million at June 30, 2013 from $134.2 million at December 31, 2012. The decrease in stockholders' equity was the result of the other comprehensive loss for the six month period ended June 30, 2013 of $11.8 million. The other comprehensive loss is the result of the change from an unrealized gain on available for sale securities at December 31, 2012 to an unrealized loss on available for sale securities at June 30, 2013. The other comprehensive loss was partially offset by net income for the six month period ended June 30, 2013 of $4.2 million. The earnings are reduced by common dividends of $2.0 million and preferred dividends of $0.5 million for a total addition to the Company's retained earnings of $1.7 million.

Regulatory Capital.

Risk-based capital regulations adopted by the FDIC require banks to achieve and maintain specified ratios of capital to risk-weighted assets. Similar capital regulations apply to bank holding companies. The risk-based capital rules are designed to measure “Tier 1” capital (consisting of common equity, retained earnings and a limited amount of qualifying perpetual preferred stock and trust preferred securities, net of goodwill and other intangible assets and accumulated other comprehensive income) and total capital in relation to the credit risk of both on- and off- balance sheet items. Under the guidelines, one of its risk weights is applied to the different on balance sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk weighting. All bank holding companies and banks must maintain a minimum total capital to total risk weighted assets ratio of 8.00%, at least half of which must be in the form of core or Tier 1 capital. These guidelines also specify that bank holding companies that are experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels.

At June 30, 2013, we satisfied the minimum regulatory capital requirements and were well capitalized within the meaning of federal regulatory requirements.

	"Well Capitalized Minimums"		As of June 30, 2013		As of December 31, 2012
Tier 1 Leverage Ratio
Consolidated	5.00	%	9.09	%	9.24	%
Bank	5.00	%	9.12	%	9.34	%

Tier 1 Risk-based Capital Ratio
Consolidated	6.00	%	13.54	%	14.13	%
Bank	6.00	%	13.60	%	14.29	%

Total Risk-based Capital Ratio
Consolidated	10.00	%	14.64	%	15.31	%
Bank	10.00	%	14.70	%	15.47	%

At June 30, 2013, we satisfied the minimum regulatory capital requirements and were well capitalized within the meaning of federal regulatory requirements.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As defined by the Securities and Exchange Commission in Exchange Act Rules 13a-15(e) and 15d-15(e), a Company's “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within time periods specified in the Commission’s rules and forms. The Company maintains such controls designed to ensure this material information is communicated to Management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decision regarding required disclosure.

Management, with the participation of the CEO and CFO, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, the CEO and CFO have concluded that the disclosure controls and procedures as of the end of the period covered by this quarterly report are effective. There were no changes in the Company's internal control over financial reporting during the last fiscal quarter in the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject to various other legal proceedings in the normal course of business and otherwise. It is our belief that the ultimate resolution of such other claims will not have a material adverse effect on the Company's financial position or results of operations.

Item 1A. Risk Factors

There have been no material changes in the risk factors disclosed by the Company in its Annual Report on Form 10-K with the Securities and Exchange Commission.

Exhibit
Number	Exhibit

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

14.3	Code of Conduct for Employees, Officers, and Directors

14.4	Code of Ethics for Senior Financial Officers

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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRST GUARANTY BANCSHARES, INC.


Date: August 13, 2013		By: /s/ Alton B. Lewis
		Alton B. Lewis
		Principal Executive Officer


Date: August 13, 2013		By: /s/ Eric J. Dosch
		Eric J. Dosch
		Principal Financial Officer
		Secretary and Treasurer