UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10- K




(Mark
One)





T
            ANNUAL
      REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934




For the
fiscal ended December 31, 2007.


or




*
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from ______________ to ______________.







Commission
file number: 000-52748










FIRST
GUARANTY BANCSHARES, INC.


(Exact
name of registrant as specified in its charter)





Louisiana
            26-0513559(State
      or other jurisdiction
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      Number)400
      East Thomas StreetHammond,
      Louisiana
            70401(Address
      of principal executive offices)
            (Zip
      Code)(985)
      345-7685(Registrant’s
      telephone number, including area code)Not
      Applicable(Former
      name or former address, if changed since last report)Securities
      registered pursuant to Section 12(b) of the
      Act:  NoneSecurities
      registered pursuant to Section 12(g) of the Act:Title
      of each class
            Name
      of each exchange on which registeredCommon
      Stock, $1 par value per share
            None





Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.YES *  NO T




Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. YES *  NO T




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 T NO *




Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.*




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


Large accelerated
filer *Accelerated
filer  *Non-accelerated
filer  *Smaller
reporting company  T




Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).  YES *  NO T




The
Company did not have public float at June 30, 2007. First Guaranty
Bancshares, Inc. was formed on July 30, 2007. The common stock is not
quoted or traded on an exchange. There is no established or liquid market for
the common stock.




As of March 27, 2008,
there were issued and outstanding 5,559,644 shares of the Registrant’s Common
Stock.






DOCUMENTS
INCORPORATED BY REFERENCE:
 (1)  Proxy
Statement for the 2008 Annual Meeting of Stockholders of the Registrant (Part
III).














TABLE OF CONTENTS




PagePart
      I.Item
      1
            Business
            3Item
      1A
            Risk
      Factors
            11Item
      1B
            Unresolved
      Staff Comments
            14Item
      2
            Properties
            15Item
      3
            Legal
      Proceedings
            16Item
      4
            Submissions
      of Matters to a Vote of Security Holders
            16Part
      II.Item
      5
            Market
      forRegistrant’sCommon
      Equity, Related Stockholder Matters and Issuer
      Purchasesof
      Equity Securities
            16Item
      6
            Selected
      Financial Data
            16Item
      7
            Management's
      Discussion and Analysis of Financial Condition and Resultsof
      Operations
            18Item
      7A
            Quantitative
      and Qualitative Disclosures about Market Risk
            37Item
      8
            Financial
      Statements and Supplementary Data
            39Item
      9
            Changes
      in and Disagreements with Accountants on Accounting and FinancialDisclosure
            64Item
      9a(T)
            Controls
      and Procedures
            64Item
      9B
            Other
      Information
            65Part
      III.Item
      10
            Directors,Executive
      Officersand
      Corporate Governance
            65Item
      11
            Executive
      Compensation
            65Item
      12
            Security
      Ownership of Certain Beneficial Owners andManagement
      and Related Stockholder Matters
            65Item
      13
            Certain
      Relationships and Related Transactionsand
      DirectorIndependence
            65Item
      14
            Principal
      Accountant Fees and Services
            65Part
      IV.Item
      15
            ExhibitsandFinancial
      Statement Schedules
            66

























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Item 1 – Business




Background


First
Guaranty Bancshares, Inc. (the “Company”) is a Louisiana corporation. On July
27, 2007, First Guaranty Bancshares, Inc. became the holding company for First
Guaranty Bank pursuant to an Agreement and Plan of Exchange dated as of July 27,
2007 (the “Agreement”). Pursuant to the Agreement, on the Effective Date, each
issued and outstanding share of the Bank’s common stock, par value $1.00 per
share, automatically was converted into and exchanged for one share of the
Company’s common stock, par value $1.00 per share. No stockholders exercised
dissenters’ rights of appraisal.  On the Effective Date, the Bank
became a wholly owned subsidiary of the Company and the stockholders of the Bank
became stockholders of the Company. No additional shares were offered or sold in
connection with the Reorganization. The Company owns all of the outstanding
shares of common stock of First Guaranty Bank. The Company’s executive office is
located at 400 East Thomas Street, Hammond, Louisiana 70401. The telephone
number is (985) 345-7685. The Company is subject to extensive regulation by the
Federal Reserve Bank (“FRB”).


First
Guaranty Bank (“Bank”) is a state chartered commercial bank with 18 full service
banking facilities located in southeast, southwest and north Louisiana. The Bank
was organized under Louisiana law under the name Guaranty Bank and Trust Company
in 1934 and changed its name to First Guaranty Bank in 1971. Deposits are
insured up to the maximum legal limits by the FDIC. The Bank is not a member of
the Federal Reserve System. As of December 31, 2007, the Bank was the fifth
largest Louisiana-based bank and the fourth largest Louisiana bank not
headquartered in New Orleans, as measured by total
assets.




Business
Objective


The
Company’s business objective is to be a bank holding company of a
customer-driven financial institution focused on providing value to customers by
delivering products and services matched to customer needs. We emphasize
personal relationships and localized decision making. The Board of Directors and
senior Management have extensive experience and contacts in our marketplace and
are an important source of new business
opportunities.


The
Company’s business plan emphasizes both growth and profitability. From December
31, 2003 to December 31, 2007, assets have grown from $484.7 million to $807.3
million. During this period, the number of full-service banking center locations
increased from 15 locations to 18 locations. As a result of our acquisition of
Homestead Bancorp in July 2007, we acquired two branch offices. Upon completion
of our acquisition of First Community Bank, we will acquire two new branches,
one in Hammond, Louisiana and the other in Mandeville, Louisiana. The
acquisition is subject to customary conditions, including the approval of the
shareholders of First Community Holding Company and the approval of certain
financial institution regulatory authorities.




Market
Areas


Our
focus is on the bedroom communities of metropolitan markets, small cities and
rural areas in southeast, southwest and north Louisiana. In southeast Louisiana,
eight branches are located in Tangipahoa Parish in the towns of Amite, Hammond
(2), Independence, Kentwood and Ponchatoula (3). Two branches are located in
Livingston Parish, one branch in Denham Springs and the other in Walker. In
southwest Louisiana, we have branches in Abbeville in Vermillion Parish and in
Jennings in Jefferson Davis Parish. The remaining six branches are located in
north Louisiana, in Haynesville and Homer, which are both in Claiborne Parish;
in Oil City and Vivian, both in Caddo Parish; in Dubach in Lincoln Parish
and Benton, in Bossier Parish. Our core market remains in the home parish of
Tangipahoa where approximately 51.0% of deposits and 50.6% of net loans were
based in 2007.


Our
southeast Louisiana market is strategically located near the intersection of
Interstates 12 and 55, which places it at a crossroads of commercial activity
for the southeastern United States. In addition, this market area is largely
populated by the work force of several nearby petrochemical refineries and other
industrial plants and is a bedroom community for the urban centers of New
Orleans and Baton Rouge, which are approximately 45 miles and 60 miles,
respectively, from Hammond, where the main office is located. Hammond is home to
one of the largest medical centers in the state of Louisiana and the third
largest state university in Louisiana.


Our
southwest Louisiana market benefits from a profitable casino gaming industry and
substantial tourism revenue derived from the Louisiana Acadian culture. It also
has a concentration of oilfield and oilfield services activity and is a thriving
agricultural center for rice, sugarcane and crawfish.


Timber
cultivation and its related industries, including milling and logging, are key
commercial activities in the north Louisiana market. It is also an agrarian
center in which corn, cotton and soybeans are the primary crops. The poultry
industry, including independent poultry grower farms that contract with national
poultry processing companies, are also very important to the local
economy.




Banking
Products and Services


The
Company offers personalized commercial banking services to businesses,
professionals and individuals. We offer a variety of deposit products including
personal and business checking and savings accounts, time deposits, money market
accounts and NOW accounts. Other services provided include personal and
commercial credit cards, remote deposit capture, safe deposit boxes, money
orders, travelers’ checks and lockbox services. Also offered is 24-hour banking
through internet banking, voice response and 25 automated teller machines.
Although full trust powers have been granted, we do not actively operate or have
any present intentions to activate a trust
department.





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Loans


The
Bank is engaged in a diversity of lending activities to serve the credit needs
of its customer base including commercial loans, commercial real estate loans,
real estate construction loans, mortgage loans, agricultural loans, home equity
lines of credit, equipment loans, inventory financing and student loans. In
addition, the Bank provides consumer loans for a variety of reasons such as the
purchase of automobiles, recreational vehicles or boats, investments or other
consumer needs. The Bank issues MasterCard and Visa credit cards and provides
merchant processing services to commercial customers. The loan portfolio is
divided, for regulatory purposes, into four broad classifications: (i) real
estate loans, which include all loans secured in whole or part by real estate;
(ii) agricultural loans, comprised of all farm loans; (iii) commercial and
industrial loans, which include all commercial and industrial loans that are not
secured by real estate; and (iv) consumer loans.




Competition


The
banking business in Louisiana is extremely competitive. We compete for deposits
and loans with existing Louisiana and out-of-state financial institutions that
have longer operating histories, larger capital reserves and more established
customer bases. The competition includes large financial services companies and
other entities in addition to traditional banking institutions such as savings
and loan associations, savings banks, commercial banks and credit
unions.


Many of
our larger competitors have a greater ability to finance wide-ranging
advertising campaigns through their greater capital resources. Marketing efforts
depend heavily upon referrals from officers, directors and shareholders,
selective advertising in local media and direct mail solicitations. We compete
for business principally on the basis of personal service to customers, customer
access to officers and directors and competitive interest rates and
fees.


In the
financial services industry, intense market demands, technological and
regulatory changes and economic pressures have eroded industry classifications
in recent years that were once clearly defined. Financial institutions have been
forced to diversify their services, increase rates paid on deposits and become
more cost effective, as a result of competition with one another and with new
types of financial services companies, including non-banking competitors. Some
of the results of these market dynamics in the financial services industry have
been a number of new bank and non-bank competitors, increased merger activity,
and increased customer awareness of product and service differences among
competitors. These factors could affect business prospects.




Employees


At
December 31, 2007, we had 204 full-time and 36 part-time employees. None of our
employees are represented by a collective bargaining group. The Company has
a good relationship with its employees.




Data
Processing


Since
November 2001, customer information has been housed on equipment owned by
Financial Information Service Corporation or FISC. FISC is a cooperative jointly
owned by a number of Louisiana and Mississippi state banks that are
currently serviced by FISC. The 2007 annual cost of this service was $696,000.
The current arrangements are adequate and are expected to be able to accommodate
our needs for the foreseeable future.




Information
Technology Infrastructure


Our
wide area network links more than 25 remote sites using a fully meshed multiple
protocol layered switch network with virtual private networking throughout to
authenticate to a Novell-Citrix hybrid server ecosystem. We have over 350
embedded devices that can be remotely administered in a secure manner from any
other location. The employees are not limited to their branch location, but
instead can access the network and authenticate securely from any branch. We
have a redundant back-up site located at the far northwestern corner of the
state in Homer, Louisiana.




Subsidiaries


The
Company is a one-bank holding company with First Guaranty Bank as its
subsidiary. The Company also acquired a non-bank subsidiary during the Homestead
Bank merger. See Note 3 to the Consolidated Financial Statements. Homestead
Bancorp Trust I is a trust established for the sole purpose of issuing trust
preferred securities and using the proceeds to purchase junior subordinated
debentures issued by Homestead Bancorp. These securities were assumed by the
Company in connection with the acquisition of Homestead
Bancorp.




Regulatory
Compliance


First
Guaranty Bank is a Federal Deposit Insurance Corporation (“FDIC”) insured,
non-member Louisiana state bank. Regulation of financial institutions is
intended primarily to protect depositors, the deposit insurance funds of the
FDIC and the banking system as a whole, and generally is not intended to protect
stockholders or other investors.


The
Bank is subject to regulation and supervision by both the Louisiana Office of
Financial Institutions and the FDIC. In addition, the Bank is subject to various
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that are made and the interest that is charged on those
loans, and limitations on the types of investments that are made and the types
of services that are offered. Various consumer laws and regulations also affect
operations. See “Regulation and Supervision.”




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of Contents




Regulation
and Supervision


Banking
is a complex, highly regulated industry. Consequently, the growth and earnings
performance of First Guaranty Bancshares, Inc. and its subsidiary bank can be
affected not only by Management decisions and general and local economic
conditions, but also by the statutes administered by, and the regulations and
policies of, various governmental regulatory authorities. These authorities
include, but are not limited to, the FRB, the FDIC, the Louisiana Office of
Financial Institutions (“OFI”) the U.S. Internal Revenue Service and state
taxing authorities. The effect of these statutes, regulations and policies and
any changes to any of them can be significant and cannot be
predicted.


The
primary goals of the regulatory scheme are to maintain a safe and sound banking
system and to facilitate the conduct of sound monetary policy. In furtherance of
these goals, Congress has created several largely autonomous regulatory agencies
and enacted numerous laws that govern banks, bank holding companies and the
banking industry. The system of supervision and regulation applicable to First
Guaranty Bancshares, Inc. establishes a comprehensive framework for their
respective operations and is intended primarily for the protection of the FDIC’s
deposit insurance funds, depositors and the public, rather than the shareholders
and creditors. The following is an attempt to summarize some of the relevant
laws, rules and regulations governing banks and bank holding companies, but does
not purport to be a complete summary of all such applicable laws, rules and
regulations. The descriptions are qualified in their entirety by reference to
the specific statutes and regulations discussed.




First
Guaranty Bancshares, Inc.


General.
First Guaranty Bancshares, Inc. is a bank holding company registered with, and
subject to regulation by, the FRB under the Bank Holding Company Act of 1956, as
amended (the “Bank Holding Company Act”). The Bank Holding Company Act and other
federal laws subject bank holding companies to particular restrictions on the
types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for
violations of laws and regulations.


In
accordance with FRB policy, a bank holding company, such as First Guaranty
Bancshares, Inc., is expected to act as a source of financial strength to its
subsidiary banks and commit resources to support its banks. This support may be
required under circumstances when we might not be inclined to do so absent this
FRB policy.


Certain
Acquisitions. Federal law requires every bank holding company to obtain
the prior approval of the FRB before (i) acquiring more than five percent of the
voting stock of any bank or other bank holding company, (ii) acquiring all or
substantially all of the assets of any bank or bank holding company, or (iii)
merging or consolidating with any other bank holding
company.


Additionally,
federal law provides that the FRB may not approve any of these transactions if
it would result in or tend to create a monopoly or substantially lessen
competition or otherwise function as a restraint of trade, unless the
anti-competitive effects of the proposed transaction are clearly outweighed by
the public interest in meeting the convenience and needs of the community to be
served. The FRB is also required to consider the financial and managerial
resources and future prospects of the bank holding companies and banks concerned
and the convenience and needs of the community to be served. Further, the FRB is
required to consider the record of a bank holding company and its subsidiary
bank(s) in combating money laundering activities in its evaluation of bank
holding company merger or acquisition transactions.


Under
the Bank Holding Company Act, if adequately capitalized and adequately managed,
any bank holding company located in Louisiana may purchase a bank located
outside of Louisiana. However, as discussed below, restrictions currently exist
on the acquisition of a bank that has only been in existence for a limited
amount of time or will result in specified concentrations of
deposits.


Change
in Bank Control. The Bank Holding Company Act and the Change in Bank
Control Act of 1978, as amended, generally require FRB approval prior to any
person or company acquiring control of a bank holding company. Control is
conclusively presumed to exist if an individual or company acquires 25% or more
of any class of voting securities of the bank holding company. Control is
rebuttably presumed to exist if a person or company acquires 10% or more, but
less than 25%, of any class of voting securities.


Permitted
Activities. Generally, bank holding companies are prohibited by federal
law from engaging in or acquiring direct or indirect control of more than 5% of
the voting shares of any company engaged in any activity other than (i) banking
or managing or controlling banks or (ii) an activity that the FRB determines to
be so closely related to banking as to be a proper incident to the business of
banking.


Activities
that the FRB has found to be so closely related to banking as to be a proper
incident to the business of banking include:




·
            factoring
      accounts receivable;


·
            making,
      acquiring, brokering or servicing loans and usual related
      activities;


·
            leasing
      personal or real property;


·
            operating
      a non-bank depository institution, such as a savings
      association;


·
            trust
      company functions;


·
            financial
      and investment advisory activities;


·
            conducting
      discount securities brokerage
activities;


·
            underwriting
      and dealing in government obligations and money market
      instruments;


·
            providing
      specified Management consulting and counseling
  activities;


·
            performing
      selected data processing services and support
  services;


·
            acting
      as agent or broker in selling credit life insurance and other types of
      insurance in connection with credit transactions;
  and


·
            performing
      selected insurance underwriting
activities.





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Despite
prior approval, the FRB has the authority to require a bank holding company to
terminate an activity or terminate control of or liquidate or divest certain
subsidiaries or affiliates when the FRB believes the activity or the control of
the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. A bank
holding company that qualifies and elects to become a financial holding company
is permitted to engage in additional activities that are financial in nature or
incidental or complementary to financial activity. The Bank Holding Company Act
expressly lists the following activities as financial in
nature:




·
            lending,
      exchanging, transferring, investing for others, or safeguarding money or
      securities;


·
            insuring,
      guaranteeing or indemnifying against loss or harm, or providing and
      issuing annuities, and acting as principal, agent or broker for these
      purposes, in any state;


·
            providing
      financial, investment or advisory
services;


·
            issuing
      or selling instruments representing interests in pools of assets
      permissible for a bank to hold
directly;


·
            underwriting,
      dealing in or making a market in
securities;


·
            other
      activities that the FRB may determine to be so closely related to banking
      or managing or controlling banks as to be a proper incident to managing or
      controlling banks;


·
            foreign
      activities permitted outside of the United States if the FRB has
      determined them to be usual in connection with banking operations
      abroad;


·
            merchant
      banking through securities or insurance affiliates;
  and


·
            insurance
      company portfolio investments.




To
qualify to become a financial holding company, First Guaranty Bancshares, Inc.
and its subsidiary bank must be well-capitalized and well managed and must have
a Community Reinvestment Act rating of at least satisfactory. Additionally,
First Guaranty Bancshares, Inc. would be required to file an election with the
FRB to become a financial holding company and to provide the FRB with 30 days’
written notice prior to engaging in a permitted financial activity. A bank
holding company that falls out of compliance with these requirements may be
required to cease engaging in some of its activities. First Guaranty Bancshares,
Inc. currently has no plans to make a financial holding company
election.


Anti-tying
Restrictions. Bank holding companies and affiliates are prohibited from
tying the provision of services, such as extensions of credit, to other services
offered by a holding company or its affiliates.


Deposit
Insurance Assessments. Banks must pay assessments to the FDIC for federal
deposit insurance protection. The FDIC has adopted a risk-based assessment
system. Under this system, FDIC-insured depository institutions pay insurance
premiums at rates based on their risk classification. Institutions assigned to
higher risk classifications (that is, institutions that pose a higher risk of
loss to their respective deposit insurance funds) pay assessments at higher
rates than institutions that pose a lower risk. An institution’s risk
classification is assigned based on its capital levels and the level of
supervisory concern the institution poses to the regulators. In addition, the
FDIC can impose special assessments in certain instances. The FDIC may terminate
its insurance of deposits if it finds that the institution has engaged in unsafe
and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC. A bank’s deposit insurance assessments may
increase or decrease depending on the risk assessment classification to which we
are assigned by the FDIC. Any increase in insurance assessments could have an
adverse effect on First Guaranty’s earnings.


Other
Regulations. Interest and other charges collected or contracted is
subject to state usury laws and federal laws concerning interest rates. Loan
operations are also subject to federal laws applicable to credit transactions,
such as:




·
            the
      federal “Truth-In-Lending Act,” governing disclosures of credit terms to
      consumer borrowers;


·
            the
      “Home Mortgage Disclosure Act of 1975,” requiring financial institutions
      to provide information to enable the public and public officials to
      determine whether a financial institution is fulfilling its obligation to
      help meet the housing needs of the community it
    serves;


·
            the
      “Equal Credit Opportunity Act,” prohibiting discrimination on the basis of
      race, creed or other prohibited factors in extending
      credit;


·
            the
      “Fair Credit Reporting Act of 1978,” governing the use and provision of
      information to credit reporting
agencies;


·
            the
      “Real Estate Settlement Procedures
Act”;


·
            the
      “Fair Debt Collection Act,” governing the manner in which consumer debts
      may be collected by collection agencies;
  and


·
            the
      rules and regulations of the various federal agencies charged with the
      responsibility of implementing these federal
  laws.





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The
deposit operations are subject to:




·
            the
      “Right to Financial Privacy Act,” which imposes a duty to maintain
      confidentiality of consumer financial records and prescribes procedures
      for complying with administrative subpoenas of financial
      records;


·
            the
      “Electronic Funds Transfer Act” and Regulation E issued by the FRB to
      implement that act, which govern automatic deposits to and withdrawals
      from deposit accounts and customers’ rights and liabilities arising from
      the use of automated teller machines and other electronic banking
      services;


·
            the
      “Truth-In Savings Act”; and


·
            the
      “Expedited Funds Availability Act”.




Dividends.
The Company is a legal entity separate and distinct from its subsidiary, First
Guaranty Bank. The majority of the Company’s revenue is from dividends paid to
the Company by the Bank. First Guaranty Bank may not pay dividends or distribute
capital assets if it is in default on any assessment due to the FDIC. The FRB
has indicated generally that it may be an unsafe or unsound practice for a bank
holding company to pay dividends unless the bank holding company’s net income
over the preceding year is sufficient to fund the dividends and the expected
rate of earnings retention is consistent with the organization’s capital needs,
asset quality and overall financial condition.


First
Guaranty Bank is also subject to regulations that impose minimum regulatory
capital and minimum state law earnings requirements that affect the amount of
cash available for distribution. In addition, under the Louisiana Banking Law,
dividends may not be paid if it would reduce the unimpaired surplus below 50% of
outstanding capital stock in any year. The Company does not expect that these
laws, regulations or policies will materially affect the ability of the Bank to
pay dividends.


Capital
Adequacy. The FRB monitors the capital adequacy of bank holding
companies, such as First Guaranty Bancshares, Inc., and the OFI and FDIC monitor
the capital adequacy of First Guaranty Bank. The federal bank regulators use a
combination of risk-based guidelines and leverage ratios to evaluate capital
adequacy and consider these capital levels when taking action on various types
of applications and when conducting supervisory activities related to safety and
soundness. The risk-based guidelines apply on a consolidated basis to bank
holding companies with consolidated assets of $500 million or more and,
generally, on a bank-only basis for bank holding companies with less than $500
million in consolidated assets. Each insured depository subsidiary of a bank
holding company with less than $500 million in consolidated assets is expected
to be “well-capitalized.”


The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and
their holding companies, to account for off-balance sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance sheet
items, such as letters of credit and unfunded loan commitments, are assigned to
broad risk categories, each with appropriate risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.


The
minimum guideline for the ratio of total capital to risk-weighted assets is 8%.
Total capital consists of two components, Tier 1 Capital and Tier 2 Capital.
Tier 1 Capital generally consists of common stock, minority interests in the
equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock and a limited amount of qualifying cumulative perpetual preferred stock,
less goodwill and other specified intangible assets. Tier 1 Capital must equal
at least 4% of risk-weighted assets. Tier 2 Capital generally consists of
subordinated debt, preferred stock (other than that which is included in Tier I
Capital), and a limited amount of loan loss reserves. The total amount of Tier 2
Capital is limited to 100% of Tier 1 Capital.


In
addition, the FRB has established minimum leverage ratio guidelines for bank
holding companies with assets of $500 million or more. These guidelines provide
for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other
specified intangible assets, of 3% for bank holding companies that meet
specified criteria, including having the highest regulatory rating and
implementing the FRB’s risk-based capital measure for market risk. All other
bank holding companies with assets of $500 million or more generally are
required to maintain a leverage ratio of at least 4%. The guidelines also
provide that bank holding companies of such size experiencing internal growth or
making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without reliance on
intangible assets. The FRB considers the leverage ratio and other indicators of
capital strength in evaluating proposals for expansion or new activities. The
FRB and the FDIC recently adopted amendments to their risk-based capital
regulations to provide for the consideration of interest rate risk in the
agencies’ determination of a banking institution’s capital
adequacy.




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Failure
to meet capital guidelines could subject a bank or bank holding company to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of federal deposit insurance, a prohibition on accepting brokered
deposits and other restrictions on its business.


Concentrated
Commercial Real Estate Lending Regulations. The FRB and FDIC have
recently promulgated guidance governing financial institutions with
concentrations in commercial real estate lending. The guidance provides that a
company has a concentration in commercial real estate lending if (i) total
reported loans for construction, land development, and other land represent 100%
or more of total capital or (ii) total reported loans secured by multifamily and
non-farm residential properties and loans for construction, land development,
and other land represent 300% or more of total capital and the outstanding
balance of such loans has increased 50% or more during the prior 36 months. If a
concentration is present, Management must employ heightened risk Management
practices including board and Management oversight and strategic planning,
development of underwriting standards, risk assessment and monitoring through
market analysis and stress testing, and increasing capital requirements. The
Company is subject to these regulations.


Prompt
Corrective Action Regulations. Under the prompt corrective action
regulations, bank regulators are required and authorized to take supervisory
actions against undercapitalized banks. For this purpose, a bank is placed in
one of the following five categories based on its
capital:




·
            well-capitalized
      (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total
      risk-based capital);


·
            adequately
      capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital
      and 8% total risk-based capital);


·
            undercapitalized
      (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3%
      leverage capital);


·
            significantly
      undercapitalized (less than 6% total risk-based capital, 3% Tier 1
      risk-based capital or 3% leverage capital);
  and


·
            critically
      undercapitalized (less than 2% tangible
  capital).




Federal
banking regulators are required to take various mandatory supervisory actions
and are authorized to take other discretionary actions with respect to
institutions in the three undercapitalized categories. The severity of the
action depends upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, banking regulators must appoint a
receiver or conservator for an institution that is “critically
undercapitalized.” The federal banking agencies have specified by regulation the
relevant capital level for each category. An institution that is categorized as
“undercapitalized”, “significantly undercapitalized” or “critically
undercapitalized” is required to submit an acceptable capital restoration plan
to its appropriate federal banking agency. A bank holding company must guarantee
that a subsidiary depository institution meets its capital restoration plan,
subject to various limitations. The controlling holding company’s obligation to
fund a capital restoration plan is limited to the lesser of 5% of an
“undercapitalized” subsidiary’s assets at the time it became “undercapitalized”
or the amount required to meet regulatory capital requirements. An
“undercapitalized” institution is also generally prohibited from increasing its
average total assets, making acquisitions, establishing any branches or engaging
in any new line of business, except under an accepted capital restoration plan
or with regulatory approval. The regulations also establish procedures for
downgrading an institution to a lower capital category based on supervisory
factors other than capital.


Restrictions
on Transactions with Affiliates and Loans to Insiders.  First
Guaranty Bank
is subject to the provisions of Section 23A of the FRB Act and its implementing
regulations. These provisions place limits on the amount
of:




·
            First
      Guaranty Bank’s
      loans or extensions of credit to
  affiliates;


·
            First
      Guaranty Bank’s  investment
      in affiliates;


·
            assets
      that First Guaranty Bank
      may purchase from affiliates, except for real and personal property
      exempted by the FRB;


·
            the
      amount of loans or extensions of credit to third parties collateralized by
      the securities or obligations of affiliates;
  and


·
            First
      Guaranty Bank’s
      guarantee, acceptance or letter of credit issued on behalf of an
      affiliate.




The
total amount of the above transactions is limited in amount, as to any one
affiliate, to 10% of First Guaranty Bank’s
capital and surplus and, as to all affiliates combined, to 20% of its capital
and surplus. In addition to the limitation on the amount of these transactions,
each of the above transactions must also meet specified collateral
requirements.


First
Guaranty Bank
is also subject to the provisions of Section 23B of the FRB Act and its
implementing regulations, which, among other things, prohibit First Guaranty
Bank
from engaging in any transaction with an affiliate, such as First Guaranty
Bancshares, Inc., unless the transaction is on terms substantially the same, or
at least as favorable to First Guaranty Bank
as those prevailing at the time for comparable transactions with nonaffiliated
companies.




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First
Guaranty Bank
is also subject to restrictions on extensions of credit to its executive
officers, directors, principal shareholders and their related interests. These
types of extensions of credit must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with third parties and must not involve more than the
normal risk of repayment or present other unfavorable
features.


Anti-terrorism
Legislation.
Financial institutions are required to establish anti-money laundering programs.
In 2001, the USA PATRIOT Act was enacted.  The USA PATRIOT Act
significantly enhanced the powers of the federal government and law enforcement
organizations to combat terrorism, organized crime and money laundering. While
the USA PATRIOT Act imposed additional anti-money laundering requirements, these
additional requirements are not material to our
operations.


Aside
from the above, the USA PATRIOT Act also requires the federal banking regulators
to assess the effectiveness of an institution’s anti-money laundering program in
connection with merger and acquisition transactions.  Failure to
maintain an effective anti-money laundering program is grounds for the denial of
merger or acquisition transactions.




Federal
Securities Laws


First
Guaranty Bancshares, Inc. common stock is registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934. First Guaranty
Bancshares, Inc. will continue to be subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Securities Exchange Act of 1934.


Non-Banking
Activities


The
Gramm-Leach-Bliley Act of 1999 eliminated most of the barriers to affiliations
among banks and securities firms, insurance companies and other financial
companies previously imposed under federal banking laws if certain criteria are
satisfied. The financial subsidiaries of “well capitalized” banks are generally
permitted to engage in activities that are financial in nature including
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance brokerage and underwriting activities; merchant
banking activities; and other activities that the Federal Reserve Board has
determined to be closely related to banking.


Brokered
Deposits and Pass-Through Insurance


An
FDIC-insured depository institution cannot accept, rollover or renew brokered
deposits unless it is well capitalized or adequately capitalized and receives a
waiver from the FDIC. A depository institution that cannot receive brokered
deposits also cannot offer “pass-through” insurance on certain employee benefit
accounts. Whether or not it has obtained such a waiver, an adequately
capitalized depository institution may not pay an interest rate on any deposits
in excess of 75 basis points over certain prevailing market rates specified by
regulation. As of December 31, 2007, the Bank
did not have brokered deposits.


Interstate
Branching


Effective
June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 permits state and national banks with different home states to
operate branches across state lines with approval of the appropriate federal
banking agency, unless the home state of a participating bank passed legislation
“opting out” of interstate banking. This federal law allows branching through
acquisition only, which means a bank must acquire another bank and merge the two
institutions in order to operate across state lines. If a state opted out of
interstate branching within a specified time period, no bank in any other state
may establish a branch in the state which has opted out, whether through an
acquisition or de
novo. Louisiana did not opt out of this law. The Company currently has no
branches located outside of Louisiana.




FDIC
Deposit Insurance Assessments


The
Bankis subject to FDIC deposit insurance assessments for deposit insurance
under the Deposit Insurance Fund. The FDIC’s current risk-based system places a
bank
in a risk assessment category, principally on the basis of its capital level and
an evaluation of the bank’s
risk to the fund, and bases premiums on the probability of loss to the FDIC with
respect to each individual bank.


As
of December 2007, the Bank
was a risk category I for assessment purposes. Total assessments paid to the
FDIC amounted to $91,900 in 2007 and $167,900 in 2006.Under the provisions of
the Federal Deposit Insurance Reform Act of 2005, the Bank
received a one-time FDIC assessment credit of $245,000 to be used against
deposit insurance assessments beginning January 1, 2007. This credit was used up
completely to offset the FDIC assessment for 2007.


The
FDIC may terminate the deposit insurance of any insured depository institution
if it determines that the institution has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations
or has violated any applicable law, regulation, order or any condition imposed
by an agreement with the FDIC. If insurance of accounts is terminated, the
accounts at the institution at the time of the termination, less subsequent
withdrawals, continue to be insured for a period of six months to two years, as
determined by the FDIC. The Bank
is not aware of any existing circumstances which would result in the termination
of deposit insurance.








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Community
Reinvestment Act


Under
the Community Reinvestment Act, or CRA, a financial institution has a continuing
and affirmative obligation, consistent with its safe and sound operation, to
help meet the credit needs of its entire community, including low and moderate
income neighborhoods. The FDIC assigns banks
a CRA rating of “outstanding,” “satisfactory,” “needs to improve” or
“substantial noncompliance,” and the bank
must publicly disclose its rating. The FDIC rated the Bank
as “satisfactory” in meeting community credit needs under the CRA at its most
recent CRA performance examination.




Privacy
Provisions


Under
the Gramm-Leach-Bliley Act, federal banking
regulators have adopted new rules requiring disclosure of privacy policies and
information sharing practices to consumers. These rules prohibit depository
institutions from sharing customer information with nonaffiliated parties
without the customer’s consent, except in limited situations, and require
disclosure of privacy policies to consumers and, in some circumstances, enable
consumers to prevent disclosure of personal information to nonaffiliated third
parties. In addition, the Fair and Accurate Credit Transactions Act of 2003
requires banks
to notify their customers if they report negative information about them to a
credit bureau or if they grant credit to them on terms less favorable than those
generally available.


The
Company has instituted risk Management systems to comply with all required
privacy provisions and believes that the new disclosure requirements and
implementation of the privacy laws will not materially increase operating
expenses.




Check
21


The
Check 21 Act facilitates check truncation and electronic check exchange by
authorizing a new negotiable instrument called a “substitute check”. The Act
provides that a properly prepared substitute check is the legal equivalent of
the original check for all purposes. This law supercedes contradictory state
laws (i.e., state laws that allow customers to demand the return of original
checks).


Although
the Check 21 Act does not require any bank
to create substitute checks or to accept checks electronically, it does require
banks
to accept a legally equivalent substitute check in place of an original check
after the Check 21 Act’s effective date of October 28,
2004.


Sarbanes-Oxley
Act


The
Company is also subject to the Sarbanes-Oxley Act of 2002, which has
imposed corporate governance and accounting oversight restrictions and
responsibilities on the board of directors, executive officers and independent
auditors. The law has increased the time spent discharging responsibilities and
costs for audit services. In 2007, Management is required to report on the
effectiveness of internal controls and procedures.




Recent
Developments


Definitive
Agreement with First CommunityHolding
Company. In November 2007, First Guaranty Bancshares,
Inc., parent company
of First GuarantyBank,
and First Community
HoldingCompany,
parent company
of First CommunityBank,
entered into a
definitive agreement under which First Community HoldingCompany
will be acquired for
approximately $19 million incash.


Under
the terms of the agreement, First Guaranty Bancshares, Inc. will acquire all of
the issued and outstanding shares of common stock of First Community Holding
Company
for the cash purchase price of $34.06 per share.  In addition, each
outstanding and unexercised option to acquire a share of common stock of First
Community Holding Company
will be converted into the right to receive cash in an amount equal to
$26.04.  The transaction has been approved by the boards of directors
of First Guaranty Bancshares, Inc. and First Community Holding Company.  The
acquisition is subject to customary conditions, including the approval of the
shareholders of First Community Holding Company
and the approval of certain financial institution regulatory
authorities.





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Item
1A. – Risk Factors


Various
factors, such as general economic conditions in the U.S. and Louisiana,
regulatory and legislative initiatives and increasing competition could impact
our business. There are also several other risks, many beyond our control, which
could adversely affect our business, results of operations and/or financial
condition.




Risks
Associated with our Business




We
may not be able to successfully maintain and manage our growth.


Since
December 31, 2002, assets have grown 85.6%, loan balances have grown 63.7% and
deposits have grown 100.1%.  Continued growth depends, in part, upon
the ability to expand market presence, to successfully attract core deposits,
and to identify attractive commercial lending
opportunities.


Management
cannot be certain as to its ability to manage increased levels of assets and
liabilities. We may be required to make additional investments in
equipment and personnel to manage higher asset levels and loans balances, which
may adversely impact our efficiency ratio, earnings and shareholder
returns.


In
addition, franchise growth is anticipated through acquisitions and de novo
branching. The ability to successfully integrate such acquisitions into our
consolidated operations will have a direct impact on our financial condition and
results of operations.


Our
loan portfolio consists of a high percentage of loans secured by non-farm
non-residential real estate. These loans are riskier than loans secured by one-
to four-family properties.


At
December 31, 2007, $236.5 million, or 41.1% of the loan portfolio consisted of
non-farm non-residential real estate loans (primarily loans secured by
commercial real estate such as office buildings, hotels and gaming facilities).
Management intends to continue to emphasize the origination of these types of
loans.  These loans generally expose a lender to greater risk of
nonpayment and loss than one- to four-family residential mortgage loans because
repayment of the loans often depends on the successful operation and income
stream of the borrowers. Such loans typically involve larger loan balances to
single borrowers or groups of related borrowers compared to one- to four-family
residential loans. Consequently, an adverse development with respect to one loan
or one credit relationship can expose us to a significantly greater risk of loss
compared to an adverse development with respect to a one- to four-family
residential mortgage loan.




Emphasis
on the origination of short-term loans could expose us to increased lending
risks.


At
December 31, 2007, $547.4 million, or 95.2% of our loan portfolio consisted of
loans that mature within five years. These loans typically provide for payments
based on a twenty-year amortization schedule. This results in our borrowers
having significantly higher final payments due at maturity, known as a “balloon
payment”. In the event our borrowers are unable to make their balloon payments
when they are due, we may incur significant losses in our loan portfolio.
Moreover, while the shorter maturities of our loan portfolio help us to manage
our interest rate risk, they also increase the reinvestment risk associated with
new loan originations. To mitigate this risk, we generally will originate loans
to existing customers. There can be no assurance that during an economic
slow-down we might not incur significant losses as our loan portfolio
matures.




We
may be unable to effectively integrate the future acquisition with and into our
operations.


The
future growth of First Guaranty Bank
and First Guaranty Bancshares, Inc. will depend, in part, on the success of the
merger of First Community Holding Company
and its subsidiary with First Guaranty Bancshares, Inc. and its subsidiary. The
success of this acquisition will, in turn, depend on a number of factors,
including: First Guaranty Bank’s
ability to integrate First Community Bank’s
branches into the current operations of First Guaranty Bank;
First Guaranty Bank’s
and First Community Bank’s
ability to limit the outflow of deposits; the ability to control the incremental
noninterest expense from the merger; and the ability to retain and integrate the
appropriate personnel of First Community Bank
into our consolidated operations.




We
could potentially recognize goodwill impairment charges
post-merger.


The
acquisition of First Community Holding Company and its subsidiary will be
accounted for using the purchase method of accounting. In accordance with
applicable accounting literature, we estimate that goodwill totaling $8.3
million will be recorded under Statement of Financial Accounting Standards No.
142., Goodwill
and Other Intangible Assets (“SFAS No. 142”). As a result, goodwill is
approximately 1.1% of $955.2 million of pro forma consolidated total assets at
December 31, 2007. Pursuant to the provisions of SFAS No. 142, we will annually
measure the fair value of our investment in our acquisitions to determine that
such fair value equals or exceeds the carrying value of its investment,
including goodwill. If the fair value of our investment in First Community Bank
does not equal or exceed its carrying value, we will be required to record
goodwill impairment charges which may adversely affect future earnings. The fair
value of a banking franchise can fluctuate downward based on a number of factors
that are beyond Management’s control, (e.g.
adverse trends in interest rates and increased loan losses). There can be no
assurance that our banking franchise value will not decline, thereby
necessitating goodwill impairment charges to
operations.




Hurricane
Activity in Louisiana can have an adverse impact on our market
area.


Our
market area in Southeast Louisiana is close to New Orleans and the Gulf of
Mexico, an area which is susceptible to hurricanes and tropical
storms.


Hurricane
Katrina hit the greater New Orleans area in August 2005. The hurricane caused
widespread property damage, required the relocation of an unprecedented number
of residents and business operations, and severely disrupted normal economic
activity in the impacted areas. The hurricane affected our loan originations and
impacted our deposit base. While Hurricane Katrina did not affect our operations
as adversely as other areas of Southeast Louisiana, future hurricane activity
may have a severe and adverse affect on our operations. More generally, our
ability to compete effectively with financial institutions whose operations are
not concentrated in areas affected by hurricanes or whose resources are greater
than ours, will depend primarily on our ability to continue normal business
operations following a hurricane. The severity and duration of the effects of
hurricanes will depend on a variety of factors that are beyond our control,
including the amount and timing of government, private and philanthropic
investments including deposits in the region, the pace of rebuilding and
economic recovery in the region and the extent to which a hurricane’s property
damage is covered by insurance.


None
of the effects described above can be accurately predicted or quantified at this
time. As a result, significant uncertainty remains regarding the impact a
hurricane may have on our business, financial condition and results or
operations.





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If
the allowance for loan losses is not sufficient to cover actual loan losses,
earnings could decrease.


Loan
customers may not repay their loans according to the terms of their loans, and
the collateral securing the payment of their loans may be insufficient to assure
repayment. We may experience significant credit losses, which could have a
material adverse effect on our operating results. Various assumptions and
judgments about the collectability of the loan portfolio are made, including the
creditworthiness of borrowers and the value of the real estate and other assets
serving as collateral for the repayment of many loans. In determining the amount
of the allowance for loan losses, Management reviews the loans and the loss and
delinquency experience and evaluates economic conditions. If assumptions prove
to be incorrect, the allowance for loan losses may not cover inherent losses in
the loan portfolio at the date of the financial statements. Material additions
to the allowance would materially decrease net income. At December 31, 2007, our
allowance for loan losses totaled $6.2 million, representing 1.08% of loans, net
of unearned income.


Management
believes it has underwriting standards to manage normal lending risks, and at
December 31, 2007, nonperforming loans consisted of $10.8 million, or 1.95% of
loans, net of unearned income. We can give no assurance that the nonperforming
loans will not increase or that nonperforming or delinquent loans will not
adversely affect future performance.


In
addition, federal and state regulators periodically review the allowance for
loan losses and may require an increase in the allowance for loan losses or
recognize further loan charge-offs. Any increase in our allowance for loan
losses or loan charge-offs as required by these regulatory agencies could have a
material adverse effect on the results of operations and financial
condition.




Adverse
events in Louisiana, where our business is concentrated, could adversely affect
our results and future growth.


Our
business, the location of our branches and the real estate used as collateral on
our real estate loans are primarily concentrated in Louisiana. As a result, we
are exposed to geographic risks. The occurrence of an economic downturn in
Louisiana, or adverse changes in laws or regulations in Louisiana could impact
the credit quality of our assets, the business of our customers and our ability
to expand our business.


Our
success significantly depends upon the growth in population, income levels,
deposits and housing in our market area.  If the communities in which
we operate do not grow or if prevailing economic conditions locally or
nationally are unfavorable, our business may be negatively
affected.  In addition, the economies of the communities in which we
operate are substantially dependent on the growth of the economy in the state of
Louisiana.  To the extent that economic conditions in Louisiana are
unfavorable or do not continue to grow as projected, the economy in our market
area would be adversely affected.  Moreover, we cannot give any
assurance that we will benefit from any market growth or favorable economic
conditions in our market area if they do occur.


In
addition, the market value of the real estate securing loans as collateral could
be adversely affected by unfavorable changes in market and economic conditions.
As of December 31, 2007, approximately 79.1% of our total loans were secured by
real estate.  Adverse developments affecting commerce or real estate
values in the local economies in our primary market areas could increase the
credit risk associated with our loan portfolio. In addition, substantially all
of our loans are to individuals and businesses in Louisiana.  Our
business customers may not have customer bases that are as diverse as businesses
serving regional or national markets. Consequently, any decline in the economy
of our market area could have an adverse impact on our revenues and financial
condition.  In particular, we may experience increased loan
delinquencies, which could result in a higher provision for loan losses and
increased charge-offs. Any sustained period of increased non-payment,
delinquencies, foreclosures or losses caused by adverse market or economic
conditions in our market area could adversely affect the value of our assets,
revenues, results of operations and financial
condition.




Our
continued pace of growth, both internally and for our pending acquisition, may
require us to raise additional capital in the future, but that capital may not
be available when it is needed.


We
are required by federal and state regulatory authorities to maintain adequate
levels of capital to support our operations.  We anticipate that our
existing capital resources will satisfy our capital requirements for the
foreseeable future. We may, at some point, need to raise additional capital to
support continued growth, both internally and for our pending
acquisition.


Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets at that time, which are outside of our control. Accordingly, we
cannot assure you of our ability to raise additional capital if needed or that
the terms acceptable to us will be available. If we cannot raise additional
capital when needed, our ability to further expand our operations through
internal growth and pending acquisition could be materially
impaired.





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We
rely on our Management team for the successful implementation of our business
strategy.


The
success of First Guaranty Bancshares, Inc. and First Guaranty Bank has been
largely due to the efforts of our executive Management team consisting of
Michael R. Sharp, President and Chief Executive Officer, and Michele E.
LoBianco, Chief Financial Officer. In addition, we substantially rely upon
Marshall T. Reynolds, our Chairman of the Board of Directors.  The
loss of services of one or more of these individuals may have a material adverse
effect on our ability to implement our business plan.




There
is no assurance that we will be able to successfully compete with others for
business.


The
area in which we operate is considered attractive from an economic and
demographic viewpoint, and is a highly competitive banking market. We compete
for loans and deposits with numerous regional and national banks and other
community banking institutions, as well as other kinds of financial institutions
and enterprises, such as securities firms, insurance companies, savings
associations, credit unions, mortgage brokers and private lenders. Many
competitors have substantially greater resources than we do and operate under
less stringent regulatory environments. The differences in resources and
regulations may make it harder for us to compete profitably, reduce the rates
that we can earn on loans and investments, increase the rates we must offer on
deposits and other funds, and adversely affect our overall financial condition
and earnings.




We
depend primarily on net interest income for our earnings rather than noninterest
income.


Net
interest income is the most significant component of our operating income. We do
not rely on traditional sources of fee income utilized by some community banks,
such as fees from sales of insurance, securities or investment advisory products
or services. For the years ended December 31, 2007 and 2006, our net interest
income was $34.1 million and $31.7 million, respectively.  The amount
of our net interest income is influenced by the overall interest rate
environment, competition, and the amount of interest-earning assets relative to
the amount of interest-bearing liabilities. In the event that one or more of
these factors were to result in a decrease in our net interest income, we do not
have significant sources of fee income to make up for decreases in net interest
income.




Fluctuations
in interest rates could reduce our profitability.


We
realize income primarily from the difference between the interest we earn on
loans and investments and the interest we pay on deposits and borrowings. The
interest rates on our assets and liabilities respond differently to changes in
market interest rates, which means our interest-bearing liabilities may be more
sensitive to changes in market interest rates than our interest-earning assets,
or vice versa. In either event, if market interest rates change, this “gap”
between the amount of interest-earning assets and interest-bearing liabilities
that reprice in response to these interest rate changes may work against us, and
our earnings may be negatively affected.


We
are unable to predict fluctuations in market interest rates, which are affected
by, among other factors, changes in the following:




·
            inflation
      rates;


·
            business
      activity levels;


·
            money
      supply; and


·
            domestic
      and foreign financial
markets.





The
value of our investment portfolio and the composition of our deposit base are
influenced by prevailing market conditions and interest rates. Our
asset-liability Management strategy, which is designed to mitigate the risk to
us from changes in market interest rates, may not prevent changes in interest
rates or securities market downturns from reducing deposit outflow or from
having a material adverse effect on our results of operations, our financial
condition or the value of our investments.




We
expect to incur additional expenses in connection with our compliance with
Sarbanes-Oxley.


Under
Section 404 of the Sarbanes-Oxley Act of 2002, we were required to conduct
a comprehensive review and assessment of the adequacy of our existing financial
systems and controls at December 31, 2007.  Future reviews of our
financial systems and controls may uncover deficiencies in existing systems and
controls. If that is the case, we would have to take the necessary steps to
correct any deficiencies, which may be costly and may strain our Management
resources and negatively impact earnings.  We also would be required to
disclose any such deficiencies, which could adversely affect the market price of
our common stock. At December 31, 2008, we will be required to obtain an
attestation report from a registered public accounting firm on the effectiveness
of our internal controls over financial reporting.




We
operate in a highly regulated environment and may be adversely affected by
changes in federal, state and local laws and regulations.


We
are subject to extensive regulation, supervision and examination by federal and
state banking authorities. Any change in applicable regulations or federal,
state or local legislation could have a substantial impact on us and our
operations. Additional legislation and regulations that could significantly
affect our powers, authority and operations may be enacted or adopted in the
future, which could have a material adverse effect on our financial condition
and results of operations. Further, regulators have significant discretion and
authority to prevent or remedy unsafe or unsound practices or violations of laws
by banks and bank holding companies in the performance of their supervisory and
enforcement duties. The exercise of regulatory authority may have a negative
impact on our results of operations and financial
condition.


Like
other bank holding companies and financial institutions, we must comply with
significant anti-money laundering and anti-terrorism laws.  Under
these laws, we are required, among other things, to enforce a customer
identification program and file currency transaction and suspicious activity
reports with the federal government. Government agencies have substantial
discretion to impose significant monetary penalties on institutions which fail
to comply with these laws or make required reports.





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Risk
Associated with an Investment in our Common Stock




The
market price of our common stock is established between a buyer and
seller.


First
Guaranty Bank acts as the transfer agent for First Guaranty Bancshares, Inc. All
shares traded are agreed upon by mutual buyers and sellers. First Guaranty
Bancshares, Inc. is not traded on an exchange, therefore liquidation and/or
purchases of stock may not be readily available.




Our
Management controls a substantial percentage of our common stock and therefore
have the ability to exercise substantial control over our affairs.


As
of December 31, 2007, our directors and executive officers (and their
affiliates) beneficially owned 1,894,735 shares or approximately 34.1% of our
common stock. Because of the large percentage of common stock held by our
directors and executive officers, such persons could significantly influence the
outcome of any matter submitted to a vote of our shareholders even if other
shareholders were in favor of a different result.




Item
1B – Unresolved Staff Comments


None.





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Item
2 - Properties


The
Company does not directly own any real estate, but it does own real estate
indirectly through its subsidiaries. The Bank operates 18 retail-banking
centers. The following table sets forth certain information relating to each
office. The Bank also owns three additional properties which are currently not
being used as banking facilities. One of the properties is a banking center
location previously owned and operated by Homestead Bank but was closed at the
time of the merger. The Bank’s intentions are to sell this property. In
addition, the Bank owns two parcels of raw land which it intends to build de
nevo banking center locations. The net book value of our properties at December
31, 2007 was $9.4 million.




Location
            
            Use
      of Facilities
            
            Year
      Facility Opened or Acquired
            
            Owned/
              LeasedFirst
      Guaranty Square
              400
      East Thomas Street
              Hammond,
      LA 70401
            
            Bank’s
      Main Office
            
            1975
            
            Owned2111
      West Thomas Street
              Hammond,
      LA 70401
            
            Guaranty West Banking Center
            
            1974
            
            Owned100
      East Oak Street
              Amite,
      LA 70422
            
            Amite Banking Center
            
            1970
            
            Owned455
      Railroad Avenue
              Independence,
      LA 70443
            
            Independence Banking Center
            
            1979
            
            Owned301
      Avenue F
              Kentwood,
      LA 70444
            
            Kentwood Banking Center
            
            1975
            
            Owned170
      West Hickory
              Ponchatoula,
      LA 70454
            
            Ponchatoula Banking Center
            
            1960
            
            Owned196
      Burt Blvd
              Benton,
      LA 71006
            
            Benton Banking Center
            
            1999
            
            Owned126
      South Hwy. 1
              Oil
      City, LA 71061
            
            Oil City Banking Center
            
            1999
            
            Owned401
      North 2nd
      Street
              Homer,
      LA  71040
            
            Homer Main Banking Center
            
            1999
            
            Owned10065
      Hwy 79
              Haynesville,
      LA 71038
            
            Haynesville Banking Center
            
            1999
            
            Owned117
      East Hico Street
              Dubach,
      LA 71235
            
            Dubach Banking Center
            
            1999
            
            Owned102
      East Louisiana Avenue
              Vivian,
      LA 71082
            
            Vivian Banking Center
            
            1999
            
            Owned500
      North Cary
              Jennings,
      LA 70546
            
            Jennings Banking Center
            
            1999
            
            Owned799
      West Summers Drive
              Abbeville,
      LA 70510
            
            Abbeville Banking Center
            
            1999
            
            Owned105
      Berryland
              Ponchatoula,
      LA 70454
            
            Berryland Banking Center
            
            2004
            
            Leased2231
      S. Range Avenue
              Denham
      Springs, LA 70726
            
            Denham Springs Banking Center
            
            2005
            
            OwnedNorth
      6th
      Street
              Ponchatoula,
      LA 70454
            
            Ponchatoula Banking Center
            
            2007
            
            Owned29815
      Walker Rd S
              Walker,
      LA 70785
            
            Walker Banking Center
            
            2007
            
            Owned








- 15
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 Table
of Contents





Item
3 - Legal Proceedings


The
Company is subject to various legal proceedings in the normal course of its
business. It is Management’s belief that the ultimate resolution of such claims
will not have a material adverse effect on the financial position or results of
operations. At December 31, 2007, we were not involved in any material legal
proceedings




Item
4 - Submission of Matters to a Vote of Security
Holders


There
were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal
2007.




PART
II




Item
5 - Market for Registant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities


There
is no liquid or active market for our common stock. The Company’sshares
of common stock are not traded on a stock exchange or in any established
over-the-counter market. Trades occur primarily between individuals at a price
mutually agreed upon by the buyer and seller. Trading in the Company’s common
stock has been infrequent and such trades cannot be characterized as
constituting an active trading market. Based on information recorded in the
Bank’s Stock Transfer Agent records, Management believes that approximately
924,692 shares of the Company’s common stock were traded during 2007 of which
22,882 shares were traded in the fourth quarter of 2007. The purchasers in these
transactions were, in most cases, either affiliates of the Company or their
associates. No assurance can be given that an active trading market for the
common stock will develop.


The
following table sets forth the high and low bid quotations for First Guaranty
Bancshares, Inc.’s (and First Guaranty Bank prior to July 27, 2007) common stock
for the periods indicated. These quotations represent trades of which we are
aware and do not include retail markups, markdowns, or commissions and do not
necessarily reflect actual transactions. As of December 31, 2007, there were
5,559,644 shares of First Guaranty Bancshares, Inc. common stock issued and
outstanding. At December 31, 2007, First Guaranty Bancshares, Inc. had
approximately 1,293 shareholders of record.


2007
              
              2006Quarter
      Ended:
              High
              Low
              Dividend
              
              High
              Low
              DividendMarch
              $    24.30
              $    23.42
              $      0.15
              
              $    23.42
              $    18.57
              $      0.15June
              24.30
              24.30
              0.16
              
              23.42
              23.42
              0.15September
              24.30
              24.30
              0.16
              
              23.42
              23.42
              0.15December
              24.30
              24.30
              0.16
              
              23.42
              23.42
              0.15




Our
stockholders are entitled to receive dividends when, and if declared by the
board of directors, out of funds legally available for dividends. We have paid
consecutive quarterly cash dividends on our common stock for each of the last
ten years and the board of directors intends to continue to pay regular
quarterly cash dividends. The ability to pay dividends in the future will depend
on earnings and financial condition, liquidity and capital requirements,
regulatory restrictions, the general economic and regulatory climate and ability
to service any equity or debt obligations senior to common
stock.


There
are legal restrictions on the ability of First Guaranty Bank to pay cash
dividends to First Guaranty Bancshares, Inc.  Under federal and state
law, we are required to maintain certain surplus and capital levels and may not
distribute dividends in cash or in kind, if after such distribution we would
fall below such levels.  Specifically, an insured depository
institution is prohibited from making any capital distribution to its
shareholders, including by way of dividend, if after making such distribution,
the depository institution fails to meet the required minimum level for any
relevant capital measure including the risk-based capital adequacy and leverage
standards.


Additionally,
under the Louisiana Business Corporation Act, First Guaranty Bancshares, Inc. is
prohibited from paying any cash dividends to shareholders if, after the payment
of such dividend, if its total assets would be less than its total liabilities
or where net assets are less than the liquidation value of shares that have a
preferential right to participate in First Guaranty Bancshares, Inc.’s assets in
the event First Guaranty Bancshares, Inc. were to be
liquidated.


We
have not repurchased any shares of our outstanding common stock during the past
year.


Stock
Performance Graph


The
line graph below compares the cumulative total return for the Company’s common
stock with the cumulative total return of both the NASDAQ Stock Market Index for
U.S. companies and the NASDAQ Index for bank stocks for the period December 31,
2002 through December 31, 2007. The total return assumes the reinvestment of all
dividends and is based on a $100 investment on December 31, 1998. It also
reflects the stock price on December 31st of each year shown, although this
price reflects only a small number of transactions involving a small number of
directors of the Company or affiliates or associates and cannot be taken as an
accurate indicator of the market value of the Company’s common
stock.





Performance
Graph


Cummulative
Total Return of First Guaranty Bancshares, Inc. Compared to NASDAQ Bank
Index


and
NASDAQ Composite Index


Stock Performance Graph


Total
      Returns for the Year2003
            2004
            2005
            2006
            2007First
      Guaranty Bancshares,
      Inc.
            $110
            $114
            $139
            $168
            $179NASDAQ
      Banks
            $158
            $175
            $168
            $186
            $145NASDAQ
      Composite
            $  91
            $  99
            $101
            $110
            $121





We
have no equity based benefit plans.




Item
6 - Selected Financial Data


The
following selected financial data should be read in conjunction with the
financial statements, including the related notes, and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” which are
included elsewhere in this Form 10-K. Except for the data under “Performance
Ratios,” “Capital Ratios” and “Asset Quality Ratios,” the income statement data
and share and per share data for the years ended December 31, 2007, 2006 and
2005 and the balance sheet data as of December 31, 2007 and 2006 are derived
from the audited financial statements and related notes which are included
elsewhere in this Form 10-K, and the income statement data and share and per
share data for the years ended December 31, 2004 and 2003 and the balance sheet
data as of December 31, 2005, 2004 and 2003 are derived from the audited
financial statements and related notes that are not included in this Form
10-K.




- 16
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 Table
of Contents
  At
      or For the Years Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Year
      End Balance Sheet Data:(dollars
      in thousands)Securities
              
              $
              142,068
              
              
              $
              158,352
              
              
              $
              175,200
              
              
              $
              106,526
              
              
              $
              59,454Federal
      funds sold
              
              
              35,869
              
              
              
              6,793
              
              
              
              1,786
              
              
              
              552
              
              
              
              356Loans,
      net of unearned income
              
              
              575,256
              
              
              
              507,195
              
              
              
              491,582
              
              
              
              456,104
              
              
              
              381,342Allowance
      for loan losses
              
              
              6,193
              
              
              
              6,675
              
              
              
              7,597
              
              
              
              5,910
              
              
              
              4,942Total
      assets
              
              
              807,331
              
              
              
              714,487
              
              
              
              713,544
              
              
              
              607,154
              
              
              
              484,715Total
      deposits
              
              
              723,094
              
              
              
              626,293
              
              
              
              632,908
              
              
              
              481,358
              
              
              
              376,002Borrowings
              
              
              13,494
              
              
              
              24,568
              
              
              
              22,132
              
              
              
              71,771
              
              
              
              60,396Stockholders'
      equity
              
              
              66,533
              
              
              
              59,203
              
              
              
              53,923
              
              
              
              51,706
              
              
              
              45,798Average
      Balance Sheet Data:(dollars
      in thousands)Securities
              
              $
              152,990
              
              
              $
              178,419
              
              
              $
              109,236
              
              
              $
              87,232
              
              
              $
              58,092Federal
      funds sold
              
              
              8,083
              
              
              
              3,115
              
              
              
              6,028
              
              
              
              618
              
              
              
              128Loans,
      net of unearned income
              
              
              543,946
              
              
              
              505,623
              
              
              
              476,144
              
              
              
              415,606
              
              
              
              366,034Total
      earning assets
              
              
              712,212
              
              
              
              690,057
              
              
              
              595,141
              
              
              
              509,261
              
              
              
              431,432Total
      assets
              
              
              751,237
              
              
              
              726,593
              
              
              
              631,554
              
              
              
              542,460
              
              
              
              464,633Total
      deposits
              
              
              658,456
              
              
              
              622,869
              
              
              
              526,995
              
              
              
              438,214
              
              
              
              368,463Borrowings
              
              
              23,450
              
              
              
              42,435
              
              
              
              45,732
              
              
              
              51,558
              
              
              
              48,398Stockholders'
      equity
              
              
              63,564
              
              
              
              56,640
              
              
              
              54,901
              
              
              
              49,257
              
              
              
              43,744Performance
      Ratios:Return
      on average assets
              
              
              1.37%
              
              
              
              1.21%
              
              
              
              0.95%
              
              
              
              1.58%
              
              
              
              1.51%Return
      on average equity
              
              
              16.15%
              
              
              
              15.54%
              
              
              
              10.97%
              
              
              
              17.37%
              
              
              
              16.04%Return on
      average tangible assets(1)
              
              
              1.37%
              
              
              
              1.21%
              
              
              
              0.96%
              
              
              
              1.58%
              
              
              
              1.52%Return on
      average tangible equity(2)
              
              
              16.47%
              
              
              
              15.73%
              
              
              
              11.24%
              
              
              
              18.08%
              
              
              
              17.03%Net
      interest margin
              
              
              4.79%
              
              
              
              4.60%
              
              
              
              4.71%
              
              
              
              5.09%
              
              
              
              5.08%Average
      loans to average deposits
              
              
              82.61%
              
              
              
              81.18%
              
              
              
              90.35%
              
              
              
              94.84%
              
              
              
              99.34%Efficiency
      ratio
              
              
              54.50%
              
              
              
              50.90%
              
              
              
              55.44%
              
              
              
              52.47%
              
              
              
              55.84%Efficiency
      ratio (excluding amortization ofintangibles
      and securities transactions)
              
              
              53.32%
              
              
              
              49.12%
              
              
              
              53.55%
              
              
              
              50.33%
              
              
              
              53.45%Full
      time equivalent employees (year end)
              
              
              222
              
              
              
              196
              
              
              
              189
              
              
              
              181
              
              
              
              169


__________________________________


(1)Average
tangible assets represent average assets less average core deposit
intangibles.


(2)Average
tangible equity represents average equity less average core deposit
intangibles.








- 17
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 Table
of Contents
 
 At
      or For the Years Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Capital
      Ratios:Average
      stockholders' equity to average assets
              
              
              8.46%
              
              
              
              7.80%
              
              
              
              8.69%
              
              
              
              9.08%
              
              
              
              9.41%Average
      tangible equity to average tangible assets(1),(2)
              
              
              8.31%
              
              
              
              7.71%
              
              
              
              8.51%
              
              
              
              8.76%
              
              
              
              8.91%Stockholders'
      equity to total assets
              
              
              8.24%
              
              
              
              8.29%
              
              
              
              7.56%
              
              
              
              8.52%
              
              
              
              9.45%Tier
      1 leverage capital
              
              
              7.38%
              
              
              
              8.16%
              
              
              
              7.67%
              
              
              
              8.53%
              
              
              
              9.00%Tier
      1 capital
              
              
              10.13%
              
              
              
              9.92%
              
              
              
              8.80%
              
              
              
              9.50%
              
              
              
              10.92%Total
      risk-based capital
              
              
              11.09%
              
              
              
              11.03%
              
              
              
              10.05%
              
              
              
              10.62%
              
              
              
              12.16%Income
      Data:(dollars
      in thousands)Interest
      income
              
              $
              55,480
              
              
              $
              50,937
              
              
              $
              40,329
              
              
              $
              33,835
              
              
              $
              28,716Interest
      expense
              
              
              21,398
              
              
              
              19,206
              
              
              
              12,367
              
              
              
              8,057
              
              
              
              6,781Net
      interest income
              
              
              34,082
              
              
              
              31,731
              
              
              
              27,962
              
              
              
              25,778
              
              
              
              21,935Provision
      for loan losses
              
              
              1,918
              
              
              
              4,419
              
              
              
              5,621
              
              
              
              1,670
              
              
              
              1,258Noninterest
      income (excluding securities transactions)
              
              
              5,176
              
              
              
              4,601
              
              
              
              5,221
              
              
              
              5,082
              
              
              
              5,006Securities
      (losses) gains
              
              
              (478
              )
              
              
              (234
              )
              
              
              7
              
              
              
              (56
              )
              
              
              (23
              )Noninterest
      expense
              
              
              21,133
              
              
              
              18,373
              
              
              
              18,399
              
              
              
              16,162
              
              
              
              15,030Earnings
      before income taxes
              
              
              15,729
              
              
              
              13,306
              
              
              
              9,170
              
              
              
              12,972
              
              
              
              10,630Net
      income
              
              
              10,263
              
              
              
              8,802
              
              
              
              6,024
              
              
              
              8,556
              
              
              
              7,016Per
      Common Share Data:(3)Net
      earnings
              
              $
              1.85
              
              
              $
              1.58
              
              
              $
              1.08
              
              
              $
              1.54
              
              
              $
              1.26Cash
      dividends paid
              
              
              0.63
              
              
              
              0.60
              
              
              
              0.57
              
              
              
              0.50
              
              
              
              0.38Book
      value
              
              
              11.97
              
              
              
              10.65
              
              
              
              9.70
              
              
              
              9.30
              
              
              
              8.24Dividend
      payout ratio
              
              
              34.13%
              
              
              
              37.89%
              
              
              
              52.67%
              
              
              
              32.16%
              
              
              
              29.73%Weighted
      average number of shares outstanding
              
              
              5,559,644
              
              
              
              5,559,644
              
              
              
              5,559,644
              
              
              
              5,559,644
              
              
              
              5,559,644Number
      of share outstanding (year end)
              
              
              5,559,644
              
              
              
              5,559,644
              
              
              
              5,559,644
              
              
              
              5,559,644
              
              
              
              5,559,644Market
      data:High
              
              $
              24.30
              
              
              $
              23.42
              
              
              $
              20.00
              
              
              $
              15.27
              
              
              $
              15.27Low
              
              $
              23.42
              
              
              $
              18.57
              
              
              $
              15.27
              
              
              $
              15.12
              
              
              $
              15.27Trading
      Volume
              
              
              924,692
              
              
              
              535,264
              
              
              
              279,503
              
              
              
              104,835
              
              
              
              110,836Stockholders
      of record
              
              
              1,293
              
              
              
              1,181
              
              
              
              1,141
              
              
              
              1,148
              
              
              
              1,247Asset
      Quality Ratios:Nonperforming
      assets to total assets
              
              
              1.39%
              
              
              
              1.81%
              
              
              
              3.05%
              
              
              
              1.18%
              
              
              
              1.46%Nonperforming
      assets to loans
              
              
              1.95%
              
              
              
              2.55%
              
              
              
              4.43%
              
              
              
              1.57%
              
              
              
              1.85%Loan
      loss reserve to nonperforming assets
              
              
              55.26%
              
              
              
              51.53%
              
              
              
              34.92%
              
              
              
              82.59%
              
              
              
              70.00%Net
      charge-offs to average loans
              
              
              0.50%
              
              
              
              1.06%
              
              
              
              0.83%
              
              
              
              0.17%
              
              
              
              0.19%Provision
      for loan loss to average loans
              
              
              0.35%
              
              
              
              0.87%
              
              
              
              1.18%
              
              
              
              0.40%
              
              
              
              0.34%Allowance
      for loan loss to total loans
              
              
              1.08%
              
              
              
              1.32%
              
              
              
              1.55%
              
              
              
              1.30%
              
              
              
              1.30%




__________________________________
 (1)Average
tangible assets represents average assets less average core deposit
intangibles.
 (2)Average
tangible equity represents average equity less average core deposit
intangibles.
 (3)For the
years ended  2003, 2004 and 2005 amounts have been restated to reflect
a stock dividend of one-third of a share of $1 par value common stock for each
share of $1 and $5
 par value common
stock outstanding, accounted for as a four-for-three stock split, effective and
payable to stockholders of record as of October 20,
2005.


Item
7 - Management’s Discussion and Analysis of Financial Condition
and Results of Operations


First
Guaranty Bancshares, Inc. became the holding company for First Guaranty Bank on
July 27, 2007 in a corporate reorganization (see “Recent Developments”). In
addition, First Guaranty Bancshares, Inc. completed its acquisition of Homestead
Bancorp on July 30, 2007. Information at or for the year ended December 31,
2006, and any prior periods, reflects the operations of First Guaranty Bank on a
stand-alone basis. Prior to becoming the holding company of First Guaranty Bank,
First Guaranty Bancshares, Inc. had no assets, liabilities or
operations.


This
discussion and analysis reflects our financial statements and other relevant
statistical data, and is intended to enhance your understanding of our financial
condition and results of operations. Reference should be made to those financial
statements of this Form 10-K and the selected financial data (above) presented
in this report in order to obtain a better understanding of the commentary which
follows.


For
the years ended 2005, 2004, and 2003 all per share data in this discussion has
been adjusted to reflect the stock dividend of one-third of a share of the $1
par value common stock for each share of the $1 and $5 par value common stock
outstanding, accounted for as a four-for-three stock split, effective and
payable to stockholders of record as of October 20, 2005. Fractional shares were
settled for cash.








- 18
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 Table
of Contents


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, which could
cause our actual results and experience to differ from the anticipated results
and expectations, expressed in such forward-looking
statements.




Application
of Critical Accounting Policies


The
accounting and reporting policies of the Company conform to generally accepted
accounting principles in the United States of America and to predominant
accounting practices within the banking industry. Certain critical accounting
policies require judgment and estimates which are used in the preparation of the
financial statements.


Allowance
for Loan Losses. The Company’s most critical accounting policy relates to
its allowance for loan losses. The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans are charged
against the allowance for loan losses when Management believes that the
collectability of the principal is unlikely. The allowance, which is based on
the evaluation of the collectability of loans and prior loan loss experience, is
an amount Management believes will be adequate to reflect the risks inherent in
the existing loan portfolio and that exist at the reporting date. The
evaluations take into consideration a number of subjective factors including
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, current economic conditions that may
affect a borrower’s ability to pay, adequacy of loan collateral and other
relevant factors.


Changes
in such estimates may have a significant impact on the financial statements. For
further discussion of the allowance for loan losses, see the “Allowance for Loan
Losses” section of this analysis and Note 1 to the Consolidated Financial
Statements.


Valuation
of Goodwill, Intangible Assets and Other Purchase Accounting Adjustments.The Company accounts for acquisitions in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,”
which requires the use of the purchase method of accounting. For purchase
acquisitions, the Company is required to record the assets acquired, including
identified intangible assets and liabilities assumed, at their fair value, which
in many instances involves estimates based on third party valuations, such as
appraisals, or internal valuations based on discounted cash flow analyses or
other valuation techniques. The determination of the useful lives of intangible
assets is subjective as is the appropriate amortization period for such
intangible assets. In addition, purchase acquisitions typically result in
recording goodwill. The Company performs a goodwill valuation at least annually.
Impairment testing of goodwill is a two step process that first compares the
fair value of goodwill with its carrying amount, and second measures impairment
loss by comparing the implied fair value of goodwill with the carrying amount of
that goodwill. Based on Management’s goodwill impairment tests, there was no
impairment of goodwill at December 31, 2007. For additional information on
goodwill and intangible assets, see Notes 1 and 8 to the Consolidated Financial
Statements.




Recent
Developments


During
2007, the Company engaged in the following transactions:




Formation
of Holding Company; Share Exchange


On
July 27, 2007, (the “Effective Date”), First Guaranty Bancshares, Inc., a
Louisiana corporation (the “Company”) became the holding company for First
Guaranty Bank (the “Reorganization”), a Louisiana chartered bank (the “Bank”),
pursuant to an Agreement and Plan of Exchange dated as of July 27, 2007 (the
“Agreement”).  Pursuant to the Agreement, on the Effective Date, each
issued and outstanding share of the Bank’s common stock, par value $1.00 per
share, automatically was converted into and exchanged for one share of the
Company’s common stock, par value $1.00 per share. On the Effective Date, the
Bank became a wholly owned subsidiary of the Company and the stockholders of the
Bank became stockholders of the Company.


Prior
to the Effective Date of the Reorganization, the Bank’s common stock was
registered under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), as administered by the
FDIC.




Homestead
Bancorp, Inc. Merger – July 30, 2007


The
Company completed its acquisition of Homestead Bancorp, Inc for cash totaling
$12.1 million. The transaction resulted in $1.9 million of goodwill and $2.1
million of core deposit intangibles. At acquisition, Homestead had total assets
of $125.6 million, including loans of $74.4 million and deposits were $67.4
million (see Note 3).





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 Table
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Pending
Acquisitions - First Community Holding Company – November 2, 2007


On
November 2, 2007, First Guaranty Bancshares, Inc. and First Community Holding
Company (“BHC”), a Louisiana corporation and holding company for First Community
Bank, entered into an Agreement and Plan of Reorganization (the “Merger
Agreement”) pursuant to which, among other things, the Company will acquire all
of the issued and outstanding shares of capital stock of First Community BHC and
all of the outstanding and unexercised options of First Community
BHC.


Under
the terms and subject to the conditions of the Merger Agreement, which has been
approved by the Boards of Directors of First Guaranty BHC and First Community
BHC, all of the outstanding common stock of First Community BHC will be
cancelled in exchange for $34.06 per share. All of the outstanding and
unexercised options to acquire shares of common stock of First Community BHC
will be cancelled in exchange for an amount in cash per outstanding and
unexercised option equal to $26.06. The Company will acquire First Community BHC
for approximately $19 million in cash. The Company anticipates using cash and
proceeds from the issuance of perpetual preferred
stock.


Consummation
of the Interim Merger is subject to various conditions, including
(i) requisite approvals of the holders of First Community BHC common stock
and (ii) receipt of regulatory approvals. The acquisition is subject
to customary conditions, including the approval of the shareholders of First
Community Holding Company and the approval of certain financial institution
regulatory authorities (see Note 3).


For
more information on the Company’s acquisitions, see Note 3 to the Consolidated
Financial Statements.




Financial
Condition


Assets.Total assets at December 31, 2007 were $807.3 million, an increase of
$92.8 million, or 13.0%, from $714.5 million at December 31, 2006. Assets
acquired from the Homestead Bank acquisition totaled $129.6 million, however
$44.5 million of the acquired securities and $34.3 million ofthe acquired loans were sold in 2007 (see Note 3). An increase of
$68.5 million in net loans was offset by a $16.3 million decrease in securities.
Total deposits increased by $96.8 million or 15.5% from 2006 to 2007. At
December 31, 2007, long-term borrowings were $3.1 million, a decrease of $14.9
million or 82.8%, from $18.0 million at December 31,
2006.


Investment
Securities.  The securities portfolio totaled $142.1 million at
December 31, 2007, representing a decrease of $16.3 million from December 31,
2006. Securities sales, calls and repayments reduced the securities portfolio
and primarily funded the increase in the loan portfolio. The primary changes in
the portfolio consisted of $575.5 million in purchases, $45.0 million in
securities acquired in the Homestead Bank merger, sales of $65.2 million, calls
totaling $23.0 million and maturities of $548.8 million. The portfolio provides
a relatively stable source of income and has lower interest rate and credit risk
compared to loans.


At
December 31, 2007 approximately 34.6% of the securities portfolio (excluding
Federal Home Loan Bank stock) mature in less than one year while securities with
maturity dates over 10 years totaled 47.0% of the portfolio. At December 31,
2007, the average maturity of the securities portfolio was 3.3 years, compared
to the average maturity at December 31, 2006 of 7.3
years.


At
December 31, 2007, securities totaling $105.6 million were classified as
available for sale and $36.5 million were classified as held to maturity as
compared to $111.4 million and $47.0 million, respectively at December 31,
2006.


The
book yields on securities available for sale ranged from 3.3% to 8.5% at
December 31, 2007, exclusive of the effect of changes in fair value reflected as
a component of stockholders’ equity. The book yields on held to maturity
securities ranged from 3.7% to 6.1%.


Average
securities as a percentage of average interest-earning assets were 21.5% and
25.9% at December 31, 2007 and 2006, respectively. Most securities held at
December 31, 2007 and 2006 qualified as securities pledgeable to collateralize
repurchase agreements and public funds. At December 31, 2007 and 2006, $131.6
million and $147.3 million in securities were pledged,
respectively.


Loans.At December 31, 2007, the loan portfolio (loans, net of unearned income)
totaled $575.3 million, an increase of approximately $68.1 million, or 13.4%,
from the December 31, 2006 level of $507.2 million. The Company acquired $40.4
million in loans from the merger with Homestead Bank (see Note 3).


Loans
represented 79.6% of deposits at December 31, 2007, compared to 81.0% of
deposits at December 31, 2006. The majority of the loan increases continued to
be in the real estate loan segments of the portfolio. Real estate and related
loans comprised 79.1% of the portfolio in 2007 as compared to 81.5% in 2006.
Loan charge-offs taken during 2007 totaled $3.9 million, compared to charge-offs
of $5.9 million in 2006. Of the loan charge-offs in 2007, approximately $3.0
million were loans secured by real estate of which $2.2 million were commercial
real estate and approximately $0.8 million were residential properties. In 2007,
recoveries of $1.2 million were recognized on loans previously charged off as
compared to $547,000 in 2006. Of the loan charge-offs in 2006, $4.6 million
related to home mortgages, as discussed below. In 2006, recoveries of $547,000
were recognized on these loan charge-offs and other loans previously charged off
as compared to $228,000 in 2005.


In
2005, we discovered mortgage loans and commitments originated in one branch
involved irregularities suggesting that many of these mortgage loans had been
made against overvalued collateral on the basis of misleading loan applications.
As of December 31, 2007, the aggregate principal balance on these loans was
approximately $0.8 million. The allowance for loan losses to provide for any
potential future losses relating to these two remaining home mortgage loans
totaled $178,000. For the year ended December 31, 2007, we charged off
approximately $363,000 as a result of these mortgage loans. As of December 31,
2006, the aggregate principal balance on these loans was approximately $2.5
million. The allowance for loan losses to provide for any potential future
losses relating to these 11 remaining home mortgage loans totaled $206,000. For
the year ended December 31, 2006, we charged off approximately $4.6 million as a
result of these mortgage loans.


In
2007, excluding the merger with Homestead Bank (see Note 3), loan growth
was geographically dispersed between north and south Louisiana (throughout
our market area). Increased loan volume from larger commercial real estate
customers outpaced loan demand from consumer clients in this
period.




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 Table
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Nonperforming
Assets. Nonperforming assets were $11.2 million, or 1.4% of total assets
at December 31, 2007, compared to $13.3 million, or 1.9% of total assets at
December 31, 2006. The decrease resulted from a $2.2 million, or 85.3%, decrease
in other real estate to $373,000 at December 31, 2007 from $2.5 million at
December 31, 2006. The decrease in other real estate was primarily the result of
a reduction in properties foreclosed on the home mortgage loans and commitments
from prior years which involved irregularities (see Note
6).


Deposits.
From December 31, 2006 to December 31, 2007, total deposits increased by $96.8
million or 15.5%, to $723.1 million at December 31, 2007 from $626.3 million at
December 31, 2006. In 2007, noninterest-bearing demand deposits decreased $1.8
million, or 1.5%. Interest-bearing demand deposits increased $37.8 million,
savings deposits increased $3.9 million and time deposits increased $56.9
million. The increased deposits include the merger with Homestead Bank (see Note
3). The increase in deposits was due to a $62.8 million increase in individual
and business deposits while public fund deposits decreased by $34.0 million. The
increase in core deposits (comprised of interest-bearing demand deposits,
noninterest-bearing demand deposits and savings accounts) resulted from $67.4
million acquired in the merger with Homestead Bank, a series of marketing
campaigns launched in 2007 and a continued effort to obtain deposit
relationships with new and existing loan customers.


Borrowings.Short-term
borrowings increased $3.8 million in 2007 to $10.4 million at December 31, 2007
from $6.6 million at December 31, 2006. Short-term borrowings are used to manage
liquidity on a daily or otherwise short-term basis. The short-term borrowings at
December 31, 2007 and 2006 respectively was comprised of repurchase agreements.
Long-term borrowings decreased $14.9 million, or 82.8%, to $3.1 million at
December 31, 2007, compared to $18.0 million at December 31, 2006. At December
31, 2007, long-term borrowings consisted of subordinated debt (see Note
10). At December 31, 2006, long-term borrowings consisted of advances from the
Federal Home Loan Bank, all of which were paid during
2007.


Equity.Total equity increased $7.3 million or 12.4% to $66.5 million at December
31, 2007 from $59.2 million at December 31, 2006. The increase in stockholders’
equity reflected consolidated net income of $10.3 million during 2007, partially
offset by dividends paid of $3.5 million.














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 Table
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Loan
Portfolio Composition.The following table sets forth the composition of
our loan portfolio, excluding loans held for sale, by type of loan at the dates
indicated.




December
      31,2007
              
              
              2006
              
              
              2005As
      % of
              
              
              
              
              
              As
      % of
              
              
              
              
              
              As
      % ofBalance
              
              
              Category
              
              
              Balance
              
              
              Category
              
              
              Balance
              
              
              Category(dollars
      in thousands)Real
      estateConstruction
      & land development
              
              $
              98,127
              
              
              
              17.0%
              
              
              $
              49,837
              
              
              
              9.9%
              
              
              $
              67,099
              
              
              
              13.6%Farmland
              
              
              23,065
              
              
              
              4.0%
              
              
              
              25,582
              
              
              
              5.0%
              
              
              
              24,903
              
              
              
              5.1%1-4
      Family
              
              
              84,640
              
              
              
              14.7%
              
              
              
              67,022
              
              
              
              13.2%
              
              
              
              78,789
              
              
              
              16.0%Multifamily
              
              
              13,061
              
              
              
              2.3%
              
              
              
              14,702
              
              
              
              2.9%
              
              
              
              11,125
              
              
              
              2.3%Non-farm
      non-residential
              
              
              236,474
              
              
              
              41.1%
              
              
              
              256,176
              
              
              
              50.5%
              
              
              
              223,622
              
              
              
              45.5%Total
      real estate
              
              
              455,367
              
              
              
              79.1%
              
              
              
              413,319
              
              
              
              81.5%
              
              
              
              405,538
              
              
              
              82.5%Agricultural
              
              
              16,816
              
              
              
              2.9%
              
              
              
              16,359
              
              
              
              3.2%
              
              
              
              11,490
              
              
              
              2.3%Commercial
      and industrial
              
              
              81,073
              
              
              
              14.1%
              
              
              
              59,072
              
              
              
              11.6%
              
              
              
              54,740
              
              
              
              11.1%Consumer
      and other
              
              
              22,517
              
              
              
              3.9%
              
              
              
              18,880
              
              
              
              3.7%
              
              
              
              20,078
              
              
              
              4.1%Total
      loans before unearned income
              
              
              575,773
              
              
              
              100.0%
              
              
              
              507,630
              
              
              
              100.0%
              
              
              
              491,846
              
              
              
              100.0%Less:
      unearned income
              
              
              (517
              )
              
              
              
              
              
              
              (435
              )
              
              
              
              
              
              
              (264
              )Total
      loans after unearned income
              
              $
              575,256
              
              
              
              
              
              
              $
              507,195
              
              
              
              
              
              
              $
              491,582December
      31,2004
              
              
              2003As
      % of
              
              
              
              
              
              
              As
      % ofBalance
              
              
              Category
              
              
              Balance
              
              
              Category(dollars
      in thousands)Real
      estateConstruction
      & land development
              
              $
              72,063
              
              
              
              15.8%
              
              
              $
              36,808
              
              
              
              9.6%Farmland
              
              
              18,303
              
              
              
              4.0%
              
              
              
              19,807
              
              
              
              5.2%1-4
      Family
              
              
              86,162
              
              
              
              18.9%
              
              
              
              62,023
              
              
              
              16.3%Multifamily
              
              
              7,601
              
              
              
              1.7%
              
              
              
              6,865
              
              
              
              1.8%Non-farm
      non-residential
              
              
              178,090
              
              
              
              39.0%
              
              
              
              163,771
              
              
              
              42.9%Total
      real estate
              
              
              362,219
              
              
              
              79.4%
              
              
              
              289,274
              
              
              
              75.8%Agricultural
              
              
              9,546
              
              
              
              2.1%
              
              
              
              7,641
              
              
              
              2.0%Commercial
      and industrial
              
              
              59,135
              
              
              
              12.9%
              
              
              
              61,184
              
              
              
              16.0%Consumer
      and other
              
              
              25,495
              
              
              
              5.6%
              
              
              
              23,506
              
              
              
              6.2%Total
      loans before unearned income
              
              
              456,395
              
              
              
              100.0%
              
              
              
              381,605
              
              
              
              100.0%Less:
      unearned income
              
              
              (291
              )
              
              
              
              
              
              
              (263
              )Total
      loans after unearned income
              
              $
              456,104
              
              
              
              
              
              
              $
              381,342






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Loan
Maturities by Type.The following table summarizes the scheduled
repayments of our loan portfolio at December 31, 2007. Loans having no stated
repayment schedule or maturity and overdraft loans are reported as being due in
one year or less. Maturities are based on the final contractual payment date and
do not reflect the effect of prepayments and scheduled principal
amortization.





One
      Year
              
              
              One
      Through
              
              
              Afteror
      Less
              
              
              Five
      Years
              
              
              Five
      Years
              
              
              Total(in
      thousands)Real
      estate:Construction
      & land development
              
              $
              95,441
              
              
              $
              2,566
              
              
              $
              120
              
              
              $
              98,127Farmland
              
              
              21,438
              
              
              
              1,163
              
              
              
              464
              
              
              
              23,0651-4
      Family
              
              
              41,966
              
              
              
              25,560
              
              
              
              17,114
              
              
              
              84,640Multifamily
              
              
              12,897
              
              
              
              77
              
              
              
              87
              
              
              
              13,061Non-farm
      non-residential
              
              
              194,754
              
              
              
              37,263
              
              
              
              3,940
              
              
              
              235,957Total
      real estate
              
              
              366,496
              
              
              
              66,629
              
              
              
              21,725
              
              
              
              454,850Agricultural
              
              
              13,658
              
              
              
              3,158
              
              
              
              -
              
              
              
              16,816Commercial
      and industrial
              
              
              64,141
              
              
              
              16,771
              
              
              
              161
              
              
              
              81,073Consumer
      and other
              
              
              10,987
              
              
              
              11,317
              
              
              
              213
              
              
              
              22,517Total
      loans
              
              $
              455,282
              
              
              $
              97,875
              
              
              $
              22,099
              
              
              $
              575,256


The following
table sets forth the scheduled contractual maturities at December 31, 2007 of
fixed- and floating-rate loans excluding non-accrual loans.





December
      31, 2007Fixed
              
              
              Floating
              
              
              Total(in
      thousands)One
      year or less
              
              $
              98,095
              
              
              $
              339,955
              
              
              $
              438,050One
      to five years
              
              
              97,198
              
              
              
              1,867
              
              
              
              99,065Five
      to 15 years
              
              
              8,179
              
              
              
              144
              
              
              
              8,323Over
      15 years
              
              
              19,530
              
              
              
              -
              
              
              
              19,530Subtotal
              
              
              223,002
              
              
              
              341,966
              
              
              
              564,968Nonaccrual
      loans
              
              
              
              
              
              
              
              
              
              
              10,288Total
      loans after unearned income
              
              $
              223,002
              
              
              $
              341,966
              
              
              $
              575,256
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 Table
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Non-Performing
Assets. The table
below sets forth the amounts and categories of our non-performing assets at the
dates indicated.




At
      December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(in
      thousands)Non-accrual
      loans:Real
      estate loans:Construction
      and land development
              
              $
              1,841
              
              
              $
              2,676
              
              
              $
              16,376
              
              
              $
              206
              
              
              $
              100Farmland
              
              
              419
              
              
              
              33
              
              
              
              -
              
              
              
              -
              
              
              
              -One-
      to four- family residential
              
              
              1,819
              
              
              
              3,202
              
              
              
              3,548
              
              
              
              1,059
              
              
              
              678Multifamily
              
              
              2
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Non-farm
      non-residential
              
              
              4,950
              
              
              
              3,882
              
              
              
              153
              
              
              
              1,232
              
              
              
              756Non-real
      estate loans:Agricultural
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Commercial
      and industrial
              
              
              978
              
              
              
              267
              
              
              
              358
              
              
              
              514
              
              
              
              78Consumer
      and other
              
              
              279
              
              
              
              302
              
              
              
              655
              
              
              
              450
              
              
              
              640Total
      non-accrual loans
              
              
              10,288
              
              
              
              10,362
              
              
              
              21,090
              
              
              
              3,461
              
              
              
              2,252Loans
      90 days and greater delinquentand
      still accruing:Real
      estate loans:Construction
      and land development
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Farmland
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -One-
      to four- family residential
              
              
              544
              
              
              
              334
              
              
              
              248
              
              
              
              370
              
              
              
              529Multifamily
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Non-farm
      non-residential
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Non-real
      estate loans:Agricultural
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Commercial
      and industrial
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              28
              
              
              
              50Consumer
      and other
              
              
              3
              
              
              
              -
              
              
              
              -
              
              
              
              11
              
              
              
              3Total
      loans 90 days greaterdelinquent and still accruing
              
              
              547
              
              
              
              334
              
              
              
              248
              
              
              
              409
              
              
              
              582Restructured
      loans
              
              
              -
              
              
              
              51
              
              
              
              121
              
              
              
              134
              
              
              
              226Total
      non-performing loans
              
              
              10,835
              
              
              
              10,747
              
              
              
              21,459
              
              
              
              4,004
              
              
              
              3,060Real
      estate owned:Construction
      and land development
              
              
              84
              
              
              
              2,217
              
              
              
              -
              
              
              
              -
              
              
              
              -Farmland
              
              
              -
              
              
              
              -
              
              
              
              144
              
              
              
              133
              
              
              
              92One-
      to four- family residential
              
              
              170
              
              
              
              78
              
              
              
              81
              
              
              
              554
              
              
              
              720Multifamily
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Non-farm
      non-residential
              
              
              119
              
              
              
              245
              
              
              
              321
              
              
              
              3,018
              
              
              
              3,782Non-real
      estate loans:Agricultural
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Commercial
      and industrial
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Consumer
      and other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      real estate owned
              
              
              373
              
              
              
              2,540
              
              
              
              546
              
              
              
              3,705
              
              
              
              4,594Total
      non-performing assets
              
              $
              11,208
              
              
              $
              13,287
              
              
              $
              22,005
              
              
              $
              7,709
              
              
              $
              7,654Ratios:Non-performing
      assets to total loans
              
              
              1.95%
              
              
              
              2.62%
              
              
              
              4.48%
              
              
              
              1.69%
              
              
              
              2.01%Non-performing
      assets to total assets
              
              
              1.39%
              
              
              
              1.86%
              
              
              
              3.08%
              
              
              
              1.27%
              
              
              
              1.58%
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 Table
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For
the years ended December 31, 2007 and 2006, gross interest income that would
have been recorded had our non-accruing loans been current in accordance with
their original terms was $0.6 million and $1.4 million, respectively.




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




·
            past
      due and nonperforming assets;


·
            specific
      internal analysis of loans requiring special
  attention;


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


·
            changes
      in underwriting standards or lending procedures and
    policies;


·
            charge-off
      and recovery practices;


·
            national
      and local economic and business
conditions;


·
            nature
      and volume of loans;


·
            overall
      portfolio quality;


·
            adequacy
      of loan collateral;


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


·
            competition
      and legal and regulatory requirements on
  borrowers;


·
            examinations
      and review by our internal loan review department, independent accountants
      and third-party independent loan review personnel;
  and


·
            examinations
      of the loan portfolio by federal and state regulatory
      agencies.




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 or
special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect the estimate of
probable losses. The unallocated component of the allowance reflects the margin
of imprecision inherent in the underlying assumptions used in the methodologies
for estimating specific and general losses in the
portfolio.




- 25
-
 Table
of Contents


Allocation
of Allowance for Loan Losses. TheCompanyis
not able to accurately and efficiently provide the allocation of the allowance
for loan losses for a five-year historical period. The following
table sets forth activity in our allowance for loan losses for the periods
indicated.


At
      or For the Years Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(dollars
      in thousands)Balance
      at beginning of period
              
              $
              6,675
              
              
              $
              7,597
              
              
              $
              5,910
              
              
              $
              4,942
              
              
              $
              4,378Charge-offs:Real
      estate loans:Construction
      and land development
              
              
              (386
              )
              
              
              (5,008
              )
              
              
              -
              
              
              
              -
              
              
              
              (18
              )Farmland
              
              
              (123
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (18
              )One-
      to four- family residential
              
              
              (639
              )
              
              
              (59
              )
              
              
              (2,001
              )
              
              
              (208
              )
              
              
              (90
              )Multifamily
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Non-farm
      non-residential
              
              
              (1,901
              )
              
              
              (208
              )
              
              
              -
              
              
              
              -
              
              
              
              (201
              )Commercial
      and industrial loans
              
              
              (273
              )
              
              
              (301
              )
              
              
              (1,649
              )
              
              
              (313
              )
              
              
              (284
              )Consumer
      and other
              
              
              (563
              )
              
              
              (312
              )
              
              
              (512
              )
              
              
              (405
              )
              
              
              (250
              )Total
      charge-offs
              
              
              (3,885
              )
              
              
              (5,888
              )
              
              
              (4,162
              )
              
              
              (926
              )
              
              
              (861
              )Recoveries:Real
      estate loans:Construction
      and land development
              
              
              779
              
              
              
              39
              
              
              
              -
              
              
              
              -
              
              
              
              -Farmland
              
              
              14
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -One-
      to four- family residential
              
              
              14
              
              
              
              25
              
              
              
              5
              
              
              
              20
              
              
              
              1Multifamily
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Non-farm
      non-residential
              
              
              4
              
              
              
              40
              
              
              
              -
              
              
              
              -
              
              
              
              -Commercial
      and industrial loans
              
              
              148
              
              
              
              304
              
              
              
              86
              
              
              
              152
              
              
              
              104Consumer
      and other
              
              
              201
              
              
              
              139
              
              
              
              137
              
              
              
              52
              
              
              
              62Total
      recoveries
              
              
              1,160
              
              
              
              547
              
              
              
              228
              
              
              
              224
              
              
              
              167Net
      charge-offs
              
              
              (2,725
              )
              
              
              (5,341
              )
              
              
              (3,934
              )
              
              
              (702
              )
              
              
              (694
              )Provision
      for loan losses
              
              
              1,918
              
              
              
              4,419
              
              
              
              5,621
              
              
              
              1,670
              
              
              
              1,258Additional
      provision from acquisition
              
              
              325
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      at end of period
              
              $
              6,193
              
              
              $
              6,675
              
              
              $
              7,597
              
              
              $
              5,910
              
              
              $
              4,942Ratios:Net
      loan charge-offs to average loans
              
              
              0.50%
              
              
              
              1.06%
              
              
              
              0.83%
              
              
              
              0.17%
              
              
              
              0.19%Net
      loan charge-offs to loans at end of period
              
              
              0.47%
              
              
              
              1.05%
              
              
              
              0.80%
              
              
              
              0.15%
              
              
              
              0.18%Allowance
      for loan losses to loans at end of period
              
              
              1.08%
              
              
              
              1.32%
              
              
              
              1.55%
              
              
              
              1.30%
              
              
              
              1.30%Net
      loan charge-offs to allowance for loan losses
              
              
              44.00%
              
              
              
              80.01%
              
              
              
              51.78%
              
              
              
              11.88%
              
              
              
              14.04%Net
      loan charge-offs to provision charged to expense
              
              
              142.04%
              
              
              
              120.86%
              
              
              
              69.99%
              
              
              
              42.04%
              
              
              
              55.17%
  Investment
Securities Portfolio. The securities portfolio totaled $142.1 million at
December 31, 2007 and consisted principally of U.S. Government agency
securities, mortgage-backed obligations, asset-backed securities, corporate debt
securities and mutual funds or other equity securities. The portfolio provides
us with a relatively stable source of income and provides a balance to interest
rate and credit risks as compared to other categories of the balance
sheet.
 At
December 31, 2007, $49.2 million or 34.6% of our securities (excluding Federal
Home Loan Bank of Dallas stock) were scheduled to mature in less than one year.
This includes $48.9 million in discount notes that are being used solely for
pledging purposes. When excluding these securities, only 1.0% of our securities
mature in less than one year. Securities with maturity dates over 15 years
totaled 5.0% of the total portfolio or 7.6% of the portfolio after deducting the
discount notes for pledging. The average maturity of the securities portfolio
was 3.3 years.
 At
December 31, 2007, securities totaling $105.6 million were classified as
available for sale and $36.5 million were classified as held to maturity,
compared to $111.4 million classified as available for sale and $47.0 million
classified as held to maturity at December 31, 2006. Management periodically
assesses the quality of our investment holdings using procedures similar to
those used in assessing the credit risks inherent in the loan portfolio. At
December 31, 2007, it is Management’s opinion that we held no investment
securities which bear a greater than the normal amount of credit risk as
compared to similar investments and that no securities had an amortized cost
greater than their recoverable value.
 Average
securities as a percentage of average interest-earning assets were 21.5% for the
year December 31, 2007 and 25.9% for the year ended December 31, 2006. All
securities held at December 31, 2007 qualified as pledgeable securities, except
$5.8 million of debt securities and $3.3 million of equity securities.
Securities pledged at December 31, 2007 totaled $131.6
million.
  - 26
-
 Table
of Contents




The following
tables set forth the composition of our investment securities portfolio
(excluding Federal Home Loan Bank of Dallas stock) at the dates
indicated.




December
      31, 2007
              
              
              December
      31, 2006
              
              
              December
      31, 2005Gross
              
              
              Gross
              
              
              
              
              
              
              
              
              Gross
              
              
              Gross
              
              
              
              
              
              
              
              
              Gross
              
              
              GrossAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              Fair
              
              
              Amortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              Fair
              
              
              Amortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              Value
              
              
              Cost
              
              
              Gains
              
              
              Losses
              
              
              Value
              
              
              Cost
              
              
              Gains
              
              
              Losses
              
              
              Value(in
      thousands)Available-for-sale:U.S.
      Government Agencies
              
              $
              92,962
              
              
              $
              26
              
              
              $
              (25
              )
              
              $
              92,963
              
              
              $
              98,369
              
              
              $
              -
              
              
              $
              (1,226
              )
              
              $
              97,143
              
              
              $
              95,880
              
              
              $
              20
              
              
              $
              (805
              )
              
              $
              95,095Mortgage-backed
      obligations
              
              
              2,016
              
              
              
              43
              
              
              
              (23
              )
              
              
              2,036
              
              
              
              4,077
              
              
              
              39
              
              
              
              (103
              )
              
              
              4,013
              
              
              
              2,712
              
              
              
              3
              
              
              
              (101
              )
              
              
              2,614Asset-backed
      securities
              
              
              1,340
              
              
              
              -
              
              
              
              (95
              )
              
              
              1,245
              
              
              
              1,385
              
              
              
              1
              
              
              
              (1
              )
              
              
              1,385
              
              
              
              426
              
              
              
              -
              
              
              
              (2
              )
              
              
              424Corporate
      debt securities
              
              
              5,954
              
              
              
              50
              
              
              
              (214
              )
              
              
              5,790
              
              
              
              7,394
              
              
              
              31
              
              
              
              (61
              )
              
              
              7,364
              
              
              
              8,157
              
              
              
              36
              
              
              
              (111
              )
              
              
              8,082Mutual
      funds or other equity securities
              
              
              3,805
              
              
              
              22
              
              
              
              (291
              )
              
              
              3,536
              
              
              
              1,500
              
              
              
              -
              
              
              
              (52
              )
              
              
              1,448
              
              
              
              1,500
              
              
              
              -
              
              
              
              (130
              )
              
              
              1,370Total
      securities
              
              $
              106,077
              
              
              $
              141
              
              
              $
              (648
              )
              
              $
              105,570
              
              
              $
              112,725
              
              
              $
              71
              
              
              $
              (1,443
              )
              
              $
              111,353
              
              
              $
              108,675
              
              
              $
              59
              
              
              $
              (1,149
              )
              
              $
              107,585Held-to-maturity:U.S.
      Government Agencies
              
              $
              33,984
              
              
              $
              24
              
              
              $
              (281
              )
              
              $
              33,727
              
              
              $
              43,976
              
              
              $
              -
              
              
              $
              (1,280
              )
              
              $
              42,696
              
              
              $
              63,968
              
              
              $
              -
              
              
              $
              (1,000
              )
              
              $
              62,968Mortgage-backed
      obligations
              
              
              2,514
              
              
              
              -
              
              
              
              (35
              )
              
              
              2,479
              
              
              
              3,023
              
              
              
              -
              
              
              
              (105
              )
              
              
              2,918
              
              
              
              3,647
              
              
              
              -
              
              
              
              (122
              )
              
              
              3,525Total
      securities
              
              $
              36,498
              
              
              $
              24
              
              
              $
              (316
              )
              
              $
              36,206
              
              
              $
              46,999
              
              
              $
              -
              
              
              $
              (1,385
              )
              
              $
              45,614
              
              
              $
              67,615
              
              
              $
              -
              
              
              $
              (1,122
              )
              
              $
              66,493




Portfolio
Maturities and Yields.The composition and maturities of the
investment securities portfolio at December 31, 2007 are summarized in the
following table. Maturities are based on the final contractual payment dates,
and do not reflect the impact of prepayments or early redemptions that may
occur.





More
      than One Year
              
              
              More
      than Five YearsOne
      Year or Less
              
              
              through
      Five Years
              
              
              through
      Ten Years
              
              
              More
      than Ten YearsWeighted
              
              
              
              
              
              Weighted
              
              
              
              
              
              Weighted
              
              
              
              
              
              WeightedAmortized
              
              
              Average
              
              
              Amortized
              
              
              Average
              
              
              Amortized
              
              
              Average
              
              
              Amortized
              
              
              AverageCost
              
              
              Yield
              
              
              Cost
              
              
              Yield
              
              
              Cost
              
              
              Yield
              
              
              Cost
              
              
              Yield(dollars
      in thousands)Investment
      securities held to maturity:U.S.
      Government agencies
              
              $
              -
              
              
              
              -
              
              
              $
              999
              
              
              
              4.15%
              
              
              $
              9,469
              
              
              
              4.57%
              
              
              $
              23,516
              
              
              
              5.49%Mortgage-backed
      obligations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              365
              
              
              
              3.66%
              
              
              
              2,149
              
              
              
              4.70%Total
      securities held to maturity
              
              $
              -
              
              
              
              -
              
              
              $
              999
              
              
              
              4.15%
              
              
              $
              9,834
              
              
              
              4.53%
              
              
              $
              25,665
              
              
              
              5.42%Investment
      securities available for sale:U.S.
      Government agencies
              
              $
              48,817
              
              
              
              4.12%
              
              
              $
              7,900
              
              
              
              5.00%
              
              
              $
              3,805
              
              
              
              5.24%
              
              
              $
              32,440
              
              
              
              5.88%Mortgage-backed
      obligations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,016
              
              
              
              5.43%Asset-backed
      securities
              
              
              -
              
              
              
              -
              
              
              
              90
              
              
              
              5.92%
              
              
              
              -
              
              
              
              -
              
              
              
              1,250
              
              
              
              8.16%Corporate
      debt securities
              
              
              365
              
              
              
              6.00%
              
              
              
              2,683
              
              
              
              5.48%
              
              
              
              763
              
              
              
              5.91%
              
              
              
              2,143
              
              
              
              6.99%Mutual
      funds or other equity securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,805
              
              
              
              6.47%Total
      securities available for sale
              
              $
              49,182
              
              
              
              4.13
              %
              
              $
              10,673
              
              
              
              5.13%
              
              
              $
              4,568
              
              
              
              5.35%
              
              
              $
              41,654
              
              
              
              6.04%Total
      SecuritiesWeightedAmortized
              
              
              
              
              
              
              AverageCost
              
              
              Fair
      Value
              
              
              Yield(dollars
      in thousands)Investment
      securities held to maturity:U.S.
      Government agencies
              
              $
              33,984
              
              
              $
              33,727
              
              
              
              5.19%Mortgage-backed
      obligations
              
              
              2,514
              
              
              
              2,479
              
              
              
              4.55%Total
      securities held to maturity
              
              $
              36,498
              
              
              $
              36,206
              
              
              
              5.15%Investment
      securities available for sale:U.S.
      Government agencies
              
              $
              92,962
              
              
              $
              92,963
              
              
              
              4.85%Mortgage-backed
      obligations
              
              
              2,016
              
              
              
              2,036
              
              
              
              5.43%Asset-backed
      securities
              
              
              1,340
              
              
              
              1,245
              
              
              
              8.01%Corporate
      debt securities
              
              
              5,954
              
              
              
              5,790
              
              
              
              6.22%Mutual
      funds or other equity securities
              
              
              3,805
              
              
              
              3,536
              
              
              
              6.47%Total
      securities available for sale
              
              $
              106,077
              
              
              $
              105,570
              
              
              
              5.04%
  - 27
-
 Table
of Contents




Deposits. The
following table sets forth the distribution of our average total deposit
accounts, by account type, for the periods indicated.





December
      31,2007
              
              2006
              
              2005(dollars
      in thousands)Balance
              
              
              As
      % of Total
              
              Wtd
      Avg Rate
              
              Balance
              
              
              As
      % of Total
              
              Wtd
      Avg Rate
              
              Balance
              
              
              As
      % of Total
              
              Wtd
      Avg RateNoninterest-bearing
      demand
              
              $
              120,740
              
              
              
              16.7
              %
              
              
              0.0
              %
              
              $
              122,540
              
              
              
              19.5
              %
              
              
              0.0
              %
              
              $
              129,827
              
              
              
              20.5
              %
              
              
              0.0
              %Interest-bearing
      demand
              
              
              223,142
              
              
              
              30.9
              %
              
              
              3.1
              %
              
              
              185,308
              
              
              
              29.6
              %
              
              
              3.1
              %
              
              
              161,958
              
              
              
              25.6
              %
              
              
              1.8
              %Savings
              
              
              45,044
              
              
              
              6.2
              %
              
              
              0.5
              %
              
              
              41,161
              
              
              
              6.6
              %
              
              
              0.4
              %
              
              
              42,633
              
              
              
              6.7
              %
              
              
              0.3
              %Time
              
              
              334,168
              
              
              
              46.2
              %
              
              
              4.6
              %
              
              
              277,284
              
              
              
              44.3
              %
              
              
              4.2
              %
              
              
              298,490
              
              
              
              47.2
              %
              
              
              3.2
              %Total
      deposits
              
              $
              723,094
              
              
              
              100.0
              %
              
              
              
              
              
              $
              626,293
              
              
              
              100.0
              %
              
              
              
              
              
              $
              632,908
              
              
              
              100.0
              %




As
of December 31, 2007, the aggregate amount of outstanding certificates of
deposit in amounts greater than or equal to $100,000 was approximately $167.3
million. The following table sets forth the maturity of those certificates as of
December 31, 2007, 2006 and 2005.





December
      31,2007
              
              
              2006
              
              
              2005Weighted
              
              
              
              
              
              Weighted
              
              
              
              
              
              WeightedAverage
              
              
              
              
              
              Average
              
              
              
              
              
              AverageBalance
              
              
              Rate
              
              
              Balance
              
              
              Rate
              
              
              Balance
              
              
              Rate(dollars
      in thousands)Due
      in one year or less
              
              $
              140,052
              
              
              
              4.43%
              
              
              $
              114,793
              
              
              
              4.88%
              
              
              $
              141,964
              
              
              
              3.77%Due
      after one year through three years
              
              
              20,207
              
              
              
              4.39%
              
              
              
              15,228
              
              
              
              4.27%
              
              
              
              25,938
              
              
              
              4.19%Due
      after three years
              
              
              7,083
              
              
              
              5.14%
              
              
              
              12,526
              
              
              
              5.07%
              
              
              
              12,656
              
              
              
              4.82%Total
              
              $
              167,342
              
              
              
              4.46%
              
              
              $
              142,547
              
              
              
              4.83%
              
              
              $
              180,558
              
              
              
              3.90%
   Borrowings.
The following table sets forth information concerning balances and interest
rates on all of our short-term borrowings at the dates and for the periods
indicated.




December
      31,2007
              
              
              2006
              
              
              2005(dollars
      in thousands)Outstanding
      at year end
              
              $
              10,401
              
              
              $
              6,584
              
              
              $
              8,981Maximum
      month-end outstanding
              
              
              45,766
              
              
              
              37,353
              
              
              
              32,348Average
      daily outstanding
              
              
              16,655
              
              
              
              23,731
              
              
              
              17,381Weighted
      average rate during the year
              
              
              5.18%
              
              
              
              5.19%
              
              
              
              3.14%Average
      rate at year end
              
              
              3.50%
              
              
              
              4.41%
              
              
              
              3.56%
  Long-term
borrowings consist of junior subordinated debentures totaling $3.1 million.
These debentures were issued in August 2003 for a 30 year period, callable after
5 years. The rate is LIBOR plus 300bp with quarterly interest payments. It is
currently the Company’s intent to redeem these debentures in August 2008 (see
Note 10).
  Shareholders’
Equity and Return on Equity and Assets.Shareholders’ equity provides a
source of permanent funding, allows for future growth and the ability to absorb
unforeseen adverse developments. At December 31, 2007, shareholders’ equity
totaled $66.5 million compared to $59.2 million at December 31,
2006.
 Information
regarding performance and equity ratios is as
follows:


December
      31,2007
              2006
              2005Return
      on average assets
              1.37%
              1.21%
              0.95%Return
      on average equity
              16.15%
              15.54%
              10.97%Dividend
      payout ratio
              34.13%
              37.89%
              52.67%
  - 28
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 Table
of Contents




Results
of Operations for the Years Ended December 31, 2007 and 2006


Net
Income. Net income for the year ended December 31, 2007 was $10.3
million, an increase of $1.5 million or 16.6%, from $8.8 million for the year
ended December 31, 2006. The increase in income was due primarily to an increase
in net interest income, and a decrease in the provision for loan losses
partially offset by increases in salaries and employee benefits. Net interest
income increased $2.4 million in 2007 due to an increase in average balances and
the net yield on interest-earning assets. $1.9 million was charged against the
provision for loan losses during the year ended December 31, 2007, a decrease of
$2.5 million as compared to $4.4 million for the year ended December 31, 2006.
Salaries and employee benefits increased by $1.7 million in connection with the
additional staff acquired from the Homestead Bank merger (see Note 3) and
increased support staff.


Earnings
per share for the year ended December 31, 2007 was $1.85 per share, an increase
of 16.6% or $0.26 per share from $1.58 per share for the year ended December 31,
2006.


Net
Interest Income.Net interest income is the largest component of our
earnings. It is calculated by subtracting the cost of interest-bearing
liabilities from the income earned on interest-earning assets and represents the
earnings from our primary business of gathering deposits and making loans and
investments. Our long-term objective is to manage this income to provide the
largest possible amount of income while balancing interest rate, credit and
liquidity risks.


A
financial institution’s asset and liability structure is substantially different
from that of an industrial company, in that virtually all assets and liabilities
are monetary in nature. Accordingly, changes in interest rates, 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 change of our interest-earning assets and interest-bearing
liabilities. The effects of the changing interest rate environment in recent
years and our interest sensitivity position are discussed
below.


Net
interest income in 2007 was $34.1 million, an increase of $2.4 million or 7.4%,
as compared to $31.8 million in 2006. The increase in interest income was due
principally to increases in the average balances of loans. Also during those
same periods, yields on investment securities and loans enhanced interest
income. An increase in interest income was partially offset by the increase in
interest expense from 2006 to 2007, which was attributable to the increased
volume of interest-bearing liabilities and increased cost of
funds.


Comparing
2007 to 2006, the average yield on interest-earning assets increased by 40 basis
points and the average rate paid on interest-bearing liabilities increased by 20
basis points. The net yield on interest-earning assets was 4.8% for the year
ended December 31, 2007, compared to 4.6% for 2006.


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 (leverage). The leverage for the
year ending December 31, 2007 and 2006 was 78.6% and 77.5%,
respectively.




- 29
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 Table
of Contents


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




Years
      Ended December 31,2007
              
              2006
              
              2005Average
              
              
              
              
              
              Yield/
              
              Average
              
              
              
              
              
              Yield/
              
              
              Average
              
              
              
              
              
              Yield/Balance
              
              
              Interest
              
              
              Rate
              
              Balance
              
              
              Interest
              
              
              Rate
              
              
              Balance
              
              
              Interest
              
              
              Rate(dollars
      in thousands)AssetsInterest-earning
      assets:Interest-bearing
      deposits with banks
              
              $
              1,977
              
              
              $
              87
              
              
              
              4.4
              %
              
              $
              2,323
              
              
              $
              95
              
              
              
              4.1
              %
              
              $
              2,509
              
              
              $
              96
              
              
              
              3.8
              %Securities
      (including FHLB stock)
              
              
              152,990
              
              
              
              8,381
              
              
              
              5.5
              %
              
              
              178,419
              
              
              
              9,654
              
              
              
              5.4
              %
              
              
              109,236
              
              
              
              5,637
              
              
              
              5.2
              %Federal
      funds sold
              
              
              8,083
              
              
              
              400
              
              
              
              4.9
              %
              
              
              3,115
              
              
              
              159
              
              
              
              5.1
              %
              
              
              6,028
              
              
              
              229
              
              
              
              3.8
              %Loans
      held for sale
              
              
              5,216
              
              
              
              142
              
              
              
              2.7
              %
              
              
              577
              
              
              
              27
              
              
              
              4.7
              %
              
              
              1,224
              
              
              
              87
              
              
              
              7.1
              %Loans,
      net of unearned income
              
              
              543,946
              
              
              
              46,470
              
              
              
              8.5
              %
              
              
              505,623
              
              
              
              41,002
              
              
              
              8.1
              %
              
              
              476,144
              
              
              
              34,280
              
              
              
              7.2
              %Total
      interest-earning assets
              
              
              712,212
              
              
              
              55,480
              
              
              
              7.8
              %
              
              
              690,057
              
              
              
              50,937
              
              
              
              7.4
              %
              
              
              595,141
              
              
              
              40,329
              
              
              
              6.8
              %Noninterest-earning
      assets:Cash
      and due from banks
              
              
              19,569
              
              
              
              
              
              
              
              
              
              
              
              20,415
              
              
              
              
              
              
              
              
              
              
              
              22,047Premises
      and equipment, net
              
              
              14,812
              
              
              
              
              
              
              
              
              
              
              
              12,442
              
              
              
              
              
              
              
              
              
              
              
              11,413Other
      assets
              
              
              4,644
              
              
              
              
              
              
              
              
              
              
              
              3,679
              
              
              
              
              
              
              
              
              
              
              
              2,953Total
              
              $
              751,237
              
              
              $
              55,480
              
              
              
              
              
              
              $
              726,593
              
              
              $
              50,937
              
              
              
              
              
              
              $
              631,554
              
              
              $
              40,329Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Demand
      deposits
              
              $
              196,805
              
              
              $
              6,152
              
              
              
              3.1
              %
              
              $
              180,384
              
              
              $
              5,657
              
              
              
              3.1
              %
              
              $
              124,757
              
              
              $
              2,289
              
              
              
              1.8
              %Savings
      deposits
              
              
              42,564
              
              
              
              228
              
              
              
              0.5
              %
              
              
              42,727
              
              
              
              174
              
              
              
              0.4
              %
              
              
              35,969
              
              
              
              117
              
              
              
              0.3
              %Time
      deposits
              
              
              297,193
              
              
              
              13,673
              
              
              
              4.6
              %
              
              
              269,016
              
              
              
              11,224
              
              
              
              4.2
              %
              
              
              263,720
              
              
              
              8,468
              
              
              
              3.2
              %Borrowings
              
              
              23,450
              
              
              
              1,345
              
              
              
              5.7
              %
              
              
              42,435
              
              
              
              2,151
              
              
              
              5.1
              %
              
              
              45,732
              
              
              
              1,493
              
              
              
              3.3
              %Total
      interest-bearing liabilities
              
              
              560,012
              
              
              
              21,398
              
              
              
              3.8
              %
              
              
              534,562
              
              
              
              19,206
              
              
              
              3.6
              %
              
              
              470,178
              
              
              
              12,367
              
              
              
              2.6
              %Noninterest-bearing
      liabilities:Demand
      deposits
              
              
              121,894
              
              
              
              
              
              
              
              
              
              
              
              130,742
              
              
              
              
              
              
              
              
              
              
              
              102,549Other
              
              
              5,767
              
              
              
              
              
              
              
              
              
              
              
              4,649
              
              
              
              
              
              
              
              
              
              
              
              3,926Total
      liabilities
              
              
              687,673
              
              
              
              21,398
              
              
              
              
              
              
              
              669,953
              
              
              
              19,206
              
              
              
              
              
              
              
              576,653
              
              
              
              12,367Stockholders'
      equity
              
              
              63,564
              
              
              
              
              
              
              
              
              
              
              
              56,640
              
              
              
              
              
              
              
              
              
              
              
              54,901Total
              
              $
              751,237
              
              
              
              21,398
              
              
              
              
              
              
              $
              726,593
              
              
              
              19,206
              
              
              
              
              
              
              $
              631,554
              
              
              
              12,367Net
      interest income
              
              
              $
              34,082
              
              
              
              
              
              
              
              
              
              
              $
              31,731
              
              
              
              
              
              
              
              
              
              
              $
              27,962Net
      interest rate spread(1)
              
              
              
              4.0
              %
              
              
              
              
              
              
              
              
              
              
              3.8
              %
              
              
              
              
              
              
              
              
              
              
              4.1
              %Net
      interest-earning assets(2)
              
              $
              152,200
              
              
              
              
              
              
              
              
              
              
              $
              155,495
              
              
              
              
              
              
              
              
              
              
              $
              124,963Net
      interest margin (3)
              
              
              
              4.8
              %
              
              
              
              
              
              
              
              
              
              
              4.6
              %
              
              
              
              
              
              
              
              
              
              
              4.7
              %Average
      interest-earning assets tointerest-bearing
      liabilities
              
              
              
              127.2
              %
              
              
              
              
              
              
              
              
              
              
              129.1
              %
              
              
              
              
              
              
              
              
              
              
              126.6
              %
 __________________________________
 (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.






- 30
-
 Table
of Contents
  Rate/Volume
Analysis.The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities for the periods indicated. The table distinguishes
between (i) changes attributable to rate (change in rate multiplied by the prior
period’s volume), (ii) changes attributable to volume (changes in volume
multiplied by the prior period’s rate), (iii) mixed changes (changes that are
not attributable to either rate of volume) and (iv) total increase (decrease)
(the sum of the previous columns).


Years
      Ended December 31,2007
      Compared to 2006
              
              
              2006
      Compared to 2005Increase
      (Decrease) Due To
              
              
              Increase
      (Decrease) Due ToRate/
              
              
              Increase/
              
              
              
              
              
              
              
              
              Rate/
              
              
              Increase/Volume
              
              
              Rate
              
              
              Volume
              
              
              Decrease
              
              
              Volume
              
              
              Rate
              
              
              Volume
              
              
              Decrease(in
      thousands)Interest
      earned on:Interest-bearing
      deposits with banks
              
              $
              (14
              )
              
              $
              7
              
              
              $
              (1
              )
              
              $
              (8
              )
              
              $
              (7
              )
              
              $
              6
              
              
              $
              -
              
              
              $
              (1
              )Securities
      (including FHLB stock)
              
              
              (1,376
              )
              
              
              120
              
              
              
              (17
              )
              
              
              (1,273
              )
              
              
              3,570
              
              
              
              273
              
              
              
              174
              
              
              
              4,017Federal
      funds sold
              
              
              254
              
              
              
              (5
              )
              
              
              (8
              )
              
              
              241
              
              
              
              (111
              )
              
              
              79
              
              
              
              (38
              )
              
              
              (70
              )Loans
      held for sale
              
              
              217
              
              
              
              (11
              )
              
              
              (91
              )
              
              
              115
              
              
              
              (46
              )
              
              
              (30
              )
              
              
              16
              
              
              
              (60
              )Loans,
      net of unearned income
              
              
              3,108
              
              
              
              2,194
              
              
              
              166
              
              
              
              5,468
              
              
              
              2,122
              
              
              
              4,332
              
              
              
              268
              
              
              
              6,722Total
      interest income
              
              
              2,189
              
              
              
              2,305
              
              
              
              49
              
              
              
              4,543
              
              
              
              5,528
              
              
              
              4,660
              
              
              
              420
              
              
              
              10,608Interest
      paid on:Demand
      deposits
              
              
              515
              
              
              
              (18
              )
              
              
              (2
              )
              
              
              495
              
              
              
              1,021
              
              
              
              1,623
              
              
              
              724
              
              
              
              3,368Savings
      deposits
              
              
              (1
              )
              
              
              55
              
              
              
              -
              
              
              
              54
              
              
              
              22
              
              
              
              29
              
              
              
              6
              
              
              
              57Time
      deposits
              
              
              1,176
              
              
              
              1,153
              
              
              
              120
              
              
              
              2,449
              
              
              
              170
              
              
              
              2,535
              
              
              
              51
              
              
              
              2,756Borrowings
              
              
              (962
              )
              
              
              283
              
              
              
              (127
              )
              
              
              (806
              )
              
              
              (108
              )
              
              
              825
              
              
              
              (59
              )
              
              
              658Total
      interest expense
              
              
              728
              
              
              
              1,473
              
              
              
              (9
              )
              
              
              2,192
              
              
              
              1,105
              
              
              
              5,012
              
              
              
              722
              
              
              
              6,839Change
      in net interest income
              
              $
              1,461
              
              
              $
              832
              
              
              $
              58
              
              
              $
              2,351
              
              
              $
              4,423
              
              
              $
              (352
              )
              
              $
              (302
              )
              
              $
              3,769




Provisionfor
Loan Losses.The provision for loan losses was $1.9 million and $4.4
million in 2007 and 2006, respectively. The decreased 2007 provisions were
attributable to $2.7 million in net loan charge-offs during 2007 compared to
$5.3 million in net loan charge-offs during 2006. Of the loan charge-offs in
2007, approximately $3.0 million were loan secured by real estate of which $2.2
million were commercial real estate and approximately $0.8 million were
residential properties. In 2007, recoveries of $1.2 million were recognized on
loans previously charged off as compared to $547,000 in 2006. Of the loan
charge-offs during 2006, and the consequent increase in the provision, $4.8
million related specifically to home mortgages. The allowance for loan losses at
December 31, 2007 was $6.2 million, compared to $6.7 million at December 31,
2006, and comprised 1.08% and 1.32% of total loans, respectively. Management
believes that the current level of the allowance is adequate to cover losses in
the loan portfolio given the current economic conditions, expected net
charge-offs and nonperforming asset levels.


In
July 2007, the Company signed a Final Release and Settlement Agreement with
BankInsurance, Inc., the Company’s insurance company, for a claim made by the
Company under the Financial Institution Bond for the suspected fraudulent
mortgage loans (see Note 6 to the Consolidated Financial Statements). Under this
Release and Agreement, the Company received $1.1 million. After attorney fees
and expenses, the Company recorded a loan recovery totaling $723,000
in 2007.


Noninterest
Income.Noninterest income totaled $4.7 million in 2007, a decrease of $331,000,
compared to $4.4 million in 2006. Service charges, commissions and fees totaled
$3.8 million and $3.6 million for the years ended December 31, 2007 and 2006,
respectively. Net securities losses were $478,000 in 2007, compared to $234,000
in 2006. As a result of increases in staff and mortgage loan volume, gains on
sale of loans were $272,000 in 2007, up $201,000 when compared to $71,000 gains
in 2006. Other noninterest income increased $156,000 to $1.1 million in 2007
from $926,000 in 2006 primarily from increases in bankcard fees and credit card
fee income.


Noninterest
Expense. Noninterest expense totaled $21.1 million in 2007 and $18.4
million in 2006. Salaries and benefits increased $1.7 million in 2007 to
$9.7 million from $7.9 million in 2006. The increase in salaries was primarily
related the Homestead Bank merger (see Note 3) and to staffing several
operational departments, including, credit and audit, to accommodate increased
activities. At December 31, 2007, 240 employees represented 222 full-time
equivalent staff members as compared to 196 full-time equivalent staff members
in 2006. Occupancy and equipment expense totaled $2.6 million in 2007 and $2.3
million in 2006. The net cost of other real estate and repossessions increased
$119,000 million in 2007 to $396,000 from $277,000 in 2006 due to increases
in costs incurred in connection with owning, maintaining and the sale and
disposition of other real estate owned. Other noninterest expense totaled $8.5
million in 2007, compared to $7.8 million in 2006, an increase of $673,000 or
8.6%. The increase in other noninterest expense was primarily attributable to
increased legal and professional fees, operating supplies, data processing
expenses, travel and lodging, sales tax and tax on capital expenses offset by
the reduction in amortization of core deposits.




- 31
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 Table
of Contents
  The
following is a summary of the significant components of other noninterest
expense:


Years
      Ended December 31,2007
              
              
              2006
              
              
              2005(in
      thousands)Other
      noninterest expense:Legal
      and professional fees
              
              $
              1,610
              
              
              $
              1,390
              
              
              $
              1,201Operating
      supplies
              
              
              615
              
              
              
              545
              
              
              
              514Marketing
      and public relations
              
              
              842
              
              
              
              823
              
              
              
              564Data
      processing
              
              
              955
              
              
              
              904
              
              
              
              736Travel
      and lodging
              
              
              439
              
              
              
              280
              
              
              
              280Taxes
      - sales and capital
              
              
              628
              
              
              
              582
              
              
              
              684Telephone
              
              
              211
              
              
              
              244
              
              
              
              421Amortization
      of core deposit intangibles
              
              
              203
              
              
              
              525
              
              
              
              630Other
              
              
              2,999
              
              
              
              2,535
              
              
              
              2,410Total
      other expense
              
              $
              8,502
              
              
              $
              7,828
              
              
              $
              7,440




Income
Taxes.  The provision for income taxes for the years ended
December 31, 2007 and 2006 was $5.5 million and $4.5 million respectively. The
higher provision for income taxes in 2007 reflected higher income during 2007 as
compared to 2006 resulting from increases in net interest income, reductions in
the provision for loan losses offset by increases in noninterest expense. The
Company’s effective tax rate amounted to 34.8% and 33.8% during 2007 and 2006,
respectively. The difference between the effective tax rate and the statutory
tax rate primarily relates to variances in items that are non-taxable or
non-deductible and various tax credits.




Results
of Operations for the Years Ended December 31, 2006 and 2005


Net
Income. Net income for the year ended December 31, 2006 was $8.8 million,
an increase of $2.8 million or 46.1%, from $6.0 million for the year ended
December 31, 2005. The increase in income was due primarily to an increase in
net interest income, a decrease in the provision for loan losses and a decrease
in the net cost of other real estate and repossessions. Net interest income
increased $3.8 million in 2006 due to an increase in average balances and yields
of both securities and loans. To primarily provide for current year charge-offs,
$4.4 million was charged to the loan loss provision for the year ended December
31, 2006, a decrease of $1.2 million as compared to $5.6 million for the year
ended December 31, 2005. The net cost of other real estate and repossessions
decreased by $1.2 million due to a reduction in costs incurred in connection
with owning, maintaining and the sale and disposition of other real estate
owned.


Earnings
per share for the year ended December 31, 2006 was $1.58 per share, an increase
of 46.1% or $0.50 per share from $1.08 per share for the year ended December 31,
2005.


Net
Interest Income.
Net interest income in 2006 was $31.7 million, an increase of $3.8 million or
13.5%, as compared to $28.0 million in 2005. The increase in interest income was
due principally to increases in the average balances of investment securities
and loans. Also during those same periods, yields on investment securities and
loans enhanced interest income. An increase in interest income was partially
offset by the increase in interest expense from 2005 to 2006, which was
attributable to the increased volume of interest-bearing liabilities and
increased cost of funds.


The
net yield on interest-earning assets is calculated by dividing net interest
income by our 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.


Comparing
2006 to 2005, the average yield on interest-earning assets increased by 60 basis
points and the average rate paid on interest-bearing liabilities increased by
100 basis points. The net yield on interest-earning assets was 4.6% for the year
ended December 31, 2006, compared to 4.7% for 2005.


Noninterest
Income.Noninterest income totaled $4.4 million in 2006, a decrease of $861,000,
compared to $5.2 million in 2005. Service charges, commissions and fees totaled
$3.6 million and $3.5 million for the years ended December 31, 2006 and 2005,
respectively. Net securities losses were $234,000 in 2006, compared to gains of
$7,000 in 2005. As a result of staff and mortgage loan volume reductions, gains
on sale of loans were $71,000 in 2006, down $252,000 when compared to $323,000
gains in 2005. Other noninterest income decreased $466,000 to $926,000 in 2006
from $1.4 million in 2005 primarily from the sale of Pulse stock (ATM software
vendor) in 2005 resulting from the merger of Pulse with
Discover.


Provision
for Loan Losses. The provision for loan losses was $4.4 million and $5.6
million in 2006 and 2005, respectively. The increased 2006 provisions were
attributable to $3.9 million in net loan charge-offs during 2005 and $5.3
million in net loan charge-offs during 2006.  Of the loan charge-offs
during 2006, and the consequent increase in the provision, $4.8 million related
specifically to home mortgages. Of the loans charged-off during 2005, $1.6
million related to seven distinct commercial credits. In addition, $145,000
related to home mortgages and $1.3 million were storm-related credits in
2005.  The allowance for loan losses at December 31, 2006 was $6.7
million, compared to $7.6 million at December 31, 2005, and comprised 1.32% and
1.55% of total loans, respectively.




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Noninterest
Expense. Noninterest expense totaled $18.4 million in 2006 and remained
relatively flat compared to 2005. Salaries and benefits increased $699,000 in
2006 to $7.9 million from $7.2 million in 2005. The increase in salaries was
primarily related to staffing several operational departments, including loan
review, credit and audit, to accommodate increased activities. At December 31,
2006, 214 employees represented 196 full-time equivalent staff members as
compared to 189 full-time equivalent staff members in 2005. Occupancy and
equipment expense totaled $2.3 million in 2006 and $2.2 million in 2005. The net
cost of other real estate and repossessions decreased $1.2 million in 2006 to
$277,000 from $1.5 million in 2005 due to a reduction in costs incurred in
connection with owning, maintaining and the sale and disposition of other real
estate owned. Other noninterest expense totaled $7.8 million in 2006, compared
to $7.4 million in 2005, an increase of $388,000 or 5.2%. The increase in other
noninterest expense was primarily attributable to legal and professional fees,
data processing expenses and marketing and public relations
expenses.


Income
Taxes. Our provision for income taxes for the years ended December 31,
2006 and 2005 was $4.5 million and $3.1 million respectively. The higher
provision for income taxes in 2006 resulted from higher income during 2006 as
compared to 2005. The Company’s effective tax rate amounted to 33.8% and
34.3% during 2006 and 2005, respectively. The difference between the effective
tax rate and the statutory tax rate primarily relates to variances in items that
are non-taxable or non-deductible and various tax
credits.





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Asset/Liability
Management and Market Risk


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


The
majority of our assets and liabilities are monetary in nature. Consequently, one
of our most significant forms of market risk is interest rate risk. Our assets,
consisting primarily of loans secured by real estate, have longer maturities
than our liabilities, consisting primarily of deposits. As a result, a principal
part of our business strategy is to manage interest rate risk and reduce the
exposure of our net interest income to changes in market interest rates.
Accordingly, our Board of Directors has established an Asset/Liability Committee
which is responsible for evaluating the interest rate risk inherent in our
assets and liabilities, for determining the level of risk that is appropriate
given our business strategy, operating environment, capital, liquidity and
performance objectives, and for managing this risk consistent with the
guidelines approved by the Board of Directors. Senior Management monitors the
level of interest rate risk on a regular basis and the Asset/Liability
Committee, which consists of executive Management and other bank personnel
operating under a policy adopted by the Board of Directors, meets as needed to
review our asset/liability policies and interest rate risk
position.


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


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


We
monitor interest rate risk using an interest sensitivity analysis set forth on
the following table. This analysis, which we prepare monthly, reflects the
maturity and repricing characteristics of assets and liabilities over various
time periods. The gap indicates whether more assets or liabilities are subject
to repricing over a given time period. The interest sensitivity analysis at
December 31, 2007 reflects an asset-sensitive position with a positive
cumulative gap on a one-year basis.








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INTEREST
SENSITIVITY AT DECEMBER 31, 2007





Interest
      Sensitivity Within3
      Months
              
              
              Over
      3 Months
              
              
              Total
              
              
              OverOr
      Less
              
              
              thru
      12 Months
              
              
              One
      Year
              
              
              One
      Year
              
              
              Total(dollars
      in thousands)Earning
      Assets:Loans
      (including loans held for sale)
              
              $
              377,276
              
              
              $
              84,769
              
              
              $
              462,045
              
              
              $
              117,170
              
              
              $
              579,215Securities
      (including FHLB stock)
              
              
              49,795
              
              
              
              375
              
              
              
              50,170
              
              
              
              92,853
              
              
              
              143,023Federal
      Funds Sold
              
              
              35,869
              
              
              
              -
              
              
              
              35,869
              
              
              
              -
              
              
              
              35,869Other
      earning assets
              
              
              2,218
              
              
              
              -
              
              
              
              2,218
              
              
              
              -
              
              
              
              2,218Total
      earning assets
              
              
              465,158
              
              
              
              85,144
              
              
              
              550,302
              
              
              
              210,023
              
              
              $
              760,325Source
      of Funds:Interest-bearing
      accounts:Demand
      deposits
              
              
              165,552
              
              
              
              -
              
              
              
              165,552
              
              
              
              57,590
              
              
              
              223,142Savings
      deposits
              
              
              11,261
              
              
              
              -
              
              
              
              11,261
              
              
              
              33,783
              
              
              
              45,044Time
      deposits
              
              
              128,734
              
              
              
              139,033
              
              
              
              267,767
              
              
              
              66,401
              
              
              
              334,168Short-term
      borrowings
              
              
              10,401
              
              
              
              -
              
              
              
              10,401
              
              
              
              -
              
              
              
              10,401Long-term
      borrowings
              
              
              -
              
              
              
              3,093
              
              
              
              3,093
              
              
              
              -
              
              
              
              3,093Noninterest-bearing,
      net
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              144,477
              
              
              
              144,477Total
      source of funds
              
              
              315,948
              
              
              
              142,126
              
              
              
              458,074
              
              
              
              302,251
              
              
              $
              760,325Period
      gap
              
              
              149,210
              
              
              
              (56,982
              )
              
              
              92,228
              
              
              
              (92,228
              )Cumulative
      gap
              
              $
              149,210
              
              
              $
              92,228
              
              
              $
              92,228
              
              
              $
              -Cumulative
      gap as apercent
      of earning assets
              
              
              19.62%
              
              
              
              12.13%
              
              
              
              12.13%
  Net
Interest Income at Risk.Net
interest income (NII) at risk measures the risk of a decline in earnings due to
changes in interest rates. The table below presents an analysis of our interest
rate risk as measured by the estimated changes in net interest income resulting
from an instantaneous and sustained parallel shift in the yield curve at
December 31, 2007. Shifts are measured in 100 basis point increments (+ 200
through - 200 basis points,) from base case. Base case encompasses key
assumptions for asset/liability mix, loan and deposit growth, pricing,
prepayment speeds, deposit decay rates, securities portfolio cash flows and
reinvestment strategy and the market value of certain assets under the various
interest rate scenarios. The base case scenario assumes that the current
interest rate environment is held constant throughout the forecast period; the
instantaneous shocks are performed against that yield
curve.
 Change
      in
                
                Estimated
      IncreaseInterest
                
                (Decrease)
      in NIIRates
                
                December
      31, 2007(basis
      points)-200
                
                -22.37%-100
                
                -10.70%Stable
                
                0.00%+100
                
                10.63%+200
                
                19.26%
  The
increasing rate scenarios shows higher levels of net interest income while the
decreasing scenarios show higher levels of volatility and subsequently lower
levels of NII. These scenarios are instantaneous shocks that assume balance
sheet Management will mirror base case. Should the yield curve begin to rise or
fall, Management has several strategies available to maximize earnings
opportunities or offset the negative impact to earnings. For example, in a
falling rate environment, deposit pricing strategies could be adjusted to
further sway customer behavior to non-contractual or short-term (less than 12
months) contractual deposit products which would reset downward with the changes
in the yield curve and prevailing market rates. Another opportunity at the start
of such a cycle would be reinvesting the securities portfolio cash flows into
longer term, non-callable bonds that would lock in higher
yields.
 Even
if interest rates change in the designated amounts, there can be no assurance
that our assets and liabilities would perform as anticipated. Additionally, a
change in the U.S. Treasury rates in the designated amounts accompanied by a
change in the shape of the U.S. Treasury yield curve would cause significantly
different changes to NII than indicated above. Strategic Management of our
balance sheet and earnings would be adjusted to accommodate these movements. As
with any method of measuring IRR, certain shortcomings are inherent in the
methods of analysis presented above. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Also, the ability of many borrowers to service
their debt may decrease in the event of an interest rate increase. We consider
all of these factors in monitoring its exposure to interest rate
risk.





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Liquidity
and Capital Resources


Liquidityand
Capital Resources.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 us 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. Including securities pledged to collateralize
public fund deposits, these assets represent 20.3%, 19.1% and 19.1% of the total
liquidity base at December 31, 2007, 2006 and 2005, respectively. In addition,
we maintained borrowing availability with the Federal Home Loan Bank, or FHLB,
approximating $54.7 million and $6.9 million at December 31, 2007 and December
31, 2006, respectively.  We also maintain federal funds lines of
credit totaling $59.7 million at three other correspondent banks, of which $59.7
was available at December 31, 2007, and $54.0 million was available at December
31, 2006. Management believes there is sufficient liquidity to satisfy current
operating needs.


Stockholders’
equity at December 31, 2007 was $66.5 million, an increase of $7.3 million, or
12.4%, from $59.2 million at December 31, 2006. At December 31, 2006,
stockholders’ equity was $59.2 million, an increase of $5.3 million, or 9.8%,
from $53.9 million on December 31, 2005. The increase in stockholders’ equity
primarily reflected net income for the years ended December 31, 2007 and
2006, offset by quarterly dividend payments.


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
December 31, 2007, we satisfied the minimum regulatory capital requirements and
were “well capitalized” within the meaning of federal regulatory
requirements.




Off-Balance
Sheet Arrangements


We
had $105.0 million, $45.0 million and $80.0 million in letters of credit issued
by the Federal Home Loan Bank at December 31, 2007, 2006, and 2005,
respectively, which was used as collateral for public fund deposits. The changes
in the arrangements parallel the changes in our public fund
deposits.




Contractual
Obligations


The
following table summarizes our significant fixed and determinable contractual
obligations and other funding needs by payment date at December 31, 2007. The
payment amounts represent those amounts due to the recipient and do not include
any unamortized premiums or discounts or other similar carrying amount
adjustments.

















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At December
31, 2007, our contractual obligations were as follows:


Payments
      Due by PeriodOne
      Year
              
              
              One
      Through
              
              
              Over
      Threeor
      Less
              
              
              Three
      Years
              
              
              Years
              
              
              Total(in
      thousands)Operating
      leases
              
              $
              10
              
              
              $
              21
              
              
              $
              95
              
              
              $
              126Time
      deposits
              
              
              267,850
              
              
              
              49,848
              
              
              
              16,470
              
              
              
              334,168Short-term
      borrowings
              
              
              10,401
              
              
              
              -
              
              
              
              -
              
              
              
              10,401Long-term
      borrowings (1)
              
              
              3,093
              
              
              
              -
              
              
              
              -
              
              
              
              3,093Total
              
              $
              281,354
              
              
              $
              49,869
              
              
              $
              16,565
              
              
              $
              347,788
 __________________________________
 (1)This
represents the call date of the subordinated debentures. The stated maturity is
2033.


Impact
of Inflation and Changing Prices


The
consolidated financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles,
which generally require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial companies,
the majority of the Company’s assets and liabilities are monetary in nature. As
a result, interest rates generally have a more significant impact on the
Company’s performance than does the effect of inflation. Although fluctuations
in interest rates are neither completely predictable or controllable, the
Company regularly monitors its interest rate position and oversees its financial
risk Management by establishing policies and operating limits (see
“Asset/Liability Management and Market Risk” section). Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services, since such prices are affected by inflation to a larger
extent than interest rates. Although not as critical to the banking industry as
to other industries, inflationary factors may have some impact on the Company’s
growth, earnings, total assets and capital levels. Management does not expect
inflation to be a significant factor in 2008.




Item
7A – Quantitative and Qualitative Disclosures about Market
Risk


For
discussion on this matter, see the “Asset/Liability Management and Market Risk”
section of this analysis.





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Report
of Castaing, Hussey & Lolan, LLC


Independent
Registered Accounting Firm








To the
Stockholders and Board of Directors


First
Guaranty Bancshares,
Inc.







We
have audited the accompanying consolidated balance sheets of First
Guaranty Bancshares, Inc. as of December 31, 2007 and 2006, and the related
consolidated statements of income, changes in stockholders’ equity and cash
flows for each of the years in the three-year period ended December 31, 2007.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
apropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.




In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of First Guaranty
Bancshares, Inc. as of December 31, 2007 and 2006, and the consolidated results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America.

















Castaing,
Hussey & Lolan, LLC


New
Iberia, Louisiana


March 28,
2008

































































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Item 8 - Financial Statements and Supplementary Data





FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      BALANCE SHEETS(dollars
      in thousands, except share data)December
      31,2007
              
              
              2006AssetsCash
      and cash equivalents:Cash
      and due from banks
              
              $
              22,778
              
              
              $
              17,893Interest-earning
      demand deposits with banks
              
              
              30
              
              
              
              131Federal
      funds sold
              
              
              35,869
              
              
              
              6,793Cash
      and cash equivalents
              
              
              58,677
              
              
              
              24,817Interest-earning
      time deposits with banks
              
              
              2,188
              
              
              
              2,188Investment
      securities:Available
      for sale, at fair value
              
              
              105,570
              
              
              
              111,353Held
      to maturity, at cost (estimated fair value of$36,206
      and $45,614, respectively)
              
              
              36,498
              
              
              
              46,999Investment
      securities
              
              
              142,068
              
              
              
              158,352Federal
      Home Loan Bank stock, at cost
              
              
              955
              
              
              
              2,264Loans
      held for sale
              
              
              3,959
              
              
              
              1,049Loans,
      net of unearned income
              
              
              575,256
              
              
              
              507,195Less:
      allowance for loan losses
              
              
              6,193
              
              
              
              6,675Net
      loans
              
              
              569,063
              
              
              
              500,520Premises
      and equipment, net
              
              
              16,240
              
              
              
              13,593Goodwill
              
              
              1,911
              
              
              
              -Intangible
      assets, net
              
              
              2,383
              
              
              
              456Other
      real estate, net
              
              
              373
              
              
              
              2,540Accrued
      interest receivable
              
              
              5,126
              
              
              
              5,378Other
      assets
              
              
              4,388
              
              
              
              3,330Total
      Assets
              
              $
              807,331
              
              
              $
              714,487Liabilities
      and Stockholders' EquityDeposits:Noninterest-bearing
      demand
              
              $
              120,740
              
              
              $
              122,540Interest-bearing
      demand
              
              
              223,142
              
              
              
              185,308Savings
              
              
              45,044
              
              
              
              41,161Time
              
              
              334,168
              
              
              
              277,284Total
      deposits
              
              
              723,094
              
              
              
              626,293Short-term
      borrowings
              
              
              10,401
              
              
              
              6,584Accrued
      interest payable
              
              
              2,956
              
              
              
              3,070Long-term
      borrowings
              
              
              3,093
              
              
              
              17,984Other
      liabilities
              
              
              1,254
              
              
              
              1,353Total
      Liabilities
              
              
              740,798
              
              
              
              655,284Stockholders'
      EquityCommon
      stock:$1
      par value - authorized 100,000,000 shares; issued andoutstanding
      5,559,644 shares
              
              
              5,560
              
              
              
              5,560Surplus
              
              
              26,459
              
              
              
              26,459Retained
      earnings
              
              
              34,849
              
              
              
              28,089Accumulated
      other comprehensive loss
              
              
              (335
              )
              
              
              (905
              )Total
      Stockholders' Equity
              
              
              66,533
              
              
              
              59,203Total
      Liabilities and Stockholders' Equity
              
              $
              807,331
              
              
              $
              714,487





See Notes
to Consolidated Financial Statements.





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FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF INCOME(dollars
      in thousands, except share data)Years
      Ended December 31,2007
              
              
              2006
              
              
              2005Interest
      Income:Loans
      (including fees)
              
              $
              46,470
              
              
              $
              41,002
              
              
              $
              34,280Loans
      held for sale
              
              
              142
              
              
              
              27
              
              
              
              87Deposits
      with other banks
              
              
              87
              
              
              
              95
              
              
              
              96Securities
      (including FHLB stock)
              
              
              8,381
              
              
              
              9,654
              
              
              
              5,637Federal
      funds sold
              
              
              400
              
              
              
              159
              
              
              
              229Total
      Interest Income
              
              
              55,480
              
              
              
              50,937
              
              
              
              40,329Interest
      Expense:Demand
      deposits
              
              
              6,152
              
              
              
              5,657
              
              
              
              2,289Savings
      deposits
              
              
              228
              
              
              
              174
              
              
              
              117Time
      deposits
              
              
              13,673
              
              
              
              11,224
              
              
              
              8,468Borrowings
              
              
              1,345
              
              
              
              2,151
              
              
              
              1,493Total
      Interest Expense
              
              
              21,398
              
              
              
              19,206
              
              
              
              12,367Net
      Interest Income
              
              
              34,082
              
              
              
              31,731
              
              
              
              27,962Provision
      for loan losses
              
              
              1,918
              
              
              
              4,419
              
              
              
              5,621Net
      Interest Income after Provision for Loan Losses
              
              
              32,164
              
              
              
              27,312
              
              
              
              22,341Noninterest
      Income:Service
      charges, commissions and fees
              
              
              3,822
              
              
              
              3,604
              
              
              
              3,506Net
      (losses) gains on sale of securities
              
              
              (478
              )
              
              
              (234
              )
              
              
              7Net
      gains on sale of loans
              
              
              272
              
              
              
              71
              
              
              
              323Other
              
              
              1,082
              
              
              
              926
              
              
              
              1,392Total
      Noninterest Income
              
              
              4,698
              
              
              
              4,367
              
              
              
              5,228Noninterest
      Expense:Salaries
      and employee benefits
              
              
              9,662
              
              
              
              7,926
              
              
              
              7,227Occupancy
      and equipment expense
              
              
              2,573
              
              
              
              2,342
              
              
              
              2,219Net
      cost of other real estate and repossessions
              
              
              396
              
              
              
              277
              
              
              
              1,513Other
              
              
              8,502
              
              
              
              7,828
              
              
              
              7,440Total
      Noninterest Expense
              
              
              21,133
              
              
              
              18,373
              
              
              
              18,399Income
      Before Income Taxes
              
              
              15,729
              
              
              
              13,306
              
              
              
              9,170Provision
      for income taxes
              
              
              5,466
              
              
              
              4,504
              
              
              
              3,146Net
      Income
              
              $
              10,263
              
              
              $
              8,802
              
              
              $
              6,024Per
      Common Share:Earnings
              
              $
              1.85
              
              
              $
              1.58
              
              
              $
              1.08Cash
      dividends paid
              
              $
              0.63
              
              
              $
              0.60
              
              
              $
              0.57Average
      Common Shares Outstanding
              
              
              5,559,644
              
              
              
              5,559,644
              
              
              
              5,559,644





See Notes
to Consolidated Financial Statements.











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 Table
of Contents





FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY(dollars
      in thousands)AccumulatedCommon
            
            
            Common
            
            
            
            
            
            
            
            
            OtherStock
            
            
            Stock
            
            
            
            
            
            Retained
            
            
            Comprehensive$1
      Par
            
            
            $5
      Par
            
            
            Surplus
            
            
            Earnings
            
            
            Loss
            
            
            TotalBalance
      December 31, 2004
            
            $
            5,076
            
            
            $
            2,416
            
            
            $
            24,527
            
            
            $
            19,771
            
            
            $
            (84
            )
            
            $
            51,706Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,024
            
            
            
            -
            
            
            
            6,024Change
      in unrealized loss onavailable
      for sale securities,net
      of reclassification adjustments, and taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (634
            )
            
            
            (634
            )Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,390Cash
      dividends on common stock ($0.57 per share)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,173
            )
            
            
            -
            
            
            
            (3,173
            )Balance
      December 31, 2005
            
            
            5,076
            
            
            
            2,416
            
            
            
            24,527
            
            
            
            22,622
            
            
            
            (718
            )
            
            
            53,923Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,802
            
            
            
            -
            
            
            
            8,802Reclassification
      of $5 par value into $1 par value
            
            
            484
            
            
            
            (2,416
            )
            
            
            1,932
            
            
            
            
            
            
            
            
            
            
            
            -Change
      in unrealized loss onavailable
      for sale securities,net
      of reclassification adjustments, and taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (187
            )
            
            
            (187
            )Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8,615Cash
      dividends on common stock ($0.60 per share)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,335
            )
            
            
            -
            
            
            
            (3,335
            )Balance
      December 31, 2006
            
            
            5,560
            
            
            
            -
            
            
            
            26,459
            
            
            
            28,089
            
            
            
            (905
            )
            
            
            59,203Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,263
            
            
            
            -
            
            
            
            10,263Change
      in unrealized loss onavailable
      for sale securities,net
      of reclassification adjustments, and taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            570
            
            
            
            570Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,833Cash
      dividends on common stock ($0.63 per share)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,503
            )
            
            
            -
            
            
            
            (3,503
            )Balance
      December 31, 2007
            
            $
            5,560
            
            
            $
            -
            
            
            $
            26,459
            
            
            $
            34,849
            
            
            $
            (335
            )
            
            $
            66,533




See
Notes to Consolidated Financial Statements.




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  FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(dollars
      in thousands)Years
      Ended December 31,2007
              
              
              2006
              
              
              2005Cash
      Flows From Operating ActivitiesNet
      income
              
              $
              10,263
              
              
              $
              8,802
              
              
              $
              6,024Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Provision
      for loan losses
              
              
              1,918
              
              
              
              4,419
              
              
              
              5,621Depreciation
      and amortization
              
              
              1,238
              
              
              
              1,438
              
              
              
              1,411Amortization of premium/discount on investments
              
              
              (1,011
              )
              
              
              66
              
              
              
              (74
              )Loss
      (Gain) on sale of securities
              
              
              477
              
              
              
              234
              
              
              
              (7
              )Gain
      on sale of assets
              
              
              (272
              )
              
              
              (81
              )
              
              
              (315
              )ORE
      writedowns and loss/(gain) on disposition
              
              
              180
              
              
              
              (365
              )
              
              
              1,101FHLB
      stock dividends
              
              
              (134
              )
              
              
              (134
              )
              
              
              (121
              )Net
      decrease (increase) in loans held for sale
              
              
              31,090
              
              
              
              (1,049
              )
              
              
              2,638Change
      in other assets and liabilities, net
              
              
              (1,269
              )
              
              
              (106
              )
              
              
              794Net
      Cash Provided By Operating Activities
              
              
              42,480
              
              
              
              13,224
              
              
              
              17,072Cash
      Flows From Investing ActivitiesProceeds
      from maturities and calls of HTM securities
              
              
              10,493
              
              
              
              20,604
              
              
              
              1,215Proceeds
      from maturities, calls and sales of AFS securities
              
              
              627,001
              
              
              
              26,770
              
              
              
              225,215Funds
      invested in HTM securities
              
              
              -
              
              
              
              -
              
              
              
              (30,000
              )Funds
      invested in AFS securities
              
              
              (575,534
              )
              
              
              (31,108
              )
              
              
              (265,984
              )Proceeds
      from sale of Federal Home Loan Bank stock
              
              
              4,175
              
              
              
              1,797
              
              
              
              3,029Funds
      invested in Federal Home Loan Bank stock
              
              
              (639
              )
              
              
              (2,346
              )
              
              
              (238
              )Net
      increase in loans
              
              
              (31,222
              )
              
              
              (29,492
              )
              
              
              (40,226
              )Proceeds
      from sale of Mortgage Servicing Rights
              
              
              583
              
              
              
              -
              
              
              
              -Purchase
      of premises and equipment
              
              
              (801
              )
              
              
              (2,478
              )
              
              
              (2,465
              )Proceeds
      from sales of other real estate owned
              
              
              3,103
              
              
              
              6,909
              
              
              
              2,731Cash
      paid in excess of cash received in acquisition
              
              
              (10,646
              )
              
              
              -
              
              
              
              -Net
      Cash Provided By (Used In) Investing Activities
              
              
              26,513
              
              
              
              (9,344
              )
              
              
              (106,723
              )Cash
      Flows From Financing ActivitiesNet
      increase (decrease) in deposits
              
              
              29,355
              
              
              
              (6,615
              )
              
              
              151,550Net
      increase (decrease) in federal funds purchased and short-term
      borrowings
              
              
              3,817
              
              
              
              (2,397
              )
              
              
              (22,437
              )Proceeds
      from long-term borrowings
              
              
              -
              
              
              
              30,000
              
              
              
              75Repayment
      of long-term borrowings
              
              
              (64,802
              )
              
              
              (25,167
              )
              
              
              (27,277
              )Dividends
      paid
              
              
              (3,503
              )
              
              
              (3,335
              )
              
              
              (3,173
              )Net
      Cash (Used In) Provided By Financing Activities
              
              
              (35,133
              )
              
              
              (7,514
              )
              
              
              98,738Net
      Increase (Decrease) In Cash and Cash Equivalents
              
              
              33,860
              
              
              
              (3,634
              )
              
              
              9,087Cash
      and Cash Equivalents at the Beginning of the Period
              
              
              24,817
              
              
              
              28,451
              
              
              
              19,364Cash
      and Cash Equivalents at the End of the Period
              
              $
              58,677
              
              
              $
              24,817
              
              
              $
              28,451Noncash
      Activities:Loans
      transferred to foreclosed assets
              
              $
              1,118
              
              
              $
              8,538
              
              
              $
              8141,389,761
      shares of $1 par value issued as stock dividend
              
              $
              -
              
              
              $
              -
              
              
              $
              1,390Cash
      paid during the year:Interest
      on deposits and borrowed funds
              
              $
              21,512
              
              
              $
              18,241
              
              
              $
              11,715Income
      taxes
              
              $
              6,015
              
              
              $
              5,590
              
              
              $
              1,925
  See
Notes to Consolidated Financial Statements.
  - 42
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 Table
of Contents


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Note
1.  Business and Summary of Significant Accounting
Policies




Business


First
Guaranty Bancshares, Inc. (the “Company”) is a Louisiana corporation. On July
27, 2007 the Company became the parent of First Guaranty Bank as described in
Note 2. The Company owns all of the outstanding shares of common stock of First
Guaranty Bank. First Guaranty Bank (the “Bank”) is a Louisiana state-chartered
commercial bank that provides a diversified range of financial services to
consumers and businesses in the communities in which it operates. These services
include consumer and commercial lending, mortgage loan origination, the issuance
of credit cards and retail banking services. The Bank has 18 banking offices and
25 automated teller machines (ATMs) in northern and southern of
Louisiana.




Summary
of significant accounting policies


First
Guaranty Bancshares, Inc. completed its acquisition of Homestead Bancorp on July
30, 2007. Information for the year ended December 31, 2006 and any prior
period reflects the operations of First Guaranty Bank on a stand-alone basis.
Prior to becoming the holding company of First Guaranty Bank, First Guaranty
Bancshares, Inc. had no assets, liabilities or
operations.


The
accounting and reporting policies of the Company conform to generally
accepted accounting principles and to predominant accounting practices within
the banking industry. The more significant accounting and reporting policies are
as follows:




Consolidation


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




Use
of estimates


The
preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expense during the reporting periods. Actual
results could differ from those estimates.


Material
estimates that are particularly susceptible to significant change in the
near-term economic environment and market conditions relate to the determination
of the allowance for loan losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and real estate owned, the
Company obtains independent appraisals for significant
properties.




Cash
and cash equivalents


For
purposes of reporting cash flows, cash and cash equivalents are defined as cash,
due from banks, interest-bearing demand deposits with banks and federal funds
sold with maturities of three months or less.




Securities


TheCompanyreviews its financial position, liquidity and future plans in evaluating
the criteria for classifying investment securities. At December 31, 2007, the
securities portfolio contained two classifications of securities - held to
maturity and available for sale. At December 31, 2007, $105.6 million were
classified as available for sale and $36.5 million were classified as held to
maturity.


Debt
securities that Management has the ability and intent to hold to maturity are
classified as held to maturity and carried at cost, adjusted for amortization of
premiums and accretion of discounts using methods approximating the interest
method. Securities available for sale are stated at fair value. The unrealized
difference, if any, between amortized cost and fair value of these securities is
excluded from income and is reported, net of deferred taxes, as a component of
stockholders' equity. Realized gains and losses on securities are computed based
on the specific identification method and are reported as a separate component
of other income.


Management
evaluates securities for other-than-temporary impairment at least quarterly and
more frequently when economic or market conditions warrant such evaluation.
Consideration is given to (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer and (3) the intent and ability of the Companyto retain its investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in fair value.


The
Company has a required investment in Federal Home Loan Bank stock that is
carried at cost that approximates fair value. This stock must be maintained by
the Company.





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 Table
of Contents


Loans
held for sale


Mortgage
loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income. Loans held for sale have primarily been fixed rate single-family
residential mortgage loans under contract to be sold in the secondary market. In
most cases, loans in this category are sold within thirty days. Buyers generally
have recourse to return a purchased loan under limited circumstances. Recourse
conditions may include early payment default, breach of representations or
warranties and documentation deficiencies.


Mortgage
loans held for sale are generally sold with the mortgage servicing rights
released. Gains or losses on sales of mortgage loans are recognized based on the
differences between the selling price and the carrying value of the related
mortgage loans sold.




Loans


Loans
are stated at the principal amounts outstanding, net of unearned income and
deferred loan fees. In addition to loans issued in the normal course of
business, overdrafts on customer deposit accounts are considered to be loans and
reclassified as such. At December 31, 2007 and 2006, $461,000 and $226,000,
respectively, in overdrafts have been reclassified to loans. Interest income on
all classifications of loans is calculated using the simple interest method on
daily balances of the principal amount outstanding.


Accrual
of interest is discontinued on a loan when Management believes, after
considering economic and business conditions and collection efforts, the
borrower’s financial condition is such that reasonable doubt exists as to the
full and timely collection of principal and interest. This evaluation is made
for all loans that are 90 days or more contractually past due. When a loan is
placed in non-accrual status, all interest previously accrued but not collected
is reversed against current period interest income. Income on such loans is then
recognized only to the extent that cash is received and where the future
collection of interest and principal is probable. Loans are returned to accrual
status when, in the judgment of Management, all principal and interest amounts
contractually due are reasonably assured of repayment within a reasonable time
frame and when the borrower has demonstrated payment performance of cash or cash
equivalents for a minimum of six months.





Loan
fees and costs


Nonrefundable
loan origination and commitment fees and direct costs associated with
originating loans are deferred and recognized over the lives of the related
loans as an adjustment to the loans' yield using the level yield
method.




Allowance
for loan losses


The
allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
Management believes that the collectability of the principal is unlikely. The
allowance, which is based on evaluation of the collectability of loans and prior
loan loss experience, is an amount that Management believes will be adequate to
reflect the risks inherent in the existing loan portfolio and exist at the
reporting date. The evaluations take into consideration a number of subjective
factors including changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans, current economic
conditions that may affect a borrower’s ability to pay, adequacy of loan
collateral and other relevant factors. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require additional recognition of losses
based on their judgments about information available to them at the time of
their examination.


Although
Management uses available information to recognize losses on loans, because of
uncertainties associated with local economic conditions, collateral values and
future cash flows on impaired loans, it is reasonably possible that a material
change could occur in the allowance for loan losses in the near term. However,
the amount of the change that is reasonably possible cannot be
estimated.




- 44
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 Table
of Contents
  The
evaluation of the adequacy of loan collateral is often based upon estimates and
appraisals. Because of changing economic conditions, the valuations determined
from such estimates and appraisals may also change. Accordingly, the
Company may ultimately incur losses that vary from Management's current
estimates. Adjustments to the allowance for loan losses will be reported in the
period such adjustments become known or can be reasonably estimated. All loan
losses are charged to the allowance for loan losses when the loss actually
occurs or when Management believes that the collectability of the principal is
unlikely. Recoveries are credited to the allowance at the time of
recovery.
 The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as doubtful, substandard or
special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect Management’s
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.
 A
loan is considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by Management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan-by-loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan’s effective
interest rate, the loan’s obtainable market price or the fair value of the
collateral if the loan is collateral dependent.
 Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, individual consumer and residential loans are not
separately identified for impairment disclosures, unless such loans are the
subject of a restructuring agreement.




Goodwill
and Intangible assets


Intangible
assets are comprised of goodwill and core deposit intangibles. Goodwill is
accounted for in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets, and accordingly is not amortized but is
evaluated at least annually for impairment. Core deposit intangibles are
amortized on a straight-line basis over terms ranging from seven to 15 years.
Management periodically evaluates whether events or circumstances have occurred
that would result in impairment of value.




Premises
and equipment


Premises
and equipment are stated at cost, less accumulated depreciation. Depreciation is
computed for financial reporting purposes using the straight-line method over
the estimated useful lives of the respective assets as
follows:




Buildings and
improvements                     10-40
years


Equipment,
fixtures and
automobiles          3-10
years




Expenditures
for renewals and betterments are capitalized and depreciated over their
estimated useful lives. Repairs, maintenance and minor improvements are charged
to operating expense as incurred. Gains or losses on disposition, if any, are
recorded in the Statements of Income.




Other
real estate


Other
real estate includes properties acquired through foreclosure or acceptance of
deeds in lieu of foreclosure. These properties are recorded at the lower of the
recorded investment in the property or its fair value less the estimated cost of
disposition. Any valuation adjustments required prior to foreclosure are charged
to the allowance for loan losses. Subsequent to foreclosure, losses on the
periodic revaluation of the property are charged to current period earnings as
other real estate expense. Costs of operating and maintaining the properties are
charged to other real estate expense as incurred. Any subsequent gains or losses
on dispositions are credited or charged to income in the period of
disposition.





- 45
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 Table
of Contents


Off-balance
sheet financial instruments


The
Company accounts for its guarantees in accordance with the provisions of
Financial Accounting Standards Board (“FASB”) Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, (“FIN 45”). In the
ordinary course of business, the Company has entered into commitments to extend
credit, including commitments under credit card arrangements, commitments to
fund commercial real estate, construction and land development loans secured by
real estate, and performance standby letters of credit. Such financial
instruments are recorded when they are funded.




Income
taxes


The
Company and all subsidiaries file a consolidated federal income tax return on a
calendar year basis. In lieu of Louisiana state income tax, the Bank is subject
to the Louisiana bank shares tax, which is included in noninterest expense in
the Company's consolidated financial statements. With few exceptions, the
Company is no longer subject to U.S. federal, state or local income tax
examinations for years before 2003.


Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the deferred tax assets or liabilities are
expected to be settled or realized. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
utilized.




Comprehensive
income


Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available for sale securities, are
reported as a separate component of the equity section of the balance sheet,
such items along with net income, are components of comprehensive income. The
components of other comprehensive income and related tax effects are presented
in the Statements of Changes in Stockholders’ Equity and Note 18of the
Consolidated Notes to the Financial Statements.


Earnings
per common share


Earnings
per share is computed and presented in accordance with SFAS No. 128 “Earnings
Per Share”. No convertible shares or other agreements to issue common stock are
outstanding. The $1 par value common stock outstanding has the same privileges,
restrictions and rights, including voting and dividend rights. In 2006, all $5
par value stock was converted into $1 par value.




Transfers
of Financial Assets


Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (i) the assets have been isolated from the Company, (ii) the transferee
obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and (iii) the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.




Recent
Accounting Pronouncements


In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS 160, Non-controlling
Interests in Consolidated Financial Statements, an Amendment of ARB 51.
SFAS 160 establishes new accounting and reporting standards for
non-controlling interests in a subsidiary. SFAS 160 will require entities
to classify non-controlling interests as a component of stockholders’ equity and
will require subsequent changes in ownership interests in a subsidiary to be
accounted for as an equity transaction. SFAS 160 will also require entities
to recognize a gain or loss upon the loss of control of a subsidiary and to
remeasure any ownership interest retained at fair value on that date. This
statement also requires expanded disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. SFAS 160 is effective on a prospective basis for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008, except for the presentation and disclosure
requirements, which are required to be applied retrospectively. We anticipate
the adoption of SFAS No. 160 will not have a significant impact to the Company’s
financial condition or results of operations
 In
December 2007, FASB issued SFAS No. 141R, Business
Combinations (“SFAS No. 141R”) which applies to all business
combinations. The statement requires most identifiable assets, liabilities,
non-controlling interests, and goodwill acquired in a business combination to be
recorded at “full fair value.” All business combinations will be accounted for
by applying the acquisition method (previously referred to as the purchase
method). Companies will have to identify the acquirer; determine the acquisition
date and purchase price; recognize at their acquisition-date fair values the
identifiable assets acquired, liabilities assumed, and any non-controlling
interests in the acquiree, and recognize goodwill or, in the case of a bargain
purchase, a gain. SFAS No. 141R is effective for periods beginning on or after
December 15, 2008, and early adoption is prohibited. It will be applied to
business combinations occurring after the effective date. We anticipate the
adoption of SFAS No. 141R will not have a significant impact to the Company’s
financial condition or results of operations.
 In
November 2007, the SEC issued Staff Accounting Bulletin No. 109, Written
Loan Commitments Recorded at Fair Value Through Earnings (“SAB No. 109”).
SAB No. 109 rescinds SAB No. 105’s prohibition on inclusion of expected net
future cash flows related to loan servicing activities in the fair value
measurement of a written loan commitment. SAB No. 109 applies to any loan
commitments for which fair value accounting is elected under SFAS No. 159. SAB
No. 109 is effective prospectively for derivative loan commitments issued or
modified in fiscal quarters beginning after December 15, 2007. We anticipate the
adoption of SAB No. 109 will not have a significant impact to the Company’s
financial condition or results of operations.
 In
June 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No.
06-11, Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Award. The
objective of this issue is to determine the accounting for the income tax
benefits of dividend or dividend equivalents when the dividends or dividend
equivalents are: (a) linked to equity-classified non-vested shares or share
units or equity-classified outstanding share options and (b) charged to retained
earnings under SFAS Statement No. 123 (Revised 2004), Share-Based
Payment. The Task Force reached a consensus that EITF No. 06-11 should be
applied prospectively to the income tax benefits of dividends on
equity-classified employee share-based payment awards that are declared in
fiscal years beginning after September 15, 2007. We anticipate the adoption of
the provisions of EITF No. 06-11 will not have a significant impact to the
Company’s financial condition or results of
operations.
  - 46
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 Table
of Contents
  In
March 2007, the FASB ratified EITF No. 06-10, Accounting
for Collateral Assignment Split-Dollar Life Insurance Arrangements. One
objective of EITF No. 06-10 is to determine whether a liability for future
benefits under a collateral assignment split-dollar life insurance arrangement
that provides a benefit to an employee that extends into postretirement periods
should be recognized in accordance with SFAS No. 106 or APB Opinion 12, as
appropriate, based on the substantive agreement with the employee. Another
objective of EITF No. 06-10 is to determine how the asset arising from a
collateral assignment split-dollar life insurance arrangement should be
recognized and measured. EITF No. 06-10 is effective for fiscal years beginning
after December 15, 2007. We anticipate the adoption of the provisions of EITF
No. 06-10 will not have a significant impact to the Company’s financial
condition or results of operations.
 In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities. SFAS
No. 159 provides the Company with an option to report selected financial
assets and liabilities at fair value and establishes presentation and disclosure
requirements to facilitate reporting between companies.  The fair
value option established by this Statement permits the Company to choose to
measure eligible items at fair value at specified election
dates.  The Company shall then 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 Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We anticipate
the adoption of SFAS No. 159 will not have a significant impact to the Company’s
financial condition or results of operations.
 In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. This Statement defines fair value, established a
framework for measuring fair value in generally accepted accounting principles
(GAAP) and expands disclosures about fair value measurement.  The
Statement is effective for the financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The Bank anticipates that the adoption of SFAS No. 157 will not have a material
impact on the Bank’s financial position or results of
operations.


Reclassifications


Certain
reclassifications have been made to prior year financial statements in order to
conform to the classification adopted for reporting in
2007.


All
share and per share data has been restated to reflecta
stock dividend of one-third of a share of $1 par value common stock for each
share of $1 and $5 par value common stock outstanding, accounted for as a
four-for-three stock split, effective and payable to stockholders of record as
of October 20, 2005 for each of the periods
presented.




Note
2.  Reorganization


On
July 27, 2007, First Guaranty Bancshares, Inc. became the holding company for
First Guaranty Bank pursuant to an Agreement and Plan of Exchange dated as of
July 27, 2007 (the “Agreement”). Pursuant to the Agreement, on the Effective
Date, each issued and outstanding share of the Bank’s common stock, par value
$1.00 per share, automatically was converted into and exchanged for one share of
the Company’s common stock, par value $1.00 per share. No stockholders exercised
dissenters’ rights of appraisal.  On the Effective Date, the Bank
became a wholly owned subsidiary of the Company and the stockholders of the Bank
became stockholders of the Company. No additional shares were offered or sold in
connection with the Reorganization.





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Note
3.  Acquisition Activity


On
July 30, 2007, the Company acquired all of the outstanding stock of Homestead
Bancorp, Inc., the holding company for Homestead Bank located in Ponchatoula,
Louisiana, for approximately $12.1 million in cash. Homestead Bank and First
Guaranty Bank were also merged on July 30, 2007. This transaction was recorded
using the purchase accounting method. The Company received the
following:





(in
      thousands)Cash
      and cash equivalents
              
              $
              1,494Securities
              
              
              45,000Loans,
      net, including loans held for sale
              
              
              74,357Premises
      and equipment, net
              
              
              2,780Goodwill
              
              
              1,911Core
      deposit and other intangibles
              
              
              2,836Other
      assets
              
              
              1,228Deposits
              
              
              (67,446
              )Borrowings
              
              
              (49,911
              )Other
      liabilities
              
              
              (109
              )Total
      purchase price
              
              $
              12,140




The
acquisition resulted in $4.7 million of intangible assets which includes $1.9
million of goodwill, $2.1 million of core deposit intangibles and $729,000 in
mortgage servicing rights. The goodwill acquired is not tax deductible. The core
deposit intangible is being amortized over the estimated useful life of 11.4
years using the straight line method.


The
results of operations of the acquired company subsequent to the acquisition date
are included in the Company's consolidated statements of
income.


The
merger increased the branch franchise from 16 locations to 18 locations and
extended the Company’s presence to Walker, Louisiana.


The
Company borrowed $12.1 million to acquire Homestead Bancorp, Inc. and Homestead
Bank. The Company repaid the debt with cash received from the sale of Homestead
Bank securities. The Company sold $46.4 million of securities owned by Homestead
Bank, which comprised of $40.6 million in mortgage-backed securities and $5.8
million in mutual funds. In addition, $46.9 million in Homestead Bank short- and
long-term FHLB advances matured or were prepaid by the Company in
2007.


On
July 31, 2007, First Guaranty Bancshares, Inc., a Louisiana corporation, and
Douglass Bancorp, Inc., a Kansas corporation, Douglass National Bank, a national
bank headquartered in Kansas, and Fannie Mae, a Congressionally chartered
federal instrumentality that is deemed a citizen of the District of Columbia
entered into a Stock Purchase Agreement pursuant to which, among other things,
First Guaranty Bancshares, Inc. would acquire all of the issued and outstanding
shares of capital stock of Douglass National Bank and all of the outstanding and
unexercised options of Douglass National Bank.


Under the
terms and subject to the conditions of the Stock Purchase Agreement, all of the
outstanding common stock of Douglass National Bank would be cancelled in
exchange for an amount of cash without interest equal to the adjusted book value
of Douglass National Bank immediately prior to the closing.


On October 5,
2007, the Company advised Douglass Bancorp, Inc. and Fannie Mae of its
intent to terminate the Stock Purchase Agreement by and among the Company,Douglass Bancorp, Inc., Douglass National Bank and Fannie Mae dated July
31, 2007. The Company did not incur any material early termination
penalties as a result of this transaction.
 On November 2,
2007, the Company and First Community Holding Company, a Louisiana corporation
and holding company for First Community Bank, a Louisiana state banking
corporation (“First Community BHC”), entered into an Agreement and Plan of
Reorganization (the “Merger Agreement”) pursuant to which, among other
things, the Company will acquire all of the issued and outstanding
shares of capital stock of First Community BHC and all of the outstanding and
unexercised options of First Community BHC by virtue of the merger of a
wholly-owned subsidiary of the Company with and into First Community BHC, with
First Community BHC as the surviving corporation (the “Interim Merger”),
followed by the merger of First Community BHC with and into the
Company.
 Under the terms
and subject to the conditions of the Merger Agreement, which has been approved
by the Boards of Directors of the Company and First Community BHC, at
the effective time of the Interim Merger (the “Effective Time”), all of the
outstanding common stock of First Community BHC will be cancelled in exchange
for $34.06 per share. All of the outstanding and unexercised options to
acquire shares of common stock of First Community BHC will be cancelled at the
Effective Time in exchange for an amount in cash per outstanding and unexercised
option equal to $26.06. Immediately following the Merger, First Community Bank
will merge with and into First Guaranty Bank, with First Guaranty Bank as the
sole surviving bank subsidiary of the Company.
  - 48
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 Consummation of
the Interim Merger is subject to various conditions, including
(i) requisite approvals of the holders of First Community BHC common stock
and (ii) receipt of regulatory approvals. In addition, each party’s
obligation to consummate the Interim Merger is subject to certain other
conditions, including (i) the other party’s representations and warranties in
the Merger Agreement being true and correct at the Effective Time, subject to
the materiality standards contained in the Merger Agreement, (ii) material
compliance of the other party with its covenants and (iii) the absence of
any law or order prohibiting the consummation of the Interim
Merger.
  Note
4.  Cash and Due From Banks
 Certain reserves
are required to be maintained at the Federal Reserve Bank. The requirement as of
December 31, 2007 and 2006 totaled $750,000. The Company has accounts at
various correspondent banks,
excluding the Federal Reserve Bank,
which exceed the FDIC insured limit of $100,000 by $14.2 million at December 31,
2007.  This balance includes $12.2 million at JPMorgan Chase, the
correspondent bank which is used to clear cash letters.
  Note
5.  Securities
 A summary
comparison of securities by type at December 31, 2007 and 2006 is shown
below.




December
      31, 2007
            
            
            December
      31, 2006Gross
            
            
            Gross
            
            
            
            
            
            
            
            
            Gross
            
            
            GrossAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            Fair
            
            
            Amortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            Value
            
            
            Cost
            
            
            Gains
            
            
            Losses
            
            
            Value(in
      thousands)Available-for-sale:U.S.
      Government Agencies
            
            $
            92,962
            
            
            $
            26
            
            
            $
            (25
            )
            
            $
            92,963
            
            
            $
            98,369
            
            
            $
            -
            
            
            $
            (1,226
            )
            
            $
            97,143Mortgage-backed
      obligations
            
            
            2,016
            
            
            
            43
            
            
            
            (23
            )
            
            
            2,036
            
            
            
            4,077
            
            
            
            39
            
            
            
            (103
            )
            
            
            4,013Asset-backed
      securities
            
            
            1,340
            
            
            
            -
            
            
            
            (95
            )
            
            
            1,245
            
            
            
            1,385
            
            
            
            1
            
            
            
            (1
            )
            
            
            1,385Corporate
      debt securities
            
            
            5,954
            
            
            
            50
            
            
            
            (214
            )
            
            
            5,790
            
            
            
            7,394
            
            
            
            31
            
            
            
            (61
            )
            
            
            7,364Mutual
      funds or other equity securities
            
            
            3,805
            
            
            
            22
            
            
            
            (291
            )
            
            
            3,536
            
            
            
            1,500
            
            
            
            -
            
            
            
            (52
            )
            
            
            1,448Total
      securities
            
            $
            106,077
            
            
            $
            141
            
            
            $
            (648
            )
            
            $
            105,570
            
            
            $
            112,725
            
            
            $
            71
            
            
            $
            (1,443
            )
            
            $
            111,353Held-to-maturity:U.S.
      Government Agencies
            
            $
            33,984
            
            
            $
            24
            
            
            $
            (281
            )
            
            $
            33,727
            
            
            $
            43,976
            
            
            $
            -
            
            
            $
            (1,280
            )
            
            $
            42,696Mortgage-backed
      obligations
            
            
            2,514
            
            
            
            -
            
            
            
            (35
            )
            
            
            2,479
            
            
            
            3,023
            
            
            
            -
            
            
            
            (105
            )
            
            $
            2,918Total
      securities
            
            $
            36,498
            
            
            $
            24
            
            
            $
            (316
            )
            
            $
            36,206
            
            
            $
            46,999
            
            
            $
            -
            
            
            $
            (1,385
            )
            
            $
            45,614





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The
scheduled maturities of securities at December 31, 2007, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.





December
      31, 2007Amortized
              
              
              Fair
              
              
              WeightedCost
              
              
              Value
              
              
              Avg
      Yield(dollars
      in thousands)Available
      For Sale:Due
      in one year or less
              
              $
              49,182
              
              
              $
              49,179
              
              
              
              4.14%Due
      after one year through five years
              
              
              10,673
              
              
              
              10,673
              
              
              
              5.13%Due
      after five years through 10 years
              
              
              4,568
              
              
              
              4,575
              
              
              
              5.35%Over
      10 years
              
              
              41,654
              
              
              
              41,143
              
              
              
              5.98%Total
              
              $
              106,077
              
              
              $
              105,570
              
              
              
              5.00%Held
      to Maturity:Due
      in one year or less
              
              $
              -
              
              
              $
              -
              
              
              
              0.00%Due
      after one year through five years
              
              
              999
              
              
              
              992
              
              
              
              4.15%Due
      after five years through 10 years
              
              
              9,834
              
              
              
              9,673
              
              
              
              4.53%Over
      10 years
              
              
              25,665
              
              
              
              25,541
              
              
              
              5.42%Total
              
              $
              36,498
              
              
              $
              36,206
              
              
              
              5.15%




At
December 31, 2007 and 2006, approximately $131.6 million and $147.3 million,
respectively, in securities were pledged to secure public fund deposits, and for
other purposes required or permitted by law. Gross realized gains were $0, $0
and $7,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Gross realized losses were $478,000, $234,000 and $0 for the years ended
December 31, 2007, 2006 and 2005. The tax (benefit) provision applicable to
these realized net (losses)/gains amounted to $(163,000), $(80,000), and $2,000,
respectively. Proceeds from sales of securities classified as available for sale
amounted to $65.2 million, $6.8 million and $0 for the years ended December
31, 2007, 2006 and 2005, respectively.


The
following is a summary of the fair value of securities with gross unrealized
losses and an aging of those gross unrealized losses at December 31,
2007.


Less
      Than 12 Months
              
              
              12
      Months or More
              
              
              TotalGross
              
              
              
              
              
              Gross
              
              
              
              
              
              GrossUnrealized
              
              
              
              
              
              Unrealized
              
              
              
              
              
              UnrealizedFair
      Value
              
              
              Losses
              
              
              Fair
      Value
              
              
              Losses
              
              
              Fair
      Value
              
              
              Losses(in
      thousands)Available
      for sale:U.S.
      Treasury and U.S.Government
      Agencies
              
              $
              -
              
              
              $
              -
              
              
              $
              3,779
              
              
              $
              25
              
              
              $
              3,779
              
              
              $
              25Mortgage-backed
      obligations
              
              
              -
              
              
              
              -
              
              
              
              510
              
              
              
              23
              
              
              
              510
              
              
              
              23Asset-backed
      securities
              
              
              1,155
              
              
              
              94
              
              
              
              90
              
              
              
              1
              
              
              
              1,245
              
              
              
              95Corporate
      debt securities
              
              
              1,710
              
              
              
              147
              
              
              
              858
              
              
              
              67
              
              
              
              2,568
              
              
              
              214Mutual
      funds or other equity securites
              
              
              1,227
              
              
              
              47
              
              
              
              1,256
              
              
              
              244
              
              
              
              2,483
              
              
              
              291Total
      securities
              
              $
              4,092
              
              
              $
              288
              
              
              $
              6,493
              
              
              $
              360
              
              
              $
              10,585
              
              
              $
              648Held
      to maturity:U.S.
      Treasury and U.S.Government
      Agencies
              
              $
              -
              
              
              $
              -
              
              
              $
              27,780
              
              
              $
              281
              
              
              $
              27,780
              
              
              $
              281Mortgage-backed
      obligations
              
              
              -
              
              
              
              -
              
              
              
              2,479
              
              
              
              35
              
              
              
              2,479
              
              
              
              35Total
      securities
              
              $
              -
              
              
              $
              -
              
              
              $
              30,259
              
              
              $
              316
              
              
              $
              30,259
              
              
              $
              316




The
Company considers the impairment on securities that have been in a gross
unrealized loss position for less than 12 months to be temporary. The gross
unrealized losses in the portfolio resulted from increases in market interest
rates and not from deterioration in the creditworthiness of the issuer. The
Company believes that it will collect all amounts contractually due and has the
intent and the ability to hold these securities until the fair value is at least
equal to the carrying value. As of December 31, 2007, the Company had 19 debt
securities and two equity securities that had gross unrealized losses for
less than 12 months.




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  At
December 31, 2007, twelve U.S. Government Agency securities, ten of which are
classified as held to maturity and two classified as available for sale, have
been in a continuous unrealized loss position for twelve months or longer. Six
mortgage-backed fixed rate securities, five classified as held to maturity and
one classified as available for sale, have also been in a continuous unrealized
loss position for twelve months or longer. Also, six corporate debt securities,
one asset-backed security, one mutual fund and one equity security, all
classified as available for sale, have been in a continuous unrealized loss
position for twelve months or longer. These securities with unrealized losses
resulted from increases in interest rates and not from deterioration in the
creditworthiness of the issuer. There were no adverse changes to the portfolio
subsequent to December 31, 2007.
 Management
evaluates securities for other-than-temporary impairment at least quarterly and
more frequently when economic or market conditions warrant such evaluation.
Consideration is given to (i) the length of time and the extent to which the
fair value has been less than cost, (ii) the financial condition and near-term
prospects of the issuer and (iii) the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. In analyzing an issuer’s financial
condition, Management considers whether the securities are issued by the federal
government or its agencies, whether downgrades by bond rating agencies have
occurred and industry reports. As of December 31, 2007, Management’s assessment
concluded that no unrealized losses are deemed to be
other-than-temporary.
 At
December 31, 2007, the Company’s exposure to three investment security issuers
exceeded 10% of stockholders’ equity as
follows:




Amortized
              
              
              FairCost
              
              
              Value(in
      thousands)Federal
      Home Loan Bank (FHLB)
              
              $
              75,770
              
              
              $
              75,614Federal
      Home Loan Mortgage Corporation (Freddie Mac)
              
              
              18,026
              
              
              
              18,060Federal
      National Mortgage Association (Fannie Mae)
              
              
              40,333
              
              
              
              39,963Total
              
              $
              134,129
              
              
              $
              133,637





Note
6.  Loans and Allowance for Loan Losses


The
following table summarizes the components of the Company's loan portfolio as of
December 31, 2007 and 2006:




December
      31,2007
            
            
            2006As
      % of
            
            
            
            
            
            As
      % ofBalance
            
            
            Category
            
            
            Balance
            
            
            Category(dollars
      in thousands)Real
      estateConstruction
      & land development
            
            $
            98,127
            
            
            
            17.0%
            
            
            $
            49,837
            
            
            
            9.9%Farmland
            
            
            23,065
            
            
            
            4.0%
            
            
            
            25,582
            
            
            
            5.0%1-4
      Family
            
            
            84,640
            
            
            
            14.7%
            
            
            
            67,022
            
            
            
            13.2%Multifamily
            
            
            13,061
            
            
            
            2.3%
            
            
            
            14,702
            
            
            
            2.9%Non-farm
      non-residential
            
            
            236,474
            
            
            
            41.1%
            
            
            
            256,176
            
            
            
            50.5%Total
      real estate
            
            
            455,367
            
            
            
            79.1%
            
            
            
            413,319
            
            
            
            81.5%Agricultural
            
            
            16,816
            
            
            
            2.9%
            
            
            
            16,359
            
            
            
            3.2%Commercial
      and industrial
            
            
            81,073
            
            
            
            14.1%
            
            
            
            59,072
            
            
            
            11.6%Consumer
      and other
            
            
            22,517
            
            
            
            3.9%
            
            
            
            18,880
            
            
            
            3.7%Total
      loans before unearned income
            
            
            575,773
            
            
            
            100.0%
            
            
            
            507,630
            
            
            
            100.0%Less:
      unearned income
            
            
            (517
            )
            
            
            
            
            
            
            (435
            )Total
      loans after unearned income
            
            $
            575,256
            
            
            
            
            
            
            $
            507,195






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The
following table summarizes fixed and floating rate loans by maturity and
repricing frequencies as of December 31, 2007:




December
      31, 2007Fixed
                
                
                Floating
                
                
                Total(in
      thousands)One
      year or less
                
                $
                98,095
                
                
                $
                339,955
                
                
                $
                438,050One
      to five years
                
                
                97,198
                
                
                
                1,867
                
                
                
                99,065Five
      to 15 years
                
                
                8,179
                
                
                
                144
                
                
                
                8,323Over
      15 years
                
                
                19,530
                
                
                
                -
                
                
                
                19,530Subtotal
                
                
                223,002
                
                
                
                341,966
                
                
                
                564,968Nonaccrual
      loans
                
                
                
                
                
                
                
                
                
                
                10,288Total
      loans after unearned income
                
                $
                223,002
                
                
                $
                341,966
                
                
                $
                575,256




Changes
in the allowance for loan losses are as follows:




Years
      Ended December 31,2007
              
              
              2006
              
              
              2005(in
      thousands)Balance,
      beginning of year
              
              $
              6,675
              
              
              $
              7,597
              
              
              $
              5,910Additional
      provision from acquisition
              
              
              325
              
              
              
              -
              
              
              
              -Provision
      charged to expense
              
              
              1,918
              
              
              
              4,419
              
              
              
              5,621Loans
      charged off
              
              
              (3,885
              )
              
              
              (5,888
              )
              
              
              (4,162
              )Recoveries
              
              
              1,160
              
              
              
              547
              
              
              
              228Balance,
      end of year
              
              $
              6,193
              
              
              $
              6,675
              
              
              $
              7,597




The
allowance for loan losses is reviewed by Management on a monthly basis and
additions thereto are recorded in order to maintain the allowance at an adequate
level. In assessing the adequacy of the allowance, Management considers a
variety of internal and external factors that might impact the performance of
individual loans. These factors include, but are not limited to, economic
conditions and their impact upon borrowers' ability to repay loans, respective
industry trends, borrower estimates and independent appraisals. Periodic changes
in these factors impact Management's assessment of each loan and its overall
impact on the adequacy of the allowance for loan
losses.


As
of December 31, 2007, 2006 and 2005, the Company had loans totaling $10.3
million, $10.4 million and $21.1 million, respectively, on which the accrual of
interest had been discontinued. Non-accrual loans remained relatively flat from
December 31, 2006 to 2007. The decrease in non-accrual loans from December 2005
to 2006 is primarily the result of foreclosing on several of the 156 home
mortgage loans that involved irregularities found in 2005 that suggest that many
of these mortgage loans had been made against overvalued collateral on the basis
of misleading loan information. As of December 31, 2007, 2006 and 2005, the
Company had loans past due 90 days or more and still accruing interest
totaling $547,000, $334,000 and $248,000,
respectively.


The
average amount of non-accrual loans in 2007 was $10.3 million compared to $17.1
million in 2006. Had these loans performed in accordance with their original
terms, the Company's interest income would have been increased by approximately
$0.6 million and $1.4 million for the years ended December 31, 2007 and 2006,
respectively. Impaired loans at December 31, 2007 and 2006, including
non-accrual loans, amounted to $10.1 million and $13.3 million, respectively.
The portion of the allowance for loan losses allocated to all impaired loans
amounted to $0.9 million and $2.4 million at December 31, 2007 and 2006,
respectively. As ofDecember
31, 2007,
the Companyhas
no outstanding commitments to advance additional funds
in connection with impaired
loans.




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  The
following is a summary of information pertaining to impaired loans as of
December 31:


2007
              
              
              2006(in
      thousands)Impaired
      loans without a valuation allowance
              
              $
              2,559
              
              
              $
              -Impaired
      loans with a valuation allowance
              
              
              7,523
              
              
              
              13,264Total
      impaired loans
              
              $
              10,082
              
              
              $
              13,264Valuation
      allowance related to impaired loans
              
              $
              879
              
              
              $
              2,420Total
      Nonaccrual Loans
              
              $
              10,288
              
              
              $
              10,362Total
      loans past due ninety days and still accruing
              
              $
              547
              
              
              $
              334
 
 2007
                
                
                2006
                
                
                2005(in
      thousands)Average
      investment in impaired loans
                
                $
                7,571
                
                
                $
                17,128
                
                
                $
                14,680Interest
      income recognized on impaired loans
                
                $
                764
                
                
                $
                1,946
                
                
                $
                475Interest
      income recognized on a cash basis on impaired loans
                
                $
                182
                
                
                $
                1,636
                
                
                $
                526





Note
7.  Premises and Equipment


The
major categories comprising premises and equipment at December 31, 2007 and 2006
are as follows:




December
      31,2007
              
              
              2006(in
      thousands)Land
              
              $
              4,301
              
              
              $
              3,137Bank
      premises
              
              
              15,135
              
              
              
              13,662Furniture
      and equipment
              
              
              13,431
              
              
              
              12,486Acquired
      value
              
              
              32,867
              
              
              
              29,285Less:
      accumulated depreciation
              
              
              16,627
              
              
              
              15,692Net
      book value
              
              $
              16,240
              
              
              $
              13,593
  Depreciation
expense amounted to approximately $0.9 million, $0.8 million and $0.7 million
for 2007, 2006 and 2005, respectively.




Note
8.  Goodwill and Other Intangible Assets


The
Company accounts for goodwill and intangible assets in accordance with SFAS
No. 142, “Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill
and intangible assets deemed to have indefinite lives are no longer amortized,
but are subject to annual impairment tests in accordance with the provision of
SFAS No. 142. Other intangible assets continue to be amortized over their useful
lives. Goodwill for the year ended December 31, 2007 was $1.9 million, all of
which was acquired in the Homestead acquisition (see Note 3). No impairment
charges were recognized during 2007. No goodwill was recorded for the years
ended December 31, 2006 or 2005.


Mortgage
servicing rights totaled $24,000 at December 31, 2007. No mortgage servicing
rights were recorded at December 31, 2006 or 2005.




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Other
intangible assets recorded include core deposit intangibles, which are subject
to amortization. The core deposits reflect the value of deposit relationships,
including the beneficial rates, which arose from the purchase of other financial
institutions and the purchase of various banking center locations from one
single financial institution. The following table summarizes the Company’s
purchased accounting intangible assets subject to amortization. See Note 3 to
the Consolidated Financial Statements for additional information on intangible
assets as a result of the Homestead Bancorp, Inc
merger.




December
      31,2007
              
              
              2006Gross
      Carrying
              
              
              Accumulated
              
              
              Net
      Carrying
              
              
              Gross
      Carrying
              
              
              Accumulated
              
              
              Net
      CarryingAmount
              
              
              Amortization
              
              
              Amount
              
              
              Amount
              
              
              Amortization
              
              
              Amount(in
      thousands)Core
      deposit intangibles
              
              $
              7,997
              
              
              $
              5,638
              
              
              $
              2,359
              
              
              $
              5,891
              
              
              $
              5,435
              
              
              $
              456Mortgage
      Servicing Rights
              
              
              24
              
              
              
              -
              
              
              
              24
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              8,021
              
              
              $
              5,638
              
              
              $
              2,383
              
              
              $
              5,891
              
              
              $
              5,435
              
              
              $
              456
  Amortization expense
relating to purchase accounting intangibles totaled $203,000, $525,000, and
$630,000 for the year ended December 31, 2007, 2006, and 2005, respectively. Theweighted average amortization period of these assets
is 8.7 years. Estimated
future amortization expense is as follows:


For
      the Years Ended
              
              EstimatedDecember
      31,
              
              Amortization
      Expense(in
      thousands)2008
              
              $3112009
              
              2922010
              
              2182011
              
              2182012
              
              216




These
estimates do not assume the addition of any new intangible assets that may be
acquired in the future nor any write-downs resulting from
impairment.




Note
9.  Deposits


The
aggregate amount of jumbo time deposits, each with a minimum denomination of
$100,000, was approximately $167.3 million and $142.5 million at December 31,
2007 and 2006, respectively.


At
December 31, 2007, the scheduled maturities of time deposits are as
follows:


December
      31, 2007(in
      thousands)Due
      in one year or less
              
              $
              267,850Due
      after one year through three years
              
              
              49,848Due
      after three years
              
              
              16,470Total
              
              $
              334,168




Note
10.  Borrowings:


Short-term
borrowings are summarized as follows:







December
      31,2007
            
            
            2006(in
      thousands)Federal
      Home Loan Bank advances
            
            $
            -
            
            
            $
            -Securities
      sold under agreements to repurchase
            
            
            10,401
            
            
            
            6,584Total
      short-term borrowings
            
            $
            10,401
            
            
            $
            6,584


Securities
sold under agreements to repurchase, which are classified as secured borrowings,
generally mature daily. Interest rates on repurchase agreements are set by
Management and are generally based on the 91-day Treasury bill
rate.


The
Company’s available lines of credit with correspondent banks, including the
Federal Home Loan Bank, totaled $111.4 million at December 31, 2007 and $60.9
million at December 31, 2006. In April 2007, the FHLB reinstated “blanket lien”
status which is secured primarily by commercial real estate loans not in custody
by the FHLB. Management chose to retain some of its loans at the FHLB in
“custody status” enabling higher credit availability. In 2006, due to a high
level of nonperforming assets, FHLB borrowings were based on “custody” status
rather than “blanket lien” status. FHLB advances in 2006 were collateralized
primarily by commercial real estate loans in the FHLB’s custody. With the
exception of the FHLB, no other lines were outstanding with any other
correspondent bank
at December 31, 2007 or December 31, 2006.




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The
following schedule provides certain information about the Company’s short-term
borrowings during 2007 and 2006:





December
      31,2007
            
            
            2006
            
            
            2005(dollars
      in thousands)Outstanding
      at year end
            
            $
            10,401
            
            
            $
            6,584
            
            
            $
            8,981Maximum
      month-end outstanding
            
            
            45,766
            
            
            
            37,353
            
            
            
            32,348Average
      daily outstanding
            
            
            16,655
            
            
            
            23,731
            
            
            
            17,381Weighted
      average rate during the year
            
            
            5.18%
            
            
            
            5.19%
            
            
            
            3.14%Average
      rate at year end
            
            
            3.50%
            
            
            
            4.41%
            
            
            
            3.56%




At
December 31, 2007, no long-term debt at the FHLB was
outstanding.


At
December 31, 2007, letters of credit issued by the FHLB totaling $105.0 were
outstanding and carried as off-balance sheet items, all of which expire in 2008.
At December 31, 2006, the Company had $45.0 million in letters of credit
issued by the FHLB which all expired in 2007 and were carried as off-balance
sheet items. The letters of credit are solely used for pledging towards public
fund deposits. See Note 20 to Notes to the Financial Statements for
additional information.


In
2007, the Company assumed $3.1 million in subordinated debentures in the
Homestead acquisition. The debentures were issued in 2003 by the Homestead
Bancorp Trust I, a statutory trust. The interest rate on the
debentures is LIBOR plus 300bp, resets quarterly and was 7.91% at December 31,
2007. The securities have a term of 30 years, callable after 5 years, with
interest payments due on a quarterly basis. The Company may redeem the
debentures on or after August 8, 2008, with regulatory approval, at face value.
It is the Company’s intent to redeem these debentures in August
2008.




Note
11.  Preferred Stock


The
number of authorized shares of preferred stock is 100,000 shares of $1,000 par
value. There is no preferred stock outstanding.




Note
12.  Minimum Capital Requirements


The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors. Prompt corrective action
provisions are not applicable to bank holding
companies.


Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets and of Tier 1 capital to average assets.
Management believes, as of December 31, 2007 and 2006, that the
Company  and the Bank met all capital adequacy requirements to which they
were subject.




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As
of December 31, 2007, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following table. There
are no conditions or events since the notification that Management believes have
changed the Bank'scategory.
The Company’s and the Bank's actual capital amounts and ratios as of
December 31, 2007 and 2006 are presented in the following
table.


MinimumTo
      Be WellCapitalized
      UnderMinimum
      Capital
              
              
              Prompt
      CorrectiveActual
              
              
              Requirements
              
              
              Action
      ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio(in
      thousands, except for percentages)December
      31, 2007Total
      risk-based capital:First
      Guaranty Bancshares, Inc.
              
              $
              71,556
              
              
              
              11.09%
              
              
              $
              51,600
              
              
              
              8.00%
              
              
              
              N/A
              
              
              
              N/AFirst
      Guaranty Bank
              
              
              71,006
              
              
              
              11.02%
              
              
              
              51,558
              
              
              
              8.00%
              
              
              
              64,447
              
              
              
              10.00%Tier
      1 capital:First
      Guaranty Bancshares, Inc.
              
              
              65,364
              
              
              
              10.13%
              
              
              
              25,800
              
              
              
              4.00%
              
              
              
              N/A
              
              
              
              N/AFirst
      Guaranty Bank
              
              
              64,813
              
              
              
              10.06%
              
              
              
              25,779
              
              
              
              4.00%
              
              
              
              38,668
              
              
              
              6.00%Tier
      1 leverage capital:First
      Guaranty Bancshares, Inc.
              
              
              65,364
              
              
              
              7.38%
              
              
              
              35,414
              
              
              
              4.00%
              
              
              
              N/A
              
              
              
              N/AFirst
      Guaranty Bank
              
              
              64,813
              
              
              
              8.22%
              
              
              
              31,556
              
              
              
              4.00%
              
              
              
              39,444
              
              
              
              5.00%December
      31, 2006Total
      risk-based capitalFirst
      Guaranty Bank
              
              $
              66,292
              
              
              
              11.03%
              
              
              $
              48,073
              
              
              
              8.00%
              
              
              $
              60,091
              
              
              
              10.00%Tier
      1 capitalFirst
      Guaranty Bank
              
              
              59,617
              
              
              
              9.92%
              
              
              
              24,037
              
              
              
              4.00%
              
              
              
              36,055
              
              
              
              6.00%Tier
      1 leverage capitalFirst
      Guaranty Bank
              
              
              59,617
              
              
              
              8.16%
              
              
              
              29,207
              
              
              
              4.00%
              
              
              
              36,509
              
              
              
              5.00%


Note
13.  Restrictions on Dividends and Loans


The
FRB has stated that generally, a bank holding company, should not maintain a
rate of distributions to shareholders unless its available net income has been
sufficient to fully fund the distributions, and the prospective rate of earnings
retention appears consistent with the bank holding company’s capital needs,
asset quality and overall financial condition. As a Louisiana corporation, we
are restricted under the Louisiana corporate law from paying dividends under
certain conditions.


First
Guaranty Bank
may not pay dividends or distribute capital assets if it is in default on any
assessment due to the FDIC.  First Guaranty Bank
is also subject to regulations that impose minimum regulatory capital and
minimum state law earnings requirements that affect the amount of cash available
for distribution. In addition, under the Louisiana Banking
Law, dividends may not be paid if it would reduce the unimpaired surplus below
50% of outstanding capital stock in any year.




Note
14.  Related Party Transactions


In
the normal course of business, the Company has loans, deposits and other
transactions with its executive officers, directors and certain business
organizations and individuals with which such persons are associated. An
analysis of the activity of loans made to such borrowers during the year ended
December 31, 2007 follows:




December
      31, 2007(in
      thousands)Balance,
      beginning of year
              
              $
              19,989New
      loans
              
              
              12,850Repayments
              
              
              (13,719
              )Balance,
      end of year
              
              $
              19,120
  Unfunded
commtments to the Company's directors and executive officers totaled $16.9 million at
December 31, 2007. Additionally, included in the Company’s loan portfolio are
participations in loans totaling $0.8 million at December 31, 2007, which were
purchased from affiliated financial institutions. Participations sold to
affiliated financial institutions totaled $10.3 million at December 31,
2007.


During
the year ended 2007, the Company
paid approximately $715,000 for printing services and supplies and office
furniture and equipment to Champion Graphic Communications (or subsidiary
companies of Champion Industries, Inc.), of which Mr. Marshall T. Reynolds, the
Chairman of the Company’s Board of Directors, is President, Chief Executive
Officer, Chairman of the Board of Directors and holder of 41.5% of the capital
stock; approximately $1.1 million to participate in the Champion Industries,
Inc. employee medical benefit plan; and approximately $245,000 to Sabre
Transportation, Inc. for travel expenses of the Chairman and other directors.
These expenses include, but are not limited to, the utilization of an aircraft,
fuel, air crew, ramp fees and other expenses attendant to the Company’s use. The
Harrah and Reynolds Corporation, of which Mr. Reynolds is President and Chief
Executive Officer and sole shareholder, has a 99% ownership interest in Sabre
Transportation, Inc.


During
the year ended 2007, the Company engaged the services of Cashe, Lewis, Coudrain
and Sandage, attorneys-at-law, of which Mr. Alton Lewis, a director of the
Company, is a partner, to represent the Company with certain legal matters. Mr.
Lewis has a 25% ownership interest in the law firm. The fees paid for these
legal services totaled $178,000.





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Note
15.  Employee Benefit Plans


The
Company has an employee savings plan to which employees, who meet certain
service requirements, may defer one to 20 percent of their base salaries, six
percent of which may be matched up to 100%, at its sole discretion.
Contributions to the savings plan were $115,000, $101,000 and $93,000 in 2007,
2006 and 2005, respectively.


An
Employee Stock Ownership Plan (“ESOP”) benefits all eligible employees.
Full-time employees who have been credited with at least 1,000 hours of service
during a 12 consecutive month period and who have attained age 21 are eligible
to participate in the ESOP. The plan document has been approved by the Internal
Revenue Service. Contributions to the ESOP are at the sole discretion of the
Company.


Voluntary
contributions of $100,000 to the ESOP were made in 2007, 2006, and 2005 for the
purchase of shares from third parties at market value. At December 31, 2007, the
ESOP had acquired 3,843 shares of $1 par value common stock at a cost of
$90,003 for the 2007 contribution, bringing the total shares allocated to 18,353
shares.


In
2006 the ESOP acquired 3,820 shares of $1 par value common stock for a cost of
$89,464. In 2005 the ESOP acquired 4,738 shares of $1 par value common stock for
a cost of $87,997. An analysis of ESOP shares allocated is presented
below:





2007
              
              
              2006
              
              
              2005Shares
      allocated, beginning of year
              
              
              14,510
              
              
              
              10,690
              
              
              
              5,952Shares
      allocated, during the year
              
              
              3,843
              
              
              
              3,820
              
              
              
              4,738Allocated
      shares held by ESOP, end of year
              
              
              18,353
              
              
              
              14,510
              
              
              
              10,690







Note
16.  Other Expense


Years
      Ended December 31,2007
                
                
                2006
                
                
                2005(in
      thousands)Other
      noninterest expense:Legal
      and professional fees
                
                $
                1,610
                
                
                $
                1,390
                
                
                $
                1,201Operating
      supplies
                
                
                615
                
                
                
                545
                
                
                
                514Marketing
      and public relations
                
                
                842
                
                
                
                823
                
                
                
                564Data
      processing
                
                
                955
                
                
                
                904
                
                
                
                736Travel
      and lodging
                
                
                439
                
                
                
                280
                
                
                
                280Taxes
      - sales and capital
                
                
                628
                
                
                
                582
                
                
                
                684Telephone
                
                
                211
                
                
                
                244
                
                
                
                421Amortization
      of core deposit intangibles
                
                
                203
                
                
                
                525
                
                
                
                630Other
                
                
                2,999
                
                
                
                2,535
                
                
                
                2,410Total
      other expense
                
                $
                8,502
                
                
                $
                7,828
                
                
                $
                7,440






Note
17.  Income
Taxes


The
following is a summary of the provision for income taxes included in the
Statements of Income:





Years
      Ended December 31,2007
              
              
              2006
              
              
              2005(in
      thousands)Current
              
              $
              4,632
              
              
              $
              4,046
              
              
              $
              3,822Deferred
              
              
              213
              
              
              
              617
              
              
              
              (618
              )Tax
      credits
              
              
              (81
              )
              
              
              (135
              )
              
              
              (34
              )Tax
      benefits attributable to items charged to goodwill
              
              
              726
              
              
              
              -
              
              
              
              -Benefit
      of operating loss carryforward
              
              
              (24
              )
              
              
              (24
              )
              
              
              (24
              )Total
              
              $
              5,466
              
              
              $
              4,504
              
              
              $
              3,146
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The
difference between income taxes computed by applying the statutory federal
income tax rate and the provision for income taxes in the financial statements
is reconciled as follows:




Years
      Ended December 31,2007
              
              
              2006
              
              
              2005(in
      thousands, except for percentages)Statutory
      tax rate
              
              
              34.2%
              
              
              
              34.2%
              
              
              
              34.1%Federal
      income taxes at statutory rate
              
              $
              5,379
              
              
              $
              4,551
              
              
              $
              3,127Tax
      credits
              
              
              (81
              )
              
              
              (135
              )
              
              
              (34
              )Other
              
              
              168
              
              
              
              88
              
              
              
              53Total
              
              $
              5,466
              
              
              $
              4,504
              
              
              $
              3,146
  Deferred
taxes are recorded based upon differences between the financial statement and
tax basis of assets and liabilities, and available tax credit carryforwards.
Temporary differences between the financial statement and tax values of assets
and liabilities give rise to deferred tax assets (liabilities). The significant
components of deferred tax assets and liabilities at December 31, 2007 and 2006
are as follows:
  Years
      Ended December 31,2007
                
                
                2006(in
      thousands)Deferred
      tax assets:Allowance
      for loan losses
                
                $
                2,023
                
                
                $
                2,270Net
      operating loss carryforwards
                
                
                -
                
                
                
                24Other
      real estate owned
                
                
                85
                
                
                
                128Depreciation
      and amortization
                
                
                -
                
                
                
                302Unrealized
      loss on available for sale securities
                
                
                172
                
                
                
                466Other
                
                
                84
                
                
                
                -Gross
      deferred tax assets
                
                $
                2,364
                
                
                $
                3,190Deferred
      tax liabilities:Depreciation
      and amortization
                
                
                (1,095
                )
                
                
                -Other
                
                
                (1,424
                )
                
                
                (1,188
                )Gross
      deferred tax liabilities
                
                
                (2,519
                )
                
                
                (1,188
                )Net
      deferred tax (liabilities) assets
                
                $
                (155
                )
                
                $
                2,002
  As
of December 31, 2007, there were no net operating loss carry forwards for income
tax purposes. As of December 31, 2006, the Company had a net operating loss
carry forward of $69,000, which was available to offset future taxable
income.
 On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes. The Company does not believe it has any
unrecognized tax benefits included in its consolidated financial statements. The
Company has not had any settlements in the current period with taxing
authorities, nor has it recognized tax benefits as a result of a lapse of the
applicable statute of limitations.
 The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits, if applicable, in noninterest expense. During the years ended December
31, 2007, 2006 and 2005, the Company did not recognize any interest or penalties
in its consolidated financial statements, nor has it recorded an accrued
liability for interest or penalty payments.




Note
18.  Comprehensive Income


The
following is a summary of the components of other comprehensive income as
presented in the Statements of Changes in Stockholders’
Equity:




December
      31,2007
              
              
              2006
              
              
              2005(in
      thousands)Unrealized
      gain (loss) on available for sale securities, net
              
              $
              387
              
              
              $
              (517
              )
              
              $
              (954
              )Reclassification
      adjustments for net losses (gains), realized net income
              
              
              478
              
              
              
              234
              
              
              
              (7
              )Other
      comprehensive income (loss)
              
              
              865
              
              
              
              (283
              )
              
              
              (961
              )Income
      tax (provision) benefit related to other comprehensive
    income
              
              
              (295
              )
              
              
              96
              
              
              
              327Other
      comprehensive income (loss), net of income taxes
              
              $
              570
              
              
              $
              (187
              )
              
              $
              (634
              )
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Note
19.  Financial Instruments


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.


Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. Each
customer's creditworthiness is evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary upon extension of credit, is based on
Management's credit evaluation of the counterpart. Collateral requirements vary
but may include accounts receivable, inventory, property, plant and equipment,
residential real estate and commercial properties.


Standby
and commercial letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. These guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The majority of these
guarantees are short-term, one year or less; however, some guarantees extend for
up to three years. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Collateral requirements are the same as on-balance sheet instruments and
commitments to extend credit.


There
were no losses incurred on any commitments in 2007, while a $7,000 loss on one
commitment was incurred in 2006.


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 our financial instruments, we 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.




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 The
methods and assumptions used to estimate the fair values of each class of
financial instruments are as follows:
  Cash and due from
banks, interest-bearing deposits with banks, federal funds sold and federal
funds purchased .
 
  Interest-bearing time
deposits with banks.
 
 
  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.
  Loans Held for
Sale.
  Loans,
net. The fair value of loans is estimated for segments of the loan
portfolio with similar financial characteristics. For variable rate loans that
re-price frequently with no
 significant
change in credit risk, the carrying amounts reported in the Statements of
Condition are reasonable approximations of their fair values. The fair values of
other types of
 loans
are estimated by discounting the future cash flows using interest rates that
consider the credit and interest rate risks inherent in the loans, and current
economic and
 lending
conditions.
 The fair
value of non-accrual loans is either estimated by discounting Management's
estimate of future cash flows using a rate commensurate with the risks involved
or
 based
u pon
recent internal or external appraisals.
  Accrued interest
receivable.
  Deposits.
 
 
  Accrued interest
payable.
  Borrowings.
 
  Other unrecognized
financial instruments.







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The
estimated fair values and carrying values of the financial instruments at
December 31, 2007 and 2006 are presented in the following
table:


December
      31,2007
              
              
              2006Estimated
              
              
              
              
              
              EstimatedCarrying
              
              
              Fair
              
              
              Carrying
              
              
              FairValue
              
              
              Value
              
              
              Value
              
              
              Value(in
      thousands)AssetsCash
      and cash equivalents
              
              $
              58,677
              
              
              $
              58,677
              
              
              $
              24,817
              
              
              $
              24,817Interest-bearing
      time deposits with banks
              
              
              2,188
              
              
              
              2,188
              
              
              
              2,188
              
              
              
              2,168Securities,
      available for sale
              
              
              105,570
              
              
              
              105,570
              
              
              
              111,353
              
              
              
              111,353Securities,
      held to maturity
              
              
              36,498
              
              
              
              36,206
              
              
              
              46,999
              
              
              
              45,614Federal
      Home Loan Bank stock
              
              
              955
              
              
              
              955
              
              
              
              2,264
              
              
              
              2,264Loans
      held for sale
              
              
              3,959
              
              
              
              3,959
              
              
              
              1,049
              
              
              
              1,049Loans,
      net
              
              
              569,063
              
              
              
              566,616
              
              
              
              500,520
              
              
              
              478,719Accrued
      interest receivable
              
              
              5,126
              
              
              
              5,126
              
              
              
              5,378
              
              
              
              5,378LiabilitiesDeposits
              
              $
              723,094
              
              
              $
              720,744
              
              
              $
              626,293
              
              
              $
              626,139Borrowings
              
              
              13,494
              
              
              
              13,491
              
              
              
              24,568
              
              
              
              24,587Accrued
      interest payable
              
              
              2,956
              
              
              
              2,956
              
              
              
              3,070
              
              
              
              3,070




A
summary of the notional amounts of the financial instruments with off-balance
sheet risk at December 31, 2007 and 2006 follows:




December
      31,2007
              
              
              2006(in
      thousands)Financial
      instruments whose contractamounts
      represent credit risk:Commitments
      to extend credit
              
              $
              92,342
              
              
              $
              87,355Commitments
      to grant loans
              
              
              56,998
              
              
              
              47,110Standby
      letters of credit
              
              
              6,035
              
              
              
              2,515




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 priced at
market.




Note
20.  Concentrations of Credit and Other Risks


Personal,
commercial and residential loans are granted to customers, most of who reside in
northern and southern areas of Louisiana. Although we have a diversified loan
portfolio, significant portions of the loans are collateralized by real estate
located in Tangipahoa Parish and surrounding parishes in southeast Louisiana.
Declines in the Louisiana economy could result in lower real estate values which
could, under certain circumstances, result in losses to the
Company.


The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers. Generally, credit is not extended in excess
of $8.0 million to any single borrower or group of related
borrowers.


A
significant portion of the Company’s deposits (approximately 28.8%) is derived
from local governmental agencies. These governmental depositing authorities are
generally long-term customers. A number of the depositing authorities are under
contractual obligation to maintain their operating funds exclusively with us. In
most cases, we are required to pledge securities or letters of credit issued by
the Federal Home Loan Bank to the depositing authorities to collateralize their
deposits. Under certain circumstances, the withdrawal of all of, or a
significant portion of, the deposits of one or more of the depositing
authorities may result in a temporary reduction in liquidity, depending
primarily on the maturities and/or classifications of the securities pledged
against such deposits and the ability to replace such deposits with either new
deposits or other borrowings.





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Note
21.  Litigation


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




Note
22.  Commitments and Contingencies


In
the ordinary course of business, various outstanding commitments and contingent
liabilities arise that are not reflected in the accompanying financial
statements. Included among these contingent liabilities are certain provisions
in agreements, entered into with outside third parties, to sell loans that we
that may require us to repurchase a loan if it becomes delinquent within a
specified period of time.




Note
23.  Condensed Parent Company Information


The
following condensed financial information reflects the accounts and transactions
of First Guaranty Bancshares, Inc. (parent company only) for the dates
indicated:




First
      Guaranty Bancshares, Inc.Condensed
      Balance Sheet(in
      thousands)December
      31,2007AssetsCash
              
              $
              49Investment
      in bank subsidiary
              
              
              69,008Other
      assets
              
              
              623Total
      Assets
              
              $
              69,680Liabilities
      and Stockholders' EquityJunior
      subordinated debentures
              
              $
              3,093Other
      liabilities
              
              
              54Stockholders'
      Equity
              
              
              66,533Total
      liabilities and stockholders' equity
              
              $
              69,680
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  First
      Guaranty Bancshares, Inc.Condensed
      Statement of Income(in
      thousands)For
      the Period EndedDecember
      31, 2007Operating
      IncomeDividends
      received from bank subsidiaries
                
                $
                19,630Other
      income
                
                
                4Total
      operating income
                
                
                19,634Operating
      ExpensesInterest
      expense
                
                
                233Other
      expenses
                
                
                448Total
      operating expenses
                
                
                681Income
      before income tax expense and increase in equity in
      undistributedearnings
      of subsidiaries
                
                
                18,953Income
      tax benefit
                
                
                220Income
      before increase in equity in undistributed earnings of
      subdisiaries
                
                
                19,173Decrease
      in equity in undistributed earnings of subsidiaries
                
                
                (15,222
                )Net
      Income
                
                $
                3,951
  First
      Guaranty Bancshares, Inc.Condensed
      Statement of Cash Flows(in
      thousands)Year EndedDecember 31, 2007Cash
      Flows From Operating ActivitiesNet
      income
                  
                  $
                  3,951Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Equity
      in undistributed (earnings) losses of subsidiaries
                  
                  
                  15,222Net
      change in other liabilities
                  
                  
                  (17
                  )Net
      change in other assets
                  
                  
                  (49
                  )Net
      Cash Provided By Operating Activities
                  
                  
                  19,107Cash
      Flows From Investing ActivitiesPayments
      for investments in and advances to subsidiaries
                  
                  
                  (5,489
                  )Cash
      paid in excess of cash received in acquisition
                  
                  
                  (11,790
                  )Net
      Cash Used in Investing Activities
                  
                  
                  (17,279
                  )Cash
      Flows From Financing ActivitiesProceeds
      from purchased funds and other short-term borrowings
                  
                  
                  17,640Repayments
      of purchased funds and other short-term borrowings
                  
                  
                  (17,640
                  )Dividends
      paid
                  
                  
                  (1,779
                  )Net
      Cash Used In Financing Activities
                  
                  
                  (1,779
                  )Net
      Increase In Cash and Cash Equivalents
                  
                  
                  49Cash
      and Cash Equivalents at the Beginning of the Period
                  
                  
                  -Cash
      and Cash Equivalents at the End of the Period
                  
                  $
                  49
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  Item
9 -Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure


There
were no changes in or disagreements with accountants on accounting and financial
disclosures for the year ended December 31, 2007




Item 9a(T) - Controls and Procedures


Evaluation
of Disclosure Controls and Procedures


As
defined by the Securities and Exchange Commission in Exchange Act Rules
13a-14(c) and 15d-14(c), 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 annual report on Form 10-K. 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 annual 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 annual report that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.










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9b - Other Information


None


Part
III




Item
10-Directors and Executive Officers and Corporate
Governance


Pursuant
to General Instruction G (3), information on directors and executive officers of
the Registrant will be incorporated by reference from the Company’s 2008
Definitive Proxy Statement.




Item
11 -Executive Compensation


Pursuant
to General Instruction G (3), information on directors and executive officers of
the Registrant will be incorporated by reference from the Company’s 2008
Definitive Proxy Statement.




Item
12 -Security Ownership of Certain Beneficial Owners, Management and
Related Stockholder Matters


Pursuant
to General Instruction G (3), information on directors and executive officers of
the Registrant will be incorporated by reference from the Company’s 2008
Definitive Proxy Statement.




Item
13 - Certain Relationships and Related Transactions and Director
Independence


Pursuant
to General Instruction G (3), information on directors and executive officers of
the Registrant will be incorporated by reference from the Company’s 2008
Definitive Proxy Statement.




Item 14 -Principal
Accountant Fees and Services


Pursuant
to General Instruction G (3), information on directors and executive officers of
the Registrant will be incorporated by reference from the Company’s 2008
Definitive Proxy Statement.





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Part
IV





Item
15 -Exhibits and Financial Statement Schedules





(a)
            1
            Consolidated
      Financial StatementsItem
            PageFirst
      Guaranty Bancshares, Inc. and SubsidiaryReport
      of Independent Registered Accounting Firm
            38Consolidated Balance
      Sheets - December 31, 2007 and 2006
            39Consolidated
      Statements of Income - Years Ended December 31, 2007, 2006 and
      2005
            40Consolidated
      Statements of Changes in Stockholders’ Equity -  December 31,
      2007, 2006 and 2005
            41Consolidated
      Statements of Cash Flows - Years Ended December 31, 2007, 2006 and
      2005
            42Notes
      to Consolidated Financial Statements
            432.
            Consolidated
      Financial Statement SchedulesAll
      schedules to the consolidated financial statements of First Guaranty
      Bancshares, Inc. and its subsidiaries have been omitted because they
      are not required under the related instructions or are inapplicable, or
      because the required information has been provided in the consolidated
      financial statements or the notes thereto.3
            ExhibitsThe
      exhibits required by Regulation S-K are set forth in the following
      list and are filed either by incorporation by reference from previous
      filings with the Securities and Exchange Commission or by attachment to
      this Annual Report on Form 10-K as indicated below.Exhibit Number
            
            Exhibit2
            
            Agreement
      and Plan of Reorganization between First Guaranty Bancshares, Inc. and
      First Community Holding Company dated November 2, 2007 (filed as Exhibit
      2.1 on the Company’s Form 8-K dated November 8, 2007 and incorporated
      herein by reference).2.1
            
            Agreement
      and Plan of Exchange dated July 27, 2007 between First Guaranty
      Bancshares, Inc and First Guaranty Bank (filed as Exhibit 2 on Form
      8-K12G3 dated August 2, 2007 and incorporated herein by
      reference).3.1
            
            Restatement
      of Articles of Incorporation of First Guaranty Bancshares, Inc. dated July
      27, 2007 (filed as Exhibit 3.1 on Form 8-K12G3 dated August 2, 2007 and
      incorporated herein by reference).3.2
            
            Bylaws
      of First Guaranty Bancshares, Inc. dated January 4, 2007 (filed as Exhibit
      3.2 on Form 8-K12G3 dated August 2, 2007 and incorporated herein by
      reference).3.3
            
            Amendment
      to Bylaws of First Guaranty Bancshares, Inc. dated May 17, 2007 (filed as
      Exhibit 3.3 on Form 8-K12G3 dated August 2, 2007 and incorporated herein
      by reference).4
            
            Specimen
      stock certificate for common stock off First Guaranty Bancshares, Inc.
      (filed as Exhibit 3.3 on Form 8-K12G3 dated August 2, 2007 and
      incorporated herein by reference).10.1
            
            First
      Guaranty Bank Employee Stock Ownership Plan (effective January 1, 2003)
      (filed as Exhibit 10.1 on Form 8-K12G3 dated August 2, 2007 and
      incorporated herein by reference).10.2
            
            Amendment
      Number One to the First Guaranty Bank Employee Stock Ownership Plan
      (effective January 1, 2003) (filed as Exhibit 10.2 on Form 8-K12G3 dated
      August 2, 2007 and incorporated herein by reference).10.3
            
            Amendment
      Number Two to the First Guaranty Bank Employee Stock Ownership Plan
      (effective January 1, 2003) (filed as Exhibit 10.3 on Form 8-K12G3 dated
      August 2, 2007 and incorporated herein by reference).10.4
            
            Amendment
      Number Three to the First Guaranty Bank Employee Stock Ownership Plan
      (effective January 1, 2003) (filed as Exhibit 10.3 on Form 8-K12G3 dated
      August 2, 2007 and incorporated herein by reference).10.5
            
            Employment
      Agreement and Ancillary Confidentiality and Non-Competition Agreement by
      and between Reggie H. Harper and First Guaranty Bank, and Employment
      Agreement and Ancillary Confidentiality and Non-Competition Agreement by
      and between Cordell H. White and First Guaranty Bank dated November 2,
      2007 (filed as Exhibit 10.1 on the Company’s Form 8-K dated November 8,
      2007 and incorporated herein by reference).11
            
            Statement
      Regarding Computation of Earnings Per Share12
            
            Statement
      Regarding Computation of Ratios14.1
            
            First
      Guaranty Bancshares, Inc. and Subsidiary Code Of Conduct And Ethics For
      Employees, Officers And Directors dated January 25, 2008 (filed as Exhibit
      14.1 on the Company’s Form 8-K dated January 31, 2008 and incorporated
      herein by reference).14.2
            
            First
      Guaranty Bancshares, Inc. Code Of Ethics For Senior Financial Officers
      dated January 25, 2008 (filed as Exhibit 14.2 on the Company’s Form 8-K
      dated January 31, 2008 and incorporated herein by
    reference).21
            
            Subsidiaries
      of the First Guaranty Bancshares, Inc. (filed as Exhibit 21 on the
      Company’s Form 8-K dated November 8, 2007 and incorporated herein by
      reference).31
            
            Section
      906 Certification of the Sarbanes-Oxley Act32
            
            Section
      302 Certification of the Sarbanes-Oxley Act(c)
            There
      are no other financial statements and financial statement schedules which
      were excluded from Item 8, which are required to be included
      herein.








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SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





FIRST
GUARANTY BANCSHARES, INC.




Dated:
March 31, 2008








Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.





/s/
      Michael R. Sharp
              Michael
      R. Sharp
            President
      and
              Chief
      Executive Officer
            March
      31, 2008/s/
      Michele E. LoBianco
              Michele
      E. LoBianco
            Chief
      Financial Officer,
              Secretary
      and Treasurer
            March
      31, 2008/s/Marshall
      T. Reynolds
              Marshall
      T. Reynolds
            Chairman
      of the Board
            March
      31, 2008/s/
      William K. Hood
              William
      K. Hood
            Director
            March
      31, 2008/s/
      Alton B. Lewis
              Alton
      B. Lewis
            Director
            March
      31, 2008