First Guaranty Bancshares (FGBI) 10-Q 2014 Q1 Quarterly report

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 March 31, 2014

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 oAccelerated filer oNon-accelerated filer oSmaller reporting company x

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

Yes o No x

As of May 13, 2014 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 March 31, 2014 and December 31, 2013	3
	Consolidated Statements of Income for the three months ended March 31, 2014 and 2013	4
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013	5
	Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2014 and 2013	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	37
Part II.	Other Information	37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 6.	Exhibits	37
Signatures		38

2

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)	March 31, 2014			December 31, 2013
Assets
Cash and cash equivalents:
Cash and due from banks	$	79,586		$	60,819
Federal funds sold		252			665
Cash and cash equivalents		79,838			61,484
Interest-earning time deposits with banks		747			747
Investment securities:
Available for sale, at fair value		473,104			484,211
Held to maturity, at cost (estimated fair value of $140,414 and $141,642 respectively)		146,597			150,293
Investment securities		619,701			634,504
Federal Home Loan Bank stock, at cost		999			1,835
Loans held for sale		-			88
Loans, net of unearned income		709,911			703,166
Less: allowance for loan losses		9,617			10,355
Net loans		700,294			692,811
Premises and equipment, net		19,459			19,612
Goodwill		1,999			1,999
Intangible assets, net		1,986			2,073
Other real estate, net		2,743			3,357
Accrued interest receivable		6,414			6,258
Other assets		7,674			11,673
Total Assets	$	1,441,854		$	1,436,441
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing demand	$	193,680		$	204,291
Interest-bearing demand		395,640			391,350
Savings		67,546			65,445
Time		639,903			642,013
Total deposits		1,296,769			1,303,099
Short-term borrowings		10,189			5,788
Accrued interest payable		2,517			2,364
Long-term borrowing		350			500
Other liabilities		2,573			1,285
Total Liabilities		1,312,398			1,313,036
Stockholders' Equity
Preferred stock:
Series C - $1,000 par value - authorized 39,435 shares; issued and outstanding 39,435		39,435			39,435
Common stock:
$1 par value - authorized 100,600,000 shares; issued 6,294,227 shares		6,294			6,294
Surplus		39,387			39,387
Treasury stock, at cost, 2,895 shares		(54	)		(54	)
Retained earnings		49,156			47,477
Accumulated other comprehensive (loss) income		(4,762	)		(9,134	)
Total Stockholders' Equity		129,456			123,405
Total Liabilities and Stockholders' Equity	$	1,441,854		$	1,436,441
See Notes to the Consolidated Financial Statements.

3

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
	Three Months Ended March 31,
(in thousands, except share data)	2014			2013
Interest Income:
Loans (including fees)	$	9,508		$	9,096
Deposits with other banks		32			40
Securities (including FHLB stock)		3,341			3,368
Total Interest Income		12,881			12,504
Interest Expense:
Demand deposits		351			362
Savings deposits		8			14
Time deposits		1,967			2,506
Borrowings		30			38
Total Interest Expense		2,356			2,920
Net Interest Income		10,525			9,584
Less: Provision for loan losses		300			904
Net Interest Income after Provision for Loan Losses		10,225			8,680
Noninterest Income:
Service charges, commissions and fees		1,072			1,151
Net gains on securities		153			777
Net gains on sale of loans		19			(25	)
Gain on sale of assets		9			-
Other		378			327
Total Noninterest Income		1,631			2,230
Noninterest Expense:
Salaries and employee benefits		3,830			3,526
Occupancy and equipment expense		993			981
Other		2,801			3,197
Total Noninterest Expense		7,624			7,704
Income Before Income Taxes		4,232			3,206
Less: Provision for income taxes		1,447			1,117
Net Income		2,785			2,089
Preferred Stock Dividends		(99	)		(283	)
Income Available to Common Shareholders	$	2,686		$	1,806
Per Common Share:
Cash dividends paid	$	0.16		$	0.16
Earnings	$	0.43		$	0.29
Weighted Average Common Shares Outstanding		6,291,332			6,291,332
See Notes to the Consolidated Financial Statements.

4

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	Three Months Ended March 31,
(in thousands)	2014			2013
Net Income	$	2,785		$	2,089
Other comprehensive income (loss):
Unrealized (losses) gains on securities:
Unrealized holding gains (losses) arising during the period		6,777			(552	)
Reclassification adjustments for net gains included in net income		(153	)		(777	)
Change in unrealized (losses) gains on securities		6,624			(1,329	)
Tax impact		(2,252	)		452
Other comprehensive income (loss)		4,372			(877	)
Comprehensive Income	$	7,157		$	1,212
See Notes to Consolidated Financial Statements

5

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
	Series C												Accumulated
	Preferred		Common										Other
	Stock		Stock				Treasury			Retained			Comprehensive
	$1,000 Par		$1 Par		Surplus		Stock			Earnings			Income/(Loss)			Total
(in thousands, except per share data)
Balance December 31, 2012	$	39,435	$	6,294	$	39,387	$	(54	)	$	43,071		$	6,048		$	134,181
Net income		-		-		-		-			2,089			-			2,089
Other comprehensive income		-		-		-		-			-			(877	)		(877	)
Cash dividends on common stock ($0.16 per share)		-		-		-		-			(1,006	)		-			(1,006	)
Preferred stock dividend		-		-		-		-			(283	)		-			(283	)
Balance March 31, 2013 (unaudited)	$	39,435	$	6,294	$	39,387	$	(54	)	$	43,871		$	5,171		$	134,104
Balance December 31, 2013	$	39,435	$	6,294	$	39,387	$	(54	)	$	47,477		$	(9,134	)	$	123,405
Net Income		-		-		-		-			2,785			-			2,785
Other comprehensive income		-		-		-		-			-			4,372			4,372
Cash dividends on common stock ($0.16 per share)		-		-		-		-			(1,007	)		-			(1,007	)
Preferred stock dividend		-		-		-		-			(99	)		-			(99	)
Balance March 31, 2014 (unaudited)	$	39,435	$	6,294	$	39,387	$	(54	)	$	49,156		$	(4,762	)	$	129,456
See Notes to Consolidated Financial Statements

6

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
	Three Months Ended March 31,
(in thousands)	2014			2013
Cash Flows From Operating Activities
Net income	$	2,785		$	2,089
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		300			904
Depreciation and amortization		540			527
Amortization/Accretion of investments		493			511
Gain on calls and sales of securities		(153	)		(777	)
(Loss) gain on sale of assets		(21	)		25
ORE write downs and loss on disposition		16			24
Net decrease in loans held for sale		88			557
FHLB stock dividends		(1	)		-
Change in other assets and liabilities, net		3,029			1,365
Net Cash Provided By Operating Activities		7,076			5,225
Cash Flows From Investing Activities
Proceeds from maturities and calls of HTM securities		3,646			11,000
Proceeds from maturities, calls and sales of AFS securities		236,839			283,452
Funds Invested in AFS securities		(219,399	)		(253,879	)
Proceeds from sale/redemption of Federal Home Loan Bank stock		838			720
Net increase in loans		(8,018	)		(27,894	)
Purchase of premises and equipment		(308	)		(372	)
Proceeds from sales of premises and equipment		32			-
Proceeds from sales of other real estate owned		833			231
Net Cash Provided By Investing Activities		14,463			13,258
Cash Flows From Financing Activities
Net decrease in deposits		(6,330	)	$	(24,822	)
Net increase (decrease) in federal funds purchased and short-term borrowings		4,401			(72	)
Repayment of long-term borrowings		(150	)		(150	)
Dividends paid		(1,106	)		(1,289	)
Net Cash Used In Financing Activities		(3,185	)		(26,333	)
Net Increase (Decrease) In Cash and Cash Equivalents		18,354			(7,850	)
Cash and Cash Equivalents at the Beginning of the Period		61,484			86,233
Cash and Cash Equivalents at the End of the Period	$	79,838		$	78,383
Noncash Activities:
Loans transferred to foreclosed assets	$	235		$	2,270
Cash Paid During The Period:
Interest on deposits and borrowed funds	$	2,203		$	2,581
Income taxes	$	500		$	-
See Notes to the Consolidated Financial Statements.

7

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, 2013.

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

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the consolidated financial statements. Those adjustments are of a normal recurring nature. The results of operations for the three month periods ended March 31, 2014 and 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

The FASB has issued Accounting Standards Update (ASU) No. 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) -Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.  The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized.

These amendments clarify that an in substance reposession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completiton of a deed in lieu of foreclosure or through a similar legal agreement.  Additional disclosures are required.

The amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014.  The adoption of this guidance is not expected to have a material impact upon the Company's financial statements.

8

Note 3. Securities

A summary comparison of securities by type at March 31, 2014 and December 31, 2013 is shown below.

	March 31, 2014									December 31, 2013
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale:
U.S Treasuries	$	30,000	$	-	$	-		$	30,000	$	36,000	$	-	$	-		$	36,000
U.S. Government Agencies		302,825		-		(11,286	)		291,539		302,816		-		(16,117	)		286,699
Corporate debt securities		130,961		4,535		(934	)		134,562		142,580		3,729		(1,828	)		144,481
Mutual funds or other equity securities		564		-		(6	)		558		564		-		(8	)		556
Municipal bonds		15,970		475		-			16,445		16,091		384		-			16,475
Total available-for-sale securities		480,320		5,010		(12,226	)		473,104		498,051		4,113		(17,953	)		484,211
Held to maturity:
U.S. Government Agencies		84,474		-		(4,242	)		80,232		86,927		-		(5,971	)		80,956
Mortgage-backed securities		62,123		-		(1,941	)		60,182		63,366		-		(2,680	)		60,686
Total held to maturity securities	$	146,597	$	-	$	(6,183	)	$	140,414	$	150,293	$	-	$	(8,651	)	$	141,642

The scheduled maturities of securities at March 31, 2014, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to call or prepayments. Mortgage-backed securities are not due at a single maturity because of amortization and potential prepayment of the underlying mortgages. For this reason they are presented separately in the maturity table below.

	March 31, 2014
(in thousands)	Amortized Cost		Fair Value
Available-for-sale:
Due in one year or less	$	40,015	$	40,130
Due after one year through five years		192,283		192,199
Due after five years through 10 years		208,387		203,221
Over 10 years		39,635		37,554
Total available-for-sale securities		480,320		473,104
Held to maturity:
Due in one year or less		-		-
Due after one year through five years		5,000		4,827
Due after five years through 10 years		79,474		75,405
Over 10 years		-		-
Subtotal		84,474		80,232
Mortgage-backed Securities		62,123		60,182
Total held to maturity securities	$	146,597	$	140,414

At March 31, 2014 $493.8 million of the Company's securities were pledged as collateral for public fund deposits and borrowings.  The pledged securities had a market value of $487.6 million as of March 31, 2014.

The following is a summary of the fair value of securities with gross unrealized losses and an aging of those gross unrealized losses:

	At March 31, 2014
	Less Than 12 Months						12 Months or More						Total
(in thousands)	Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses
Available-for-sale:
U.S. Treasuries	2	$	20,000	$	-		-	$	-	$	-		2	$	20,000	$	-
U.S. Government agencies	59		211,356		(7,160	)	27		80,183		(4,126	)	86		291,539		(11,286	)
Corporate debt securities	79		23,106		(611	)	23		5,114		(323	)	102		28,220		(934	)
Mutual funds or other equity securities	-		-		-	)	1		494		(6	)	1		494		(6	)
Total available-for-sale securities	140		254,462		(7,771	)	51		85,791		(4,455	)	191		340,253		(12,226	)
Held to maturity:
U.S. Government agencies	12		47,296		(2,512	)	8		32,936		(1,730	)	20		80,232		(4,242	)
Mortgage-backed securities	26		60,182		(1,941	)	-		-		-		26		60,182		(1,941	)
Total held to maturity securities	38	$	107,478	$	(4,453	)	8	$	32,936	$	(1,730	)	46	$	140,414	$	(6,183	)

9

Proceeds from sales of securities classified as available for sale amounted to $10.1 million and $3.7 million for March 31, 2014 and 2013 respectively.

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

Investment securities issued by the U.S. Government and Government sponsored agencies with unrealized losses and the amount of unrealized losses on those investment securities are the result of changes in market interest rates. The Company has the ability and intent to hold these securities until recovery, which may not be until maturity.

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

The Company believes that the securities with unrealized losses reflect impairment that is temporary and there are currently no securities with other-than-temporary impairment. There were no impairments recognized on securities in the years 2012, 2013 or the first quarter 2014. 

At March 31, 2014, the Company's exposure to investment securities issuers that exceeded 10% of stockholders’ equity is as follows:

	At March 31, 2014
(in thousands)	Amortized Cost		Fair Value
U.S Treasury	$	30,000	$	30,000
Federal Home Loan Bank (FHLB)		139,593		133,219
Federal Home Loan Mortgage Corporation (Freddie Mac-FHLMC)		50,411		48,209
Federal National Mortgage Association (Fannie Mae-FNMA)		137,773		133,111
Federal Farm Credit Bank (FFCB)		121,645		117,414
Total	$	479,422	$	461,953

10

Note 4. Loans

The following table summarizes the components of the Company's loan portfolio as of March 31, 2014 and December 31, 2013:

	March 31, 2014					December 31, 2013
(in thousands except for %)	Balance			As % of Category		Balance			As % of Category
Real Estate:
Construction & land development	$	49,792		7.0	%	$	47,550		6.7	%
Farmland		9,759		1.4	%		9,826		1.4	%
1- 4 Family		107,613		15.1	%		103,764		14.7	%
Multifamily		13,688		2.0	%		13,771		2.0	%
Non-farm non-residential		334,889		47.0	%		336,071		47.7	%
Total Real Estate		515,741		72.5	%		510,982		72.5	%
Non-real Estate:
Agricultural		20,675		2.9	%		21,749		3.1	%
Commercial and industrial		154,769		21.8	%		151,087		21.4	%
Consumer and other		20,463		2.8	%		20,917		3.0	%
Total Non-real Estate		195,907		27.5	%		193,753		27.5	%
Total loans before unearned income		711,648		100.0	%		704,735		100.0	%
Unearned income		(1,737	)				(1,569	)
Total loans net of unearned income	$	709,911				$	703,166

The following table summarizes fixed and floating rate loans by contractual maturity as of March 31, 2014 and December 31, 2013 unadjusted for scheduled principal payments, prepayments, or repricing opportunities. The average life of the loan portfolio may be substantially less than the contractual terms when these adjustments are considered.

	March 31, 2014							December 31, 2013
(in thousands)	Fixed		Floating		Total			Fixed		Floating		Total
One year or less	$	71,734	$	63,967	$	135,701		$	60,642	$	70,602	$	131,244
One to five years		207,552		221,336		428,888			220,490		209,587		430,077
Five to 15 years		73,908		31,273		105,181			71,655		26,076		97,731
Over 15 years		12,027		16,902		28,929			8,503		22,695		31,198
Subtotal	$	365,221	$	333,478		698,699		$	361,290	$	328,960		690,250
Nonaccrual loans						12,949							14,485
Total loans before unearned income						711,648							704,735
Unearned income						(1,737	)						(1,569	)
Total loans net of unearned income					$	709,911						$	703,166

As of March 31, 2014 $206.6 million of floating rate loans were at their interest rate floor. At December 31, 2013 $209.5 million of floating rate loans were at the floor rate. Nonaccrual loans have been excluded from these totals.

The following tables present the age analysis of past due loans at March 31, 2014 and December 31, 2013:

	As of March 31, 2014
(in thousands)	30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Loans			Recorded Investment 90 Days Accruing
Real Estate:
Construction & land development	$	214	$	117	$	331	$	49,461	$	49,792		$	-
Farmland		16		95		111		9,648		9,759			-
1 - 4 family		2,924		4,202		7,126		100,487		107,613			187
Multifamily		-		-		-		13,688		13,688			-
Non-farm non-residential		1,954		6,466		8,420		326,469		334,889			-
Total Real Estate		5,108		10,880		15,988		499,753		515,741			187
Non-Real Estate:
Agricultural		28		370		398		20,277		20,675			-
Commercial and industrial		52		1,878		1,930		152,839		154,769			-
Consumer and other		58		7		65		20,398		20,463			-
Total Non-Real Estate		138		2,255		2,393		193,514		195,907			-
Total loans before unearned income	$	5,246	$	13,135	$	18,381	$	693,267	$	711,648		$	187
Unearned income										(1,737	)
Total loans net of unearned income									$	709,911

11

The following tables present the age analysis of past due loans for the periods indicated:

	As of December 31, 2013
(in thousands)	30-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days Accruing
Real Estate:
Construction & land development	$	100	$	73	$	173	$	47,377	$	47,550		$	-
Farmland		-		130		130		9,696		9,826			-
1 - 4 family		3,534		4,662		8,196		95,568		103,764			414
Multifamily		-		-		-		13,771		13,771			-
Non-farm non-residential		154		7,539		7,693		328,378		336,071			-
Total Real Estate		3,788		12,404		16,192		494,790		510,982			414
Non-Real Estate:
Agricultural		-		526		526		21,223		21,749			-
Commercial and industrial		63		1,946		2,009		149,078		151,087			-
Consumer and other		123		23		146		20,771		20,917			-
Total Non-Real Estate		186		2,495		2,681		191,072		193,753			-
Total loans before unearned income	$	3,974	$	14,899	$	18,873	$	685,862		704,735		$	414
Unearned income										(1,569	)
Total loans net of unearned income									$	703,166

The tables above include $12.9 million and $14.5 million of nonaccrual loans for March 31, 2014 and December 31, 2013,  respectively. See the tables below for more detail on nonaccrual loans.

The following is a summary of nonaccrual loans by class for the periods indicated:

(in thousands)	March 31, 2014		December 31, 2013
Real Estate:
Construction & land development	$	117	$	73
Farmland		95		130
1 - 4 family		4,015		4,248
Multifamily		-		-
Non-farm non-residential		6,466		7,539
Total Real Estate		10,693		11,990
Non-Real Estate:
Agricultural		370		526
Commercial and industrial		1,878		1,946
Consumer and other		7		23
Total Non-Real Estate		2,255		2,495
Total Nonaccrual Loans	$	12,948	$	14,485

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

	As of March 31, 2014											As of December 31, 2013
(in thousands)	Pass		Special Mention		Substandard		Doubtful		Total			Pass		Special Mention		Substandard		Doubtful		Total
Real Estate:
Construction & land development	$	43,010	$	1,303	$	5,479	$	-	$	49,792		$	40,286	$	1,330	$	5,934	$	-	$	47,550
Farmland		9,582		102		75		-		9,759			9,631		85		110		-		9,826
1 - 4 family		92,379		5,661		9,573		-		107,613			89,623		4,060		10,081		-		103,764
Multifamily		5,816		6,531		1,341		-		13,688			5,884		5,936		1,951		-		13,771
Non-farm non-residential		304,755		11,028		19,106		-		334,889			305,992		9,196		20,883		-		336,071
Total Real Estate		455,542		24,625		35,574		-		515,741			451,416		20,607		38,959		-		510,982
Non-Real Estate:
Agricultural		20,418		10		247		-		20,675			21,486		11		252		-		21,749
Commercial and industrial		153,290		890		589		-		154,769			149,930		592		565		-		151,087
Consumer and other		20,249		154		60		-		20,463			20,720		117		80		-		20,917
Total Non-Real Estate		193,957		1,054		896		-		195,907			192,136		720		897		-		193,753
Total loans before unearned income	$	649,499	$	25,679	$	36,470	$	-		711,648		$	643,552	$	21,327	$	39,856	$	-		704,735
Unearned income										(1,737	)										(1,569	)
Total loans net of unearned income									$	709,911										$	703,166

12

Note 5. Allowance for Loan Losses

A summary of changes in the allowance for loan losses, by portfolio type, for the three months ended March 31, 2014 and 2013 are as follows:

	As of March 31,
	2014												2013
(in thousands)	Beginning Allowance (12/31/13)		Charge-offs			Recoveries		Provision			Ending Allowance (3/31/14)		Beginning Allowance (12/31/12)		Charge-offs			Recoveries		Provision			Ending Allowance(3/31/13)
Real Estate:
Construction & land development	$	1,530	$	-		$	1	$	193		$	1,724	$	1,098	$	(219	)	$	1	$	338		$	1,218
Farmland		17		-			-		1			18		50		-			-		(13	)		37
1 - 4 family		1,974		(24	)		30		(321	)		1,659		2,239		(68	)		22		(1	)		2,192
Multifamily		376		-			-		69			445		284		-			-		-			284
Non-farm non-residential		3,607		(865	)		6		489			3,237		3,666		(898	)		1		246			3,015
Total Real Estate		7,504		(889	)		37		431			7,083		7,337		(1,185	)		24		570			6,746
Non-Real Estate:
Agricultural		46		-			-		(8	)		38		64		-			1		(2	)		63
Commercial and industrial		2,176		(149	)		6		(217	)		1,816		2,488		(679	)		4		182			1,995
Consumer and other		208		(99	)		56		25			190		233		(65	)		61		(18	)		211
Unallocated		421		-			-		69			490		220		-			-		172			392
Total Non-Real Estate		2,851		(248	)		62		(131	)		2,534		3,005		(744	)		66		334			2,661
Total	$	10,355	$	(1,137	)	$	99	$	300		$	9,617	$	10,342	$	(1,929	)	$	90	$	904		$	9,407

13

A summary of the allowance and loans individually and collectively evaluated for impairment are as follows:

	As of March 31, 2014
(in thousands)	Allowance Individually Evaluated for Impairment		Allowance Collectively Evaluated for Impairment		Total Allowance for Credit Losses		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans before Unearned Income
Real Estate:
Construction & land development	$	1,316	$	408	$	1,724	$	5,327	$	44,465	$	49,792
Farmland		-		18		18		-		9,759		9,759
1 - 4 family		26		1,633		1,659		2,856		104,757		107,613
Multifamily		301		144		445		1,341		12,347		13,688
Non-farm non-residential		538		2,699		3,237		17,791		317,098		334,889
Total Real Estate		2,181		4,902		7,083		27,315		488,426		515,741
Non-Real Estate:
Agricultural		-		38		38		-		20,675		20,675
Commercial and industrial		-		1,816		1,816		-		154,769		154,769
Consumer and other		-		190		190		-		20,463		20,463
Unallocated		-		490		490
Total Non-Real Estate		-		2,534		2,534		-		195,907		195,907
Total	$	2,181	$	7,436	$	9,617	$	27,315	$	684,333		711,648
Unearned Income												(1,737	)
Total loans net of unearned income											$	709,911

	As of December 31, 2013
(in thousands)	Allowance Individually Evaluated for Impairment		Allowance Collectively Evaluated for Impairment		Total Allowance for Credit Losses		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans before Unearned Income
Real Estate:
Construction & land development	$	1,166	$	364	$	1,530	$	5,777	$	41,773	$	47,550
Farmland		-		17		17		-		9,826		9,826
1 - 4 family		25		1,949		1,974		2,868		100,896		103,764
Multifamily		304		72		376		1,951		11,820		13,771
Non-farm non-residential		1,053		2,554		3,607		19,279		316,792		336,071
Total Real Estate		2,548		4,956		7,504		29,875		481,107		510,982
Non-Real Estate:
Agricultural		-		46		46		-		21,749		21,749
Commercial and industrial		-		2,176		2,176		-		151,087		151,087
Consumer and other		-		208		208		-		20,917		20,917
Unallocated		-		421		421
Total Non-Real Estate		-		2,851		2,851		-		193,753		193,753
Total	$	2,548	$	7,807	$	10,355	$	29,875	$	674,860		704,735
Unearned Income												(1,569	)
Total loans net of unearned income											$	703,166

As of March 31, 2014, the Company has no outstanding commitments to advance additional funds in connection with impaired loans.

14

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

	As of March 31, 2014
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Cash Basis
Impaired Loans with no related allowance:
Real Estate:
Construction & land development	$	1,644	$	1,644	$	-	$	1,851	$	77	$	78
Farmland		-		-		-		-		-		-
1 - 4 family		441		441		-		441		10		10
Multifamily		-		-		-		602		16		17
Non-farm non-residential		7,877		8,739		-		8,408		139		138
Total Real Estate		9,962		10,824		-		11,302		242		243
Non-Real Estate:
Agricultural		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate		-		-		-		-		-		-
Total Impaired Loans with no related allowance		9,962		10,824		-		11,302		242		243
Impaired Loans with an allowance recorded:
Real estate:
Construction & land development		3,683		3,683		1,316		3,767		89		89
Farmland		-		-		-		-		-		-
1 - 4 family		2,415		2,614		26		2,418		62		62
Multifamily		1,341		1,341		301		1,341		27		27
Non-farm non-residential		9,914		13,614		538		10,163		136		136
Total Real Estate		17,353		21,252		2,181		17,689		314		314
Non-Real Estate:
Agricultural		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate		-		-		-		-		-		-
Total Impaired Loans with an allowance recorded		17,353		21,252		2,181		17,689		314		314
Total Impaired Loans	$	27,315	$	32,076	$	2,181	$	28,991	$	556	$	557

15

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

	As of December 31, 2013
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Cash Basis
Impaired Loans with no related allowance:
Real Estate:
Construction & land development	$	-	$	-	$	-	$	599	$	35	$	36
Farmland		-		-		-		-		-		-
1 - 4 family		441		441		-		472		28		35
Multifamily		607		607		-		5,890		359		382
Non-farm non-residential		4,722		5,456		-		7,579		425		527
Total Real Estate		5,770		6,504		-		14,540		847		980
Non-Real Estate:
Agricultural		-		-		-		-		-		-
Commercial and industrial		-		-		-		1,472		134		162
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate		-		-		-		1,472		134		162
Total Impaired Loans with no related allowance		5,770		6,504		-		16,012		981		1,142
Impaired Loans with an allowance recorded:
Real estate:
Construction & land development		5,777		5,777		1,166		6,345		383		360
Farmland		-		-		-		-		-		-
1 - 4 family		2,427		2,620		25		1,643		121		107
Multifamily		1,344		1,344		304		1,348		89		96
Non-farm non-residential		14,557		17,469		1,053		14,868		775		573
Total Real Estate		24,105		27,210		2,548		24,204		1,368		1,136
Non-Real Estate:
Agricultural		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate		-		-		-		-		-		-
Total Impaired Loans with an allowance recorded		24,105		27,210		2,548		24,204		1,368		1,136
Total Impaired Loans	$	29,875	$	33,714	$	2,548	$	40,216	$	2,349	$	2,278

16

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 March 31, 2014 and December 31, 2013:

Troubled Debt Restructurings	March 31, 2014								December 31, 2013
	Accruing Loans								Accruing Loans
(in thousands)	Current		30-89 Days Past Due		Nonaccrual		Total TDRs		Current		30-89 Days Past Due		Nonaccrual		Total TDRs
Real Estate:
Construction & land development	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Farmland		-		-		-		-		-		-		-		-
1-4 Family		-		-		-		-		-		-		-		-
Multifamily		-		-		-		-		-		-		-		-
Non-farm non residential		3,006		-		230		3,236		3,006		-		230		3,236
Total Real Estate		3,006		-		230		3,236		3,006		-		230		3,236
Non-Real Estate:								-
Agricultural		-		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-		-		-
Total Non-Real Estate		-		-		-		-		-		-		-		-
Total	$	3,006	$	-	$	230	$	3,236	$	3,006	$	-	$	230	$	3,236

The following table discloses TDR activity for the three months ended March 31, 2014.

	Trouble Debt Restructured Loans Activity
	Three Months Ended March 31, 2014
(in thousands)	Beginning balance (December 31, 2013)		New TDRs		Charge-offs post-modification		Transferred to ORE		Paydowns		Construction to permanent financing		Restructured to market terms		Ending balance (March 31, 2014)
Real Estate:
Construction & land development	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Farmland		-		-		-		-		-		-		-		-
1 - 4 family		-		-		-		-		-		-		-		-
Multifamily		-		-		-		-		-		-		-		-
Non-farm non-residential		3,236		-		-		-		-		-		-		3,236
Total Real Estate		3,236		-		-		-		-		-		-		3,236
Non-Real Estate:
Agricultural		-		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-		-		-
Total Non-Real Estate		-		-		-		-		-		-		-		-
Total Impaired Loans with no related allowance	$	3,236	$	-	$	-	$	-	$	-	$	-	$	-	$	3,236

There were no commitments to lend additional funds to debtors whose terms have been modified in a troubled debt restructuring at March 31, 2014.

17

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 the Homestead Bancorp in 2007. Goodwill totaled $2.0 million at March 31, 2014 and December 31, 2013. No impairment charges have been recognized on the Company's intangible assets.Mortgage servicing rights were relatively unchanged totaling $0.1 million at March 31, 2014 and December 31, 2013. Other intangible assets recorded include core deposit intangibles, which are subject to amortization. The weighted-average amortization period remaining for the Company's core deposit intangibles is 7.0 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)	March 31, 2014		December 31, 2013
Real Estate Owned Acquired by Foreclosure:
Residential	$	1,480	$	1,803
Construction & land development		463		754
Non-farm non-residential		800		800
Total Other Real Estate Owned and Foreclosed Property	$	2,743	$	3,357

Loans secured by one to four family residential properties in the process of foeclosure totaled $1.0 million as of March 31, 2014.  

Note 8. Commitments and Contingencies

Off-balance sheet commitments

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

The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual notional amount of those instruments. The same credit policies are used in making commitments and conditional obligations as it does for on-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 March 31, 2014 and December 31, 2013:

Contract Amount
(in thousands)	March 31, 2014		December 31, 2013
Commitments to Extend Credit	$	42,469	$	30,516
Unfunded Commitments under lines of credit	$	110,172	$	115,311
Commercial and Standby letters of credit	$	7,667	$	7,695

Litigation

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

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

18

Note 9. Accumulated Other Comprehensive Income

The following table details the changes in the single component of accumulated other comprehensive income for the three months ended March 31, 2014:

(in thousands)	Unrealized (Loss) Gain on Securities Available for Sale
Accumulated Other Comprehensive (Loss) Income:
Balance December 31, 2013	$	(9,134)
Reclassification adjustments to net income:
Realized gains on securities		(153	)
Provision for income taxes		52
Unrealized losses arising during the period, net of tax		4,473
Balance March 31, 2014	$	(4,762	)

The following table details the changes in the single component of accumulated other comprehensive income for the three months ended March 31, 2013:

(in thousands)	Unrealized (Loss) Gain on Securities Available for Sale
Accumulated Other Comprehensive (Loss) Income:
Balance December 31, 2012	$	6,048
Reclassification adjustments to net income:
Realized gains on securities		(777	)
Provision for income taxes		264
Unrealized losses arising during the period, net of tax		(363	)
Balance March 31, 2013	$	5,171

19

Note 10. Fair Value Measurements

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

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

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

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

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

Securities available for sale. Securities are classified within Level 1 where quoted market prices are available in an active market. Inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are unavailable, fair value is estimated using quoted prices of securities with similar characteristics, at which point the securities would be classified within Level 2 of the hierarchy. Securities classified Level 3 as of March 31, 2014 include municipal bonds and an equity security.

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

Other real estate owned. Properties are recorded at the balance of the loan or at estimated fair value less estimated selling costs, whichever is less, at the date acquired. Fair values of other real estate owned ("OREO") at March 31, 2014 are determined by sales agreement or appraisal, and costs to sell are based on estimation per the terms and conditions of the sales agreement or amounts commonly used in real estate transactions. Inputs include appraisal values or recent sales activity for similar assets in the property’s market; thus OREO measured at fair value would be classified within Level 2 of the hierarchy.

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

The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

(in thousands)	March 31, 2014		December 31, 2013
Available for Sale Securities Fair Value Measurements Using:
Level 1: Quoted Prices in Active Markets For Identical Assets	$	30,494	$	36,492
Level 2: Significant Other Observable Inputs		436,384		441,885
Level 3: Significant Unobservable Inputs		6,226		5,834
Securities available for sale measured at fair value	$	473,104	$	484,211

The Company's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While Management believes the methodologies used are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value.

The change in Level 3 securities available for sale from December 31, 2013 was due to principally to the purchase of a municipal bond $0.4 million.

20

The following table reconciles assets measured at fair value on a recurring basis using unobservable inputs (Level 3):

	Level 3 Changes
(in thousands)	March 31, 2014		December 31, 2013
Balance, beginning of time period	$	5,834	$	6,707
Total gains or losses (realized/unrealized):
Included in earnings				-
Included in other comprehensive income		-		-
Purchases, sales, issuances and settlements, net		392		(873	)
Transfers in and/or out of Level 3		-		-
Balance as of end of time period	$	6,226	$	5,834

There were no gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held as of March 31, 2014.

The following table measures financial assets and financial liabilities measured at fair value on a non-recurring basis as of March 31, 2014 and December 31, 2013, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:

(in thousands)	At March 31, 2014		At December 31, 2013
Fair Value Measurements Using: Impaired Loans
Level 1: Quoted Prices in Active Markets For Identical Assets	$	-	$	-
Level 2: Significant Other Observable Inputs		4,908		9,282
Level 3: Significant Unobservable Inputs		12,445		14,823
Impaired loans measured at fair value	$	17,353	$	24,105
Fair Value Measurements Using: Other Real Estate Owned
Level 1: Quoted Prices in Active Markets For Identical Assets	$	-	$	-
Level 2: Significant Other Observable Inputs		2,743		3,357
Level 3: Significant Unobservable Inputs		-		-
Other real estate owned measured at fair value	$	2,743	$	3,357

ASC 825-10 provides the Company with an option to report selected financial assets and liabilities at fair value. The fair value option established by this statement permits the Company to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each reporting date subsequent to implementation.

The Company has chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States.

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Note 11. Financial Instruments

Fair value estimates are generally subjective in nature and are dependent upon a number of significant assumptions associated with each instrument or group of similar instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows and relevant available market information. Fair value information is intended to represent an estimate of an amount at which a financial instrument could be exchanged in a current transaction between a willing buyer and seller engaging in an exchange transaction. However, since there are no established trading markets for a significant portion of the Company’s financial instruments, the Company may not be able to immediately settle financial instruments; as such, the fair values are not necessarily indicative of the amounts that could be realized through immediate settlement. In addition, the majority of the financial instruments, such as loans and deposits, are held to maturity and are realized or paid according to the contractual agreement with the customer.

Quoted market prices are used to estimate fair values when available. However, due to the nature of the financial instruments, in many instances quoted market prices are not available. Accordingly, estimated fair values have been estimated based on other valuation techniques, such as discounting estimated future cash flows using a rate commensurate with the risks involved or other acceptable methods. Fair values are estimated without regard to any premium or discount that may result from concentrations of ownership of financial instruments, possible income tax ramifications or estimated transaction costs. The fair value estimates are subjective in nature and involve matters of significant judgment and, therefore, cannot be determined with precision. Fair values are also estimated at a specific point in time and are based on interest rates and other assumptions at that date. As events change the assumptions underlying these estimates, the fair values of financial instruments will change.

Disclosure of fair values is not required for certain items such as lease financing, investments accounted for under the equity method of accounting, obligations of pension and other postretirement benefits, premises and equipment, other real estate, prepaid expenses, the value of long-term relationships with depositors (core deposit intangibles) and other customer relationships, other intangible assets and income tax assets and liabilities. Fair value estimates are presented for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses have not been considered in the estimates. Accordingly, the aggregate fair value amounts presented do not purport to represent and should not be considered representative of the underlying market or franchise value of the Company.

Because the standard permits many alternative calculation techniques and because numerous assumptions have been used to estimate the fair values, reasonable comparison of the fair value information with other financial institutions' fair value information cannot necessarily be made. The methods and assumptions used to estimate the fair values of financial instruments are as follows:

Cash and due from banks, interest-bearing deposits with banks, federal funds sold and federal funds purchased.

These items are generally short-term and the carrying amounts reported in the consolidated balance sheets are a reasonable estimation of the fair values.

Investment Securities.

Fair values are principally based on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or the use of discounted cash flow analyses.

Loans Held for Sale.

Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices. These loans are classified within level 3 of the fair value hierarchy.

Loans, net.

Market values are computed present values using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. These loans are classified within level 3 of the fair value hierarchy.

Accrued interest receivable.

The carrying amount of accrued interest receivable approximates its fair value.

Deposits.

Market values are actually computed present values using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. Deposits are classified within level 3 of the fair value hierarchy.

Accrued interest payable.

The carrying amount of accrued interest payable approximates its fair value.

22

Borrowings.

The carrying amount of federal funds purchased and other short-term borrowings approximate their fair values. The fair value of the Company’s long-term borrowings is computed using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. Borrowings are classified within level 3 of the fair value hierarchy.

Other Unrecognized Financial Instruments.

The fair value of commitments to extend credit is estimated using the fees charged to enter into similar legally binding agreements, taking into account the remaining terms of the agreements and customers' credit ratings. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Noninterest-bearing deposits are held at cost. The fair values of letters of credit are based on fees charged for similar agreements or on estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At March 31, 2014 and December 31, 2013 the fair value of guarantees under commercial and standby letters of credit was not material.

The estimated fair values and carrying values of the financial instruments at March 31, 2014 and December 31, 2013 are presented in the following table:

	March 31, 2014				December 31, 2013
(in thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets
Cash and cash equivalents	$	79,838	$	79,838	$	61,484	$	61,484
Securities, available for sale	$	473,104	$	473,104	$	484,211	$	484,211
Securities, held to maturity	$	146,597	$	140,414	$	150,293	$	141,642
Federal Home Loan Bank stock	$	999	$	999	$	1,835	$	1,835
Loans, net	$	709,911	$	711,091	$	703,166	$	703,025
Accrued interest receivable	$	6,414	$	6,414	$	6,258	$	6,258
Liabilities
Deposits	$	1,296,769	$	1,265,465	$	1,303,099	$	1,265,898
Borrowings	$	10,539	$	10,539	$	6,288	$	6,288
Accrued interest payable	$	2,517	$	2,517	$	2,364	$	2,364

There is no material difference between the contract amount and the estimated fair value of off-balance sheet items that are primarily comprised of short-term unfunded loan commitments that are generally at market prices.

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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 March 31, 2014 and for the three months ended March 31, 2014 and 2013 have been derived from unaudited consolidated financial statements and include, in the opinion of management, all adjustments (consisting of normal recurring accruals and provisions) necessary to present fairly the Company's financial position and results of operations for such periods.

First Guaranty Bancshares, Inc. is a bank holding company headquartered in Hammond, LA with one wholly owned subsidiary, First Guaranty Bank. First Guaranty Bank is a Louisiana 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.

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First Quarter 2014 Financial Overview

Financial highlights for the three month periods of 2014 and 2013 are as follows:

● Net income for the first quarter of 2014 and 2013 was $2.8 million and $2.1 million, respectively. Net income to common shareholders after preferred stock dividends was $2.7 million and $1.8 million for the first quarter of 2014 and 2013, with earnings per common share of $0.43 and $0.29, respectively. The increase in net income for the first quarter of 2014 when compared to the first quarter of 2013 was primarily the result of an increase in loan interest income, a decrease in interest expense, and a decrease in provision for loan losses.

● Net interest income for the first quarter of 2014 and 2013 was $10.5 million and $9.6 million, respectively. The net interest margin was 2.98% for the first quarter 2014 and 2.85% for the same period in 2013.

● The provision for loan losses for the first quarter of 2014 was $0.3 million compared to $0.9 million for the first quarter of 2013.

● Total assets at March 31, 2014 were $1.44 billion; a increase of $5.4 million or 0.4% from December 31, 2013. The increase in assets was primarily from an increase in loans.

● Investment securities totaled $619.7 million at March 31, 2014, a decrease of $14.8 million when compared to $634.5 million at December 31, 2013. At March 31, 2014, available for sale securities, at fair value, totaled $473.1 million; a decrease of $11.1 million when compared to $484.2 million at December 31, 2013. At March 31, 2014, held to maturity securities, at amortized cost, totaled $146.6 million; a decrease of $3.7 million when compared to $150.3 million at December 31, 2013.

●   The weighted average life of the securities portfolio at March 31, 2014 was 5.6 years a decline of 0.1 years when compared to the average life of 5.7 years at December 31, 2013.

● The net loan portfolio at March 31, 2014 totaled $700.3 million, a net increase of $7.5 million from the December 31, 2013 net loan portfolio of $692.8 million. Loans are reduced by the allowance for loan losses which totaled $9.6 million for March 31, 2014 and $10.4 million for December 31, 2013.

● Total impaired loans decreased $2.6 million at March 31, 2014 to $27.3 million compared to $29.9 million at December 31, 2013.

● Loans classified as Troubled Debt Restructurings ("TDRs") stayed at the same level of $3.2 million for March 31, 2014 and December 31, 2013.

● Total deposits decreased $6.3 million or 0.5% at March 31, 2014 compared to December 31, 2013. This decrease is from seasonal fluctuation of public fund deposits.

● Return on average assets for the three months ended March 31, 2014 and March 31, 2013 was 0.78% and 0.60%, respectively. Return on average common shareholders’ equity, adjusted for preferred stock dividends, for the three months ended March 31, 2014 and March 31, 2013 was 12.27% and 7.69%, respectively. Return on average assets is calculated by dividing annualized net income before preferred dividends by average assets. Return on common shareholders’ equity is calculated by dividing net earnings applicable to common shareholders by average common shareholders’ equity.

● The Company's Board of Directors declared a cash dividend of $0.16 per common share in the first quarters of 2014 and 2013.

● Other real estate decreased $0.7 million to $2.7 million at March 31, 2014 from $3.4 million at December 31, 2013. 

● Book value per common share was $14.31 as of March 31, 2014 compared to $13.35 as of December 31, 2013. The increase in book value per share is a result of the decrease in the unrealized loss on available for sale securities and due to an increase in retained earnings..

● Preferred stock dividends from participation in the U.S. Treasury's Small Business Lending Fund ("SBLF") decreased $0.2 million to $0.1 million for the first quarter of 2014 compared to $0.3 million for the same period in 2013. The reduction was due to the increase in qualified small business loans.  The Company is at the contractual minimum rate of 1.0% on the SBLF preferred stock.

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Financial Condition

Changes in Financial Condition from December 31, 2013 to March 31, 2014

General.

Total assets as of March 31, 2014 were $1.44 billion; a increase $5.4 million or 0.4% from December 31, 2013. The increase in assets represents an increase in loans.

Investment Securities.

Investment securities at March 31, 2014 totaled $619.7 million, a decrease of $14.8 million compared to $634.5 million at December 31, 2013. The decrease is attributed to the sale of corporate securities and a reduction in short term Treasury bills used for seasonal public funds pledging.  The investment portfolio consisted of available for sale securities at their fair market value total of $473.1 million and held to maturity securities at amortized cost total of $146.6 million.

The securities portfolio consisted principally of U.S. Government agency securities, agency backed mortgage backed securities, corporate debt securities and municipal bonds. The securities portfolio provides the Company with a relatively stable source of income and provides a balance to credit risk when compared to other categories of assets. Management monitors the securities portfolio for both credit and interest rate risk. The Company generally limits the purchase of corporate securities to individual issuers to manage concentration and credit risk. Corporate securities generally have a maturity of 10 years or less. Government agency securities generally have maturities of 15 years or less. Corporate securities held at fair value totaled $134.6 million at March 31, 2014. U.S. Government Agency securities that were held at fair value totaled $291.5 million at March 31, 2014. Agency securities that were held for maturity and carried at amortized cost totaled $84.5 million at March 31, 2014. The fair value of held to maturity agency securities was $80.2 million at March 31, 2014.  Mortgage backed securities that were held for maturity and carried at amortized cost totaled $62.1 million at March 31, 2014.  The fair value of held to maturity mortgage backed securities was $60.2 million at March 31, 2014.

At March 31, 2014, $40.0 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 $39.6 million or 6.3% of the total portfolio. Mortgage backed securities totaled $62.1 million or 9.9% of the investment portfolio.  The weighted average contractual maturity of the securities portfolio was 5.6 years at March 31, 2014 compared to 5.7 years at December 31, 2013. 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.

Average securities as a percentage of average interest-earning assets were 45.5% for the three month period ended March 31, 2014 and 47.9% for the same period in 2013. At March 31, 2014, the U.S Government agency securities and municipal bonds qualified as securities pledgeable to collateralize repurchase agreements and public funds. Securities pledged totaled $493.8 million at March 31, 2014 and $503.1 million at December 31, 2013. See Note 3 of the Notes to Consolidated Financial Statements for more information on investment securities.

Loans.

Average loans as a percentage of average interest-earning assets were 49.8% for the three month period ended March 31, 2014 and 46.2% for the same period in 2013.  Net loans increased $7.5 million or 1.1% from $692.8 million at December 31, 2013. As we have increased our loans to qualified small businesses, as a part of the SBLF program, our preferred dividend on our SBLF capital has decreased to $0.1 million for the first quarter of 2014 from $0.3 million for the same period in 2013.  There are no significant concentrations of credit to any individual borrower. As of March 31, 2014, 72.5% of our loan portfolio was secured primarily or secondarily by real estate. The largest portion of our loan portfolio, at 47.0%, is non-farm non-residential loans secured by real estate.

Net loans are reduced by the allowance for loan losses which totaled $9.6 million for March 31, 2014 and $10.4 million for December 31, 2013. Loan charge offs totaled $1.1 million during the first three months of 2014, compared to $1.9 million during the same period of 2013. Recoveries totaled $0.1 million during the first three months of 2014 and $0.1 million during the first three months of 2013. See Note 4 of the Notes to Consolidated Financial Statements for more information on loans and Note 5 for information on the allowance for loan losses.

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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 non-performing assets and restructured loans where the interest rate or other terms have been renegotiated at the dates indicated.

(in thousands)	March 31, 2014			December 31, 2013
Nonaccrual loans:
Real Estate:
Construction and land development	$	117		$	73
Farmland		95			130
1 - 4 family residential		4,015			4,248
Multifamily		-			-
Non-farm non-residential		6,466			7,539
Total Real Estate		10,693			11,990
Non-Real Estate:
Agricultural		370			526
Commercial and industrial		1,878			1,946
Consumer and other		7			23
Total Non-Real Estate		2,555			2,495
Total nonaccrual loans		12,948			14,485
Loans 90 days and greater delinquent & accruing:
Real Estate:
Construction and land development		-			-
Farmland		-			-
1 - 4 family residential		187			414
Multifamily		-			-
Non-farm non-residential		-			-
Total Real Estate		187			414
Non-Real Estate:
Agricultural		-			-
Commercial and industrial		-			-
Consumer and other		-			-
Total Non-Real Estate		-			-
Total loans 90 days and greater delinquent & accruing		187			414
Total non-performing loans	$	13,135		$	14,899
Real Estate Owned:
Real Estate Loans:
Construction and land development		463			754
Farmland		-			-
1 - 4 family residential		1,480			1,803
Multifamily		-			-
Non-farm non-residential		800			800
Total Real Estate		2,743			3,357
Non-Real Estate Loans:
Agricultural		-			-
Commercial and industrial		-			-
Consumer and other		-			-
Total Non-Real Estate		-			-
Total Real Estate Owned		2,743			3,357
Total non-performing assets	$	15,878		$	18,256
Non-performing assets to total loans		2.2	%		2.6	%
Non-performing assets to total assets		1.1	%		1.27	%

27

(in thousands)	March 31, 2014		December 31, 2013
Restructured Loans:
In Compliance with Modified Terms	$	3,006	$	3,006
Past Due 30 through 89 days and still accruing		-		-
Past Due 90 days and greater and still accruing		-		-
Nonaccrual		230		230
Restructured Loans that subsequently defaulted		-
Total Restructured Loans	$	3,236	$	3,236

At March 31, 2014, nonperforming assets totaled $15.9 million compared to $18.3 million at December 31, 2013; a decrease of 13.1% or $2.4 million. 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 March 31, 2014 loans 90 days or greater delinquent and still accruing totaled $0.2 million; a decrease of $0.2 million or 50.0% compared to the $0.4 million total at December 31, 2013. 

At March 31, 2014 nonaccrual loans totaled $12.9 million; a decrease of $1.5 million or 10.6% compared to December 31, 2013 nonaccrual loans of $14.5 million. Nonaccrual loans were concentrated in 4 credit relationships for a total of $6.4 million or 49.1% of nonaccrual loans at March 31, 2014.

Other real estate owned at March 31, 2014 totaled $2.7 million; a decrease of $0.7 million from $3.4 million at December 31, 2013.

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Allowance for Loan Losses.

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

● past due and nonperforming assets;

● specific internal analysis of loans requiring special attention;

● the current level of regulatory classified and criticized assets and the associated risk factors with each;

● changes in underwriting standards or lending procedures and policies;

● charge off and recovery practices;

● national and local economic and business conditions;

● nature and volume of loans;

● overall portfolio quality;

● adequacy of loan collateral;

● quality of loan review system and degree of oversight by its Board of Directors;

● competition and legal and regulatory requirements on borrowers;

● examinations of the loan portfolio by federal and state regulatory agencies and examinations;

● and review by our internal loan review department and independent accountants.

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

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

Provisions made pursuant to these processes totaled $0.3 million in the first three months of 2014 as compared to $0.9 million for the same period in 2013. The provisions made in the first three months of 2014 were taken to provide for current loan losses and to maintain the allowance proportionate to risks inherent in the loan portfolio. Total charge-offs were $1.1 million for first three months of 2014 as compared to $1.9 million for the same period in 2013. Recoveries totaled $0.1 million during the first three months of 2014 and $0.1 million during the first three months of 2013. For more information, see Note 5 to Consolidated Financial Statements.

Comparing March 31, 2014 to March 31, 2013, the decline in allowance provision is attributed to improvement in the credit quality of the loan portfolio and to the fact that the impaired loan portfolio did not suffer additional declines in estimated fair value. The credit quality improvements were across most loan portfolio types with the largest improvement in non-farm non-residential loans, commercial and industrial loans, and construction and land development.

The Company charged off $1.1 million in loan balances for the first quarter of 2014. The amounts were partial charge offs concentrated in two loan relationships which totaled $0.9 million or 81.9% of the total charged off amount. The charge offs were provided for in prior periods as specific reserves for these loans.  The details of the charged off loans in excess of $0.3 million are as follows:

1.	The Company charged of $0.4 million on a non-farm non-residential loan secured by a hotel.  The non-accrual loan had further deterioration in value which required the additional write down.
2.	The Company charged of $0.5 million on a non-farm non-residential loan secured by a hotel. The non-accrual loan had further deterioration in value which required the additional write down.

The remaining $0.2 million of charge-offs for the first quarter of 2014 were comprised of smaller loans and overdrawn deposit accounts. 

As of March 31, 2014, the Company had classified $27.3 million in loans as impaired compared to $29.9 million as of December 31, 2013. The $2.6 million reduction in impaired loans was principally due to a $0.6 million credit relationship that was no longer considered impaired in the first quarter of 2014. $0.9 million of the reduction in impaired loans was due to charge-offs. $0.6 million was due to principal payments on impaired loans.

29

All accrued but uncollected interest related to a loan is deducted from income in the period the loan is placed on nonaccrual. During the period a loan is in nonaccrual status, any cash receipts are first applied to the principal balance. Once the principal balance has been fully recovered, any residual amounts are applied to expenses resulting from the collection of the payment and to the recovery of any reversed interest income and interest income that would have been due had the loan not been nonaccrual. As of March 31, 2014 and December 31, 2013 the Company had nonaccrual loans totaling $12.9 million and $14.5 million, respectively. The allowance for loan losses at March 31, 2014 was $9.6 million or 1.35% of total loans and 73.3% 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)	March 31, 2014			March 31, 2013
Loans:
Average outstanding balance	$	703,725		$	629,753
Balance at end of period	$	709,911		$	653,285
Allowance for Loan Losses:
Balance at beginning of year	$	10,355		$	10,342
Charge offs		(1,137	)		(1,929	)
Recoveries		99			90
Provision		300			904
Balance at end of period	$	9,617		$	9,407

30

Deposits.

Managing the mix and pricing the maturities of deposit liabilities is an important factor affecting our ability to maximize our net interest margin. The strategies used to manage interest-bearing deposit liabilities are designed to adjust as the interest rate environment changes. In this regard, management regularly assesses our funding needs, deposit pricing and interest rate outlooks. From December 31, 2013 to March 31, 2014, total deposits decreased $6.3 million, or 0.5%, to $1.3 billion at March 31, 2014. Average Noninterest-bearing demand deposits decreased $6.0 million from December 31, 2013 to March 31, 2014. Average Interest-bearing demand deposits increased by $70.9 million when comparing March 31, 2014 to December 31, 2013.  Average time deposits decreased $12.8 million, or 2.0% to $638.2 million at March 31, 2013, compared to $648.4 million at December 31, 2012.

At March 31, 2014, public fund deposits totaled $516.9 million. During the first three months of 2014, public fund deposits increased $13.4 million. This increase is due to the seasonal fluctuation of public funds. 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 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 March 31, 2014, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $436.8 million. At March 31, 2014, approximately $226.4 million of the Company's certificates of deposit had a remaining term greater than one year.

As we seek to maintain a strong net interest margin and improve our earnings, attracting core noninterest-bearing deposits will remain a 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.

	Average Balance		Average Balance		Increase/(Decrease)
(in thousands except for %)	March 31, 2014		December 31, 2013		Amount			Percent
Noninterest-bearing demand	$	190,566	$	196,589	$	(6,023	)	(3.1)	%
Interest-bearing demand		405,461		334,573		70,888		21.2	%
Savings		68,116		64,639		3,477		5.4	%
Time		638,156		650,540		(12,840	)	(2.0)	%
Total deposits	$	1,302,299	$	1,252,612	$	49,687		4.0	%

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

(in thousands)	March 31, 2014
Time deposits of less than $100,000	$	203,110
Time deposits of $100,000 through $250,000	$	163,241
Time deposits of more than $250,000	$	273,552
Total Time Deposits	$	639,903

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

(in thousands except for %)	March 31, 2014			December 31, 2013			December 31, 2012			December 31, 2011			December 31, 2010
Total Public Funds	$	516,903		$	503,495		$	470,498		$	431,905		$	356,153
Total Deposits	$	1,296,769		$	1,303,099		$	1,252,612		$	1,207,302		$	1,007,383
Total Public Funds as a percent of Total Deposits		39.9	%		38.6	%		37.6	%		35.8	%		35.4	%

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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 March 31, 2014, short-term borrowings totaled $10.2 million which is an increase of $4.4 million from December 31, 2013, and consisted of repurchase agreements of $8.4 million and a line of credit totaling $1.8 million. The increase in short term borrowings was concentrated in the change in repurchase agreements.  Overnight repurchase agreement balances are monitored daily for sufficient collateralization. The Company had long-term borrowings totaling $0.4 million as of March 31, 2014 and $0.5 million at December 31, 2013.

The average amount of total short-term borrowings for the three months ended March 31, 2014 totaled $13.1 million, compared to $15.8 million for the three months ended March 31, 2013. At March 31, 2014, the Company had $100.0 million in Federal Home Loan Bank letters of credit outstanding obtained solely for collateralizing our public deposits.

Equity.

Stockholders’ equity provides a source of permanent funding, allows for future growth and the ability to absorb unforeseen adverse developments. Total equity increased to $129.5 million as of March 31, 2014 from $123.4 million at December 31, 2013. The increase in stockholders' equity was primarily the result of the increase in other comprehensive income totaling $4.4 million and net earnings of $2.8 million.  The earnings for the quarter are reduced by common dividends of $1.0 million and preferred dividends of $0.1 million for a total addition to the Company's retained earnings of $1.7 million.

Results of Operations for the Three Months Ended March 31, 2014 and 2013

Net Income.

Net Income for the three months ended March 31, 2014 was $2.8 million, a increase of $0.7 million or 33.3% from $2.1 million for the three months ended March 31, 2013. Net income available to common shareholders for the three months ended March 31, 2014 was $2.7 million which is a increase of $0.9 million from $1.8 million for the same period in 2013. The increase in income can mainly be attributed to an increase in loan interest income of $0.4 million, a reduction in interest expense of $0.6 million and a decrease in provision expense of $0.6 million.  Interest and fee income on loans was $9.5 million for the three month period ended March 31, 2014; an increase of $0.4 million from $9.1 million for the same period in 2013. The increase in loan interest income can be mainly attributed to an increase in the volume of loans originated when compared to March 31, 2013. Interest expense for the first three months of 2013 totaled $2.4 million, a decrease of $0.6 million from $2.9 million for the first three months of 2013. The changes in interest earnings and expenses resulted in a net interest income increase of $0.9 million to $10.5 million for the first quarter of 2014 when compared to $9.6 million for the same period in 2013. The provision for loan losses decreased $0.6 million from $0.9 million for the first quarter of 2013 to $0.3 million in the first quarter of 2014. Net gains on securities for the first quarter of 2014 and 2013 were $0.2 million and $0.8 million, respectively. Noninterest expense decreased $0.1 million primarily from decreased expenses associated with other real estate and various other non-interest expenses. The provision for income tax expense increased by $0.3 million to $1.4 million for the first quarter of 2014 compared to $1.1 million for the same period in 2013. The increase in tax expense is a result of the increase in income for the quarter. Earnings per common share for the three months ended March 31, 2014 were $0.43, an increase of $0.14, or 48.3% per common share from $0.29 per common share for the three months ended March 31, 2013.

Net Interest Income.

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

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

Net interest income in the first quarter of 2014 was $10.5 million, an increase of $0.9 million or 9.8%, when compared to $9.6 million in 2013. For the first quarter of 2014, loans and securities made up 49.8% and 45.5% of the average interest-earning assets, respectively; 47.0% of our loans are floating rate loans which are primarily tied to the prime lending rate or the London Inter-Bank Offered Rate (LIBOR). For the same period in 2013 loans and securities represented 46.2% and 47.9% of interest-earning assets, respectively. The cost of our interest-bearing liabilities reflects a lower cost of funds paid on interest-bearing deposits. As of March 31, 2014, time deposits represented 49.3% of total deposits, which is a decrease from 53.0% of total deposits at March 31, 2013.

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The average yield on interest-earning assets decreased from 3.72% at March 31, 2013 to 3.69% at March 31, 2014. This is largely attributable to the 0.38% decrease in the average yield on loans from 5.86% at March 31, 2013 to 5.48% at March 31, 2014.  The interest-bearing liabilities average cost decreased to 0.85% at March 31, 2014, compared to 1.11% at March 31, 2013. The average borrowing costs decreased slightly from 0.98% at March 31, 2013 to 0.96% at March 31, 2014.  The net yield on interest-earning assets was 2.84% for the three months ended March 31, 2014, compared to 2.61% for the same period in 2013.

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. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

	March 31, 2014						March 31, 2013
(in thousands except for %)	Average Balance		Interest		Yield/Rate		Average Balance		Interest		Yield/Rate
Assets
Interest-earning assets:
Interest-earning deposits with banks	$	66,169	$	32	0.20	%	$	78,610	$	40	0.21	%
Securities (including FHLB stock)		643,433		3,341	2.09	%		653,150		3,368	2.09	%
Federal funds sold		387		-	-	%		2,930		-	-	%
Loans, net of unearned income		703,725		9,508	5.48	%		629,753		9,096	5.86	%
Total interest-earning assets	$	1,413,714	$	12,881	3.69	%	$	1,364,443	$	12,504	3.72	%
Noninterest-earning assets:
Cash and due from banks	$	5,402					$	9,869
Premises and equipment, net		19,549						19,539
Other assets		8,951						7,099
Total Assets	$	1,447,616					$	1,400,950
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Demand deposits	$	405,461	$	351	0.35	%	$	341,175	$	362	0.43	%
Savings deposits		68,116		8	0.05	%		63,897		14	0.09	%
Time deposits		638,156		1,967	1.25	%		650,558		2,506	1.56	%
Borrowings		13,033		30	0.96	%		15,787		38	0.98	%
Total interest-bearing liabilities	$	1,124,766	$	2,356	0.85	%	$	1,071,417	$	2,920	1.11	%
Noninterest-bearing liabilities:
Demand deposits	$	190,566					$	189,832
Other		4,043						5,096
Total Liabilities	$	1,319,375					$	1,266,345
Stockholders' equity	$	128,241					$	134,605
Total Liabilities and Stockholders'	$	1,447,616					$	1,400,950
Net interest income			$	10,525					$	9,584
Net interest rate spread (1)					2.84	%					2.61	%
Net interest-earning assets (2)	$	288,948					$	293,026
Net interest margin (3)					2.98	%					2.85	%
Average interest-earning assets to interest-bearing liabilities					125.69	%					127.3	%

(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.

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Provision for Loan Losses.

The provision for loan losses was $0.3 million and $0.9 million for the first quarter of 2014 and 2013, respectively. The lower 2014 provision was based on an assessment of the loan portfolio as well as other qualitative and quantitative factors considered by the Company's management team. The allowance for loan losses at March 31, 2014 was $9.6 million, compared to $10.4 million at December 31, 2013, and was 1.35% and 1.48% of total loans, respectively. The allowance for loan losses decreased due to the charge-off of loans that had specific allowances reserved. Management believes that the current level of the allowance is adequate to cover losses in the loan portfolio given the current economic conditions, expected net charge-offs and nonperforming asset levels.

Noninterest Income.

Noninterest income totaled $1.6 million for the three months ended March 31, 2014; a decrease of $0.6 million when compared to $2.2 million for the three months ended March 31, 2013. Service charges, commissions and fees totaled $1.1 million for the three months ended March 31, 2014 and $1.2 million for the three months ended March 31, 2013. Net securities gains were $0.2 million for the first quarter of 2014 compared to $0.8 million for the first quarter of 2013.

Noninterest Expense.

Noninterest expense includes salaries and employee benefits, occupancy and equipment expense, net cost from other real estate and repossessions, regulatory assessments and other types of expenses. Noninterest expense totaled $7.6 million in the first quarter of 2014 and $7.7 million for the same period in 2013. Salaries and benefits increased $0.3 million in the first quarter of 2014 to $3.8 million compared to $3.5 million in the first quarter of 2013. Occupancy and equipment expense totaled $1.0 million for the first quarter of 2014 and $1.0 million in first quarter of 2013. Other noninterest expense totaled $2.8 million in the first quarter of 2014, compared to $3.2 million the first quarter of 2013.

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

(in thousands)	As of March 31, 2014		As of March 31, 2013
Other noninterest expense:
Legal and professional fees	$	457	$	522
Data processing		274		330
Marketing and public relations		251		244
Taxes - sales, capital, and franchise		172		147
Operating supplies		100		159
Travel and lodging		133		145
Net costs from other real estate and repossessions		184		267
Regulatory assessment		361		476
Other		869		907
Total other expense	$	2,801	$	3,197

Income Taxes.

The provision for income taxes for the three months ended March 31, 2014 and 2013 was $1.4 million and $1.1 million, respectively. The increase in the provision for income taxes is a result of higher income for the first quarter of 2014 when compared to the first quarter of 2013. The Company's statutory tax rate for the three month period ended March 31, 2014 was 34.5%; this is relatively unchanged from 34.5% for the first quarter of 2013.

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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.

To maximize our margin, we attempt to be somewhat more asset sensitive during periods of rising rates and more liability sensitive during periods of falling rates. The need for interest sensitivity gap management is most critical in times of rapid changes in overall interest rates. We generally seek to limit our exposure to interest rate fluctuations by maintaining a relatively balanced mix of rate sensitive assets and liabilities on a one-year time horizon. The mix is relatively difficult to manage. Because of the significant impact on net interest margin from mismatches in repricing opportunities, the asset-liability mix is monitored periodically depending upon Management’s assessment of current business conditions and the interest rate outlook. Exposure to interest rate fluctuations is maintained within prudent levels by the use of varying investment strategies.

The following interest sensitivity analysis is one measurement of interest rate risk and is set forth on the following table. This analysis, which we prepare monthly, reflects the contractual maturity characteristics of assets and liabilities over various time periods. This analysis does not factor in prepayments which may significantly change the report. This table includes nonaccrual loans in their respective maturity periods. The gap indicates whether more assets or liabilities are subject to repricing over a given time period. The interest sensitivity analysis at March 31, 2014 shown below reflects a liability-sensitive position with a negative cumulative gap on a one-year basis.

	March 31, 2014
	Interest Sensitivity Within
(in thousands except for %)	3 Months Or Less			Over 3 Months thru 12 Months			Total One Year			Over One Year		Total
Earning Assets:
Loans (including loans held for sale)	$	387,122		$	29,049		$	416,171		$	293,740	$	709,911
Securities (including FHLB stock)		36,182			6,438			43,620			579,580		620,700
Federal Funds Sold		252			-			252			-		252
Other earning assets		70,833			-			70,833			-		70,833
Total earning assets	$	494,389		$	35,487		$	529,876		$	873,320	$	1,403,196
Source of Funds:
Interest-bearing accounts:
Demand deposits	$	395,640		$			$	395,640		$	-	$	395,640
Savings deposits		67,547			-			67,547			-		67,546
Time deposits		179,893			233,596			413,489			226,414		639,903
Short-term borrowings		10,189			-			10,189			-		10,189
Long-term borrowings					350			350					350
Noninterest-bearing, net		-			-			-			289,567		289,567
Total source of funds	$	653,269		$	233,946		$	887,215		$	515,981	$	1,403,196
Period gap	$	(158,880	)	$	(198,459	)	$	(357,339	)	$	357,339
Cumulative gap	$	(158,880	)	$	(357,339	)	$	(357,339	)	$	-
Cumulative gap as a percent of earning assets		(11.3)	%		(25.5)	%		(25.5)	%

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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 March 31, 2014 totaled $135.7 million. At March 31, 2014, time deposits maturing within one year or less totaled $413.5 million.

The Company maintained a net borrowing capacity at the Federal Home Loan Bank totaling $106.1 million and $99.0 million at March 31, 2014 and December 31, 2013, respectively. 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 March 31, 2014; this excludes the availability with the Federal Reserve Bank. The Company had a $1.8 million outstanding balance on these lines of credit as of March 31, 2014. Management believes there is sufficient liquidity to satisfy current operating needs.

Capital Resources.

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

Stockholders’ equity provides a source of permanent funding, allows for future growth and the ability to absorb unforeseen adverse developments. Total equity increased to $129.5 million as of March 31, 2014 from $123.4 million at December 31, 2013. The increase in stockholders' equity was the result of the increase in other comprehensive income totaling $4.4 million.  The earnings for the quarter are reduced by common dividends of $1.0 million and preferred dividends of $0.1 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 March 31, 2014, we satisfied the minimum regulatory capital requirements and were well capitalized within the meaning of federal regulatory requirements.

	"Well Capitalized Minimums"		As of March 31, 2014		As of December 31, 2013
Tier 1 Leverage Ratio
Consolidated	5.00	%	8.97	%	9.14	%
Bank	5.00	%	8.99	%	9.17	%
Tier 1 Risk-based Capital Ratio
Consolidated	6.00	%	13.88	%	13.61	%
Bank	6.00	%	13.91	%	13.66	%
Total Risk-based Capital Ratio
Consolidated	10.00	%	14.90	%	14.71	%
Bank	10.00	%	14.93	%	14.76	%

At March 31, 2014, we satisfied the minimum regulatory capital requirements and were well capitalized within the meaning of federal regulatory requirements.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As defined by the Securities and Exchange Commission in Exchange Act Rules 13a-15(e) and 15d-15(e), a Company's “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within time periods specified in the Commission’s rules and forms. 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 management's belief that the ultimate resolution of such other claims will not have a material adverse effect on the Company's financial position or results of operations.

Item 1A. Risk Factors

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

Item 6.  Exhibits

The following exhibits are either field as part of this report or are incorporated herein by reference.

Exhibit
Number	Exhibit
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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: May 15, 2014	By: /s/ Alton B. Lewis
	Alton B. Lewis
	Principal Executive Officer
Date: May 15, 2014	By: /s/ Eric J. Dosch
	Eric J. Dosch
	Principal Financial Officer
	Secretary and Treasurer

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