UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549











Form
10-Q











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


THE
SECURITIES EXCHANGE ACT OF 1934





For
the Quarter Ended September 30, 2009


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 office)
            (Zip
      Code)





(985)
345-7685


(Telephone
number, including area code)

















Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X]No [ ]





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
[  ] No
[  ]





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


Large
accelerated filer*Accelerated
filer*Non-accelerated
filer*Smaller
reporting companyT





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


Yes [
]   No [X]





As of
November 5, 2009, the registrant had 5,559,644 shares of $1 par value common
stock which were issued and outstanding.


- 1
-


PART
I.                 FINANCIAL
INFORMATION


Item
1.  Consolidated Financial Statements





FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      BALANCE SHEETS(dollars
      in thousands, except share data)September
      30,
              
              
              December
      31,2009
              
              
              2008Assets
              
              (unaudited)Cash
      and cash equivalents:Cash
      and due from banks
              
              $
              15,101
              
              
              $
              77,159Interest-earning
      demand deposits with banks
              
              
              37,512
              
              
              
              20Federal
      funds sold
              
              
              -
              
              
              
              838Cash
      and cash equivalents
              
              
              52,613
              
              
              
              78,017Interest-earning
      time deposits with banks
              
              
              13,123
              
              
              
              21,481Investment
      securities:Available
      for sale, at fair value
              
              
              245,943
              
              
              
              114,406Held
      to maturity, at cost (estimated fair value of$2,837
      and $24,936, respectively)
              
              
              2,665
              
              
              
              24,756Investment
      securities
              
              
              248,608
              
              
              
              139,162Federal
      Home Loan Bank stock, at cost
              
              
              948
              
              
              
              944Loans
      held for sale
              
              
              -
              
              
              
              -Loans,
      net of unearned income
              
              
              595,152
              
              
              
              606,369Less:
      allowance for loan losses
              
              
              6,895
              
              
              
              6,482Net
      loans
              
              
              588,257
              
              
              
              599,887Premises
      and equipment, net
              
              
              16,243
              
              
              
              16,141Goodwill
              
              
              1,999
              
              
              
              1,980Intangible
      assets, net
              
              
              1,952
              
              
              
              2,078Other
      real estate, net
              
              
              1,140
              
              
              
              568Accrued
      interest receivable
              
              
              6,635
              
              
              
              4,611Other
      assets
              
              
              3,410
              
              
              
              6,563Total
      Assets
              
              $
              934,928
              
              
              $
              871,432Liabilities
      and Stockholders' EquityDeposits:Noninterest-bearing
      demand
              
              $
              116,878
              
              
              $
              118,255Interest-bearing
      demand
              
              
              181,140
              
              
              
              180,230Savings
              
              
              42,990
              
              
              
              41,357Time
              
              
              479,630
              
              
              
              440,530Total
      deposits
              
              
              820,638
              
              
              
              780,372Short-term
      borrowings
              
              
              11,495
              
              
              
              9,767Accrued
      interest payable
              
              
              3,789
              
              
              
              3,033Long-term
      borrowings
              
              
              845
              
              
              
              8,355Other
      liabilities
              
              
              3,702
              
              
              
              3,275Total
      Liabilities
              
              
              840,469
              
              
              
              804,802Stockholders'
      EquityPreferred
      stock:Series
      A - $1,000 par value - authorized 5,000 shares; issuedand
      outstanding 2,069.9 shares
              
              
              19,529
              
              
              
              -Series
      B - $1,000 par value - authorized 5,000 shares; issuedand
      outstanding 103 shares
              
              
              1,151
              
              
              
              -Common
      stock:$1
      par value - authorized 100,600,000 shares; issued andoutstanding
      5,559,644 shares
              
              
              5,560
              
              
              
              5,560Surplus
              
              
              26,459
              
              
              
              26,459Retained
      earnings
              
              
              39,200
              
              
              
              37,769Accumulated
      other comprehensive income (loss)
              
              
              2,560
              
              
              
              (3,158
              )Total
      Stockholders' Equity
              
              
              94,459
              
              
              
              66,630Total
      Liabilities and Stockholders' Equity
              
              $
              934,928
              
              
              $
              871,432See
      Notes to Consolidated Financial Statements.
  - 2
-


FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF INCOME (unaudited)(dollars
      in thousands, except per share data)Three
      Months
              
              
              Nine
      MonthsEnded
      September 30,
              
              
              Ended
      September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Interest
      Income:Loans
      (including fees)
              
              $
              9,075
              
              
              $
              10,105
              
              
              $
              26,605
              
              
              $
              31,104Loans
      held for sale
              
              
              2
              
              
              
              2
              
              
              
              5
              
              
              
              37Deposits
      with other banks
              
              
              63
              
              
              
              8
              
              
              
              372
              
              
              
              22Securities
      (including FHLB stock)
              
              
              3,039
              
              
              
              1,695
              
              
              
              7,581
              
              
              
              4,635Federal
      funds sold
              
              
              6
              
              
              
              20
              
              
              
              33
              
              
              
              378Total
      Interest Income
              
              
              12,185
              
              
              
              11,830
              
              
              
              34,596
              
              
              
              36,176Interest
      Expense:Demand
      deposits
              
              
              296
              
              
              
              664
              
              
              
              1,118
              
              
              
              2,305Savings
      deposits
              
              
              12
              
              
              
              48
              
              
              
              89
              
              
              
              150Time
      deposits
              
              
              3,286
              
              
              
              2,782
              
              
              
              10,381
              
              
              
              9,249Borrowings
              
              
              68
              
              
              
              134
              
              
              
              228
              
              
              
              345Total
      Interest Expense
              
              
              3,662
              
              
              
              3,628
              
              
              
              11,816
              
              
              
              12,049Net
      Interest Income
              
              
              8,523
              
              
              
              8,202
              
              
              
              22,780
              
              
              
              24,127Provision
      for loan losses
              
              
              742
              
              
              
              407
              
              
              
              2,091
              
              
              
              1,099Net
      Interest Income after Provision for Loan Losses
              
              
              7,781
              
              
              
              7,795
              
              
              
              20,689
              
              
              
              23,028Noninterest
      Income:Service
      charges, commissions and fees
              
              
              1,073
              
              
              
              1,034
              
              
              
              3,093
              
              
              
              3,009Net
      gains on sale of securities
              
              
              33
              
              
              
              -
              
              
              
              43
              
              
              
              3Loss
      on securities impairment
              
              
              (242
              )
              
              
              (4,611
              )
              
              
              (242
              )
              
              
              (4,611
              )Net
      gains on sale of loans
              
              
              74
              
              
              
              7
              
              
              
              345
              
              
              
              182Other
              
              
              331
              
              
              
              392
              
              
              
              852
              
              
              
              1,219Total
      Noninterest Income
              
              
              1,269
              
              
              
              (3,178
              )
              
              
              4,091
              
              
              
              (198
              )Noninterest
      Expense:Salaries
      and employee benefits
              
              
              2,691
              
              
              
              2,700
              
              
              
              8,184
              
              
              
              7,878Occupancy
      and equipment expense
              
              
              705
              
              
              
              743
              
              
              
              2,116
              
              
              
              2,173Net
      cost from other real estate & repossessions
              
              
              86
              
              
              
              116
              
              
              
              266
              
              
              
              200Regulatory
      assessment
              
              
              399
              
              
              
              161
              
              
              
              1,344
              
              
              
              412Other
              
              
              2,206
              
              
              
              2,190
              
              
              
              6,242
              
              
              
              6,610Total
      Noninterest Expense
              
              
              6,087
              
              
              
              5,909
              
              
              
              18,152
              
              
              
              17,273Income
      (Loss) Before Income Taxes
              
              
              2,963
              
              
              
              (1,292
              )
              
              
              6,628
              
              
              
              5,557Provision
      (Benefit) for income taxes
              
              
              1,033
              
              
              
              (457
              )
              
              
              2,300
              
              
              
              1,935Net
      Income (Loss)
              
              
              1,930
              
              
              
              (835
              )
              
              
              4,328
              
              
              
              3,622Preferred
      Stock Dividends
              
              
              (228
              )
              
              
              -
              
              
              
              (228
              )
              
              
              -Income
      (Loss) Available to Common Shareholders
              
              $
              1,702
              
              
              $
              (835
              )
              
              $
              4,100
              
              
              $
              3,622Per
      Common Share:Earnings
              
              $
              0.31
              
              
              $
              (0.15
              )
              
              $
              0.74
              
              
              $
              0.65Cash
      dividends paid
              
              $
              0.16
              
              
              $
              0.16
              
              
              $
              0.48
              
              
              $
              0.48Average
      Common Shares Outstanding
              
              
              5,559,644
              
              
              
              5,559,644
              
              
              
              5,559,644
              
              
              
              5,559,644See
      Notes to Consolidated Financial Statements
  - 3
-




FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY(dollars
      in thousands, except per share data)Series
      A
              Series
      B
              
              
              
              AccumulatedPreferred
              Preferred
              Common
              
              
              OtherStock
              Stock
              Stock
              
              Retained
              Comprehensive$1,000
      Par
              $1,000
      Par
              $1
      Par
              Surplus
              Earnings
              Income
      / (Loss)
              TotalBalance
      December 31, 2007
              $0
              $0
              $5,560
              $26,459
              $34,849
              ($335)
              $66,533Net
      income
              -
              -
              -
              -
              3,622
              -
              3,622Change
      in unrealized losson
      available for sale securities,net
      of reclassification adjustments and taxes
              -
              -
              -
              -
              -
              (3,179)
              (3,179)Comprehensive
      income
              
              
              
              
              
              
              443Cash
      dividends on common stock ($0.48 per share)
              -
              -
              -
              -
              (2,669)
              -
              (2,669)Balance
      September 30, 2008 (unaudited)
              $0
              $0
              $5,560
              $26,459
              $35,802
              ($3,514)
              $64,307Balance
      December 31, 2008
              $0
              $0
              $5,560
              $26,459
              $37,769
              ($3,158)
              $66,630Preferred
      stock issued
              19,551
              1,148
              -
              -
              -
              -
              20,699Net
      income
              -
              -
              -
              -
              4,328
              -
              4,328Change
      in unrealized gain (loss)on
      available for sale securities,net
      of reclassification adjustments and taxes
              -
              -
              -
              -
              -
              5,718
              5,718Comprehensive
      income
              
              
              
              
              
              
              10,046Cash
      dividends on common stock ($0.48 per share)
              -
              -
              -
              -
              (2,669)
              -
              (2,669)Preferred
      stock dividend, amortization and accretion
              (22)
              3
              -
              -
              (228)
              -
              (247)Balance
      September 30, 2009 (unaudited)
              $19,529
              $1,151
              $5,560
              $26,459
              $39,200
              $2,560
              $94,459See
      Notes to Consolidated Financial Statements


- 4
-


FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF CASH FLOWS (unaudited)(in
      thousands)Nine
      Months Ended September 30,2009
              
              
              2008Cash
      Flows From Operating ActivitiesNet
      income
              
              $
              4,328
              
              
              $
              3,622Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Provision
      for loan losses
              
              
              2,091
              
              
              
              1,099Depreciation
      and amortization
              
              
              1,070
              
              
              
              1,109Amortization
      of discount on investments
              
              
              (631
              )
              
              
              (642
              )Gain
      on call of securities
              
              
              (43
              )
              
              
              (3
              )Gain
      on sale of assets
              
              
              (313
              )
              
              
              (182
              )Other
      than temporary impairment charge on securities
              
              
              243
              
              
              
              4,611ORE
      writedowns and loss on disposition
              
              
              174
              
              
              
              35FHLB
      stock dividends
              
              
              (4
              )
              
              
              (26
              )Net
      decrease in loans held for sale
              
              
              -
              
              
              
              3,579Change
      in other assets and liabilities, net
              
              
              (1,647
              )
              
              
              2,534Net
      Cash Provided By Operating Activities
              
              
              5,268
              
              
              
              15,736Cash
      Flows From Investing ActivitiesProceeds
      from maturities and calls of HTM securities
              
              
              22,097
              
              
              
              2,180Proceeds
      from maturities and calls of AFS securities
              
              
              1,213,555
              
              
              
              625,460Funds
      invested in AFS securities
              
              
              (1,336,004
              )
              
              
              (629,698
              )Proceeds
      from sale of Federal Home Loan Bank stock
              
              
              -
              
              
              
              505Funds
      invested in Federal Home Loan Bank stock
              
              
              -
              
              
              
              (1,857
              )Funds
      invested in time deposits with banks
              
              
              (13,613
              )
              
              
              (22,216
              )Proceeds
      from maturities of time deposits with banks
              
              
              21,971
              
              
              
              24,305Net
      decrease (increase) in loans
              
              
              8,465
              
              
              
              (31,514
              )Purchase
      of premises and equipment
              
              
              (905
              )
              
              
              (446
              )Proceeds
      from sales of premises and equipment
              
              
              24
              
              
              
              -Proceeds
      from sales of other real estate owned
              
              
              328
              
              
              
              232Additional
      acquisition costs paid
              
              
              -
              
              
              
              (84
              )Net
      Cash Used In Investing Activities
              
              
              (84,082
              )
              
              
              (33,133
              )Cash
      Flows From Financing ActivitiesNet
      increase (decrease) in deposits
              
              
              40,273
              
              
              
              (7,687
              )Net
      increase in federal funds purchased and short-term
    borrowings
              
              
              1,728
              
              
              
              30,920Proceeds
      from long-term borrowings
              
              
              -
              
              
              
              10,000Repayment
      of long-term borrowings
              
              
              (7,510
              )
              
              
              (3,093
              )Proceeds
      from issuance of preferred stock
              
              
              20,699
              
              
              
              -Dividends
      paid
              
              
              (1,780
              )
              
              
              (2,669
              )Net
      Cash Provided By Financing Activities
              
              
              53,410
              
              
              
              27,471Net
      (Decrease) Increase In Cash and Cash Equivalents
              
              
              (25,404
              )
              
              
              10,074Cash
      and Cash Equivalents at the Beginning of the Period
              
              
              78,017
              
              
              
              58,677Cash
      and Cash Equivalents at the End of the Period
              
              $
              52,613
              
              
              $
              68,751Noncash
      Activities:Loans
      transferred to foreclosed assets
              
              $
              1,074
              
              
              $
              557Cash
      Paid During The Period:Interest
      on deposits and borrowed funds
              
              $
              11,060
              
              
              $
              12,052Income
      taxes
              
              $
              3,100
              
              
              $
              1,200See
      Notes to Consolidated Financial Statements


- 5
-


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Note
1. Basis of Presentation


The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles. The consolidated
financial statements and the footnotes of First Guaranty Bancshares, Inc. (the
“Company”) thereto should be read in conjunction with the audited financial
statements and note disclosures for the Company previously filed with the
Securities and Exchange Commission in the Company’s Annual Report filed on Form
10-K for the year ended December 31, 2008.


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


In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair presentation of the
consolidated financial statements. Those adjustments are of a normal recurring
nature. The results of operations for the three and nine-month periods ended
September 30, 2009 are not necessarily indicative of the results expected for
the full year. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Material estimates that are susceptible to significant change in the
near term are the allowance for loan losses, valuation of goodwill, intangible
assets and other purchase accounting adjustments.





Note
2. Fair Value


Effective
January 1, 2008, the Company adopted the provisions of FASB ASC 820-10-65, Fair Value Measurements and
Disclosures (SFAS No. 157), for financial assets and liabilities. FASB
ASC 820-1-65 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the
asset or transfer the liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous market
for the asset or liability. Valuation techniques use certain inputs to arrive at
fair value. Inputs to valuation techniques are the assumptions that market
participants would use in pricing the asset or liability. They may be observable
or unobservable. FASB ASC 820-1-65 establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:


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


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


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


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


Securities Available for
Sale.  Securities classified as available for sale are reported
at fair value utilizing Level 1, Level 2 and Level 3 inputs. For these
securities, the Company obtains fair value measurements from an independent
pricing service. The fair value measurements consider observable data that may
include dealer quotes, market spreads, cash flows, market yield curves,
prepayment speeds, credit information and the instrument’s contractual terms and
conditions, among other things.


Impaired
Loans.  Certain financial assets such as impaired loans are
measured at fair value on a nonrecurring basis; that is, the instruments are not
measured at fair value on an ongoing basis but are subject to fair value
adjustments in certain circumstances, such as when there is evidence of
impairment. The fair value of impaired loans was $9.8 million at September 30,
2009. The fair value of impaired loans is measured by either the obtainable
market price (Level 1), the fair value of the collateral as determined by
appraisals or independent valuation (Level 2), or the present value of expected
future cash flows discounted at the effective interest rate of the loan (Level
3).


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


The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of September 30, 2009, segregated by the
level of the valuation inputs within the fair value hierarchy utilized to
measure fair value:





- 6
-


Fair
      Value Measurements atSeptember
      30, 2009, UsingQuotedPrices
      InActiveMarkets
              SignificantAssets/Liabilities
              
              For
              Other
              SignificantMeasured
      at Fair
              
              Identical
              Observable
              UnobservableValue
              
              Assets
              Inputs
              Inputs(Dollars
      in thousands)
              September
      30, 2009
              
              (Level
      1)
              (Level
      2)
              (Level
      3)Securities
      available for sale
              $                  245,943
              
              $           22,680
              $         223,263
              $                  -





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


Gains and
losses (realized and unrealized) included in earnings (or changes in net assets)
for the first nine months of 2009 on a recurring basis are reported in
noninterest income or other comprehensive income as follows:




OtherNoninterest
              
              ComprehensiveIncome
              
              Income(in
      thousands)Total
      gains included in earnings
              34
              
              -(or
      changes in net assests)Increase
      in unrealized gains relating to assets
              -
              
              5,718still
      held at September 30, 2009





The
Company did not record any assets or liabilities at fair value for which
measurement of the fair value was made on a nonrecurring basis during the nine
months ended September 30, 2009.


FASB ASC
825-10 (SFAS No. 159) provides the Company with an option to report selected
financial assets and liabilities at fair value. The fair value option
established by this Statement permits the Company to choose to measure eligible
items at fair value at specified election dates and report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each reporting date subsequent to implementation.


The
Company has currently chosen not to elect the fair value option for any items
that are not already required to be measured at fair value in accordance with
accounting principles generally accepted in the United States, and as such has
not included any gains or losses in earnings for the nine-month period ended
September 30, 2009.





Note
3. Securities Impairment


The Company recorded a non-cash
other-than-temporary impairment (“OTTI”) on one available for sale corporate
security for the quarter ending September 30, 2009.  The OTTI charges
recorded for the quarter ending September 30, 2009 totaled $243,000 before tax
and $157,000 after tax.  There were no held to maturity securities in which
OTTI charges were taken.


During
the third quarter 2008, the U.S. Treasury and the Federal Housing Finance Agency
(FHFA) announced that Fannie Mae and Freddie Mac were being placed under
conservatorship and giving management control to their regulator, the FHFA. At
September 30, 2008, First Guaranty Bank had three securities totaling
$3,046,000, on a cost basis, of preferred stock of Fannie Mae and Freddie Mac
which had unrealized losses of $1,991,000 and $1,010,000, respectively, debt
securities totaling $727,000 and $240,000 issued by Lehman Brothers and
Washington Mutual which had unrealized losses of $634,000 and $239,000,
respectively.  The Bank also owned $510,000 and $739,000 in asset
backed securities issued by TRAPEZA and ALESCO (CDOs) which had unrealized
losses of $344,000 and $409,000, respectively. The impact of the above actions
and concerns in the market place about the future value of the preferred stock
of Fannie Mae and Freddie Mac, as well as the bankruptcy of Lehman Brothers, the
acquisition of Washington Mutual by J.P. Morgan and the material decrease in
values in asset-backed securities due to the lack of trading has made it unclear
when and if the value of these investments will improve in the future. Given the
above developments, the Bank recorded a non-cash other-than-temporary impairment
(“OTTI”) on these investments for the quarter ending September 30,
2008.  The OTTI charges recorded for the quarter ending September 30,
2008 totaled $4.6 million before tax, $3.0 million after tax.





- 7
-


Note
4. Loans and Allowance for Loan Losses


Loans, net of unearned income, totaled
$595.2 million at September 30, 2009 and $606.4 million at December 31, 2008. No
loans were held for sale at September 30, 2009 or December 31,
2008.  The loan portfolio is the largest component of assets with
total loans, net of allowance for loan losses, accounting for 62.9% and 68.8% of
total assets as of September 30, 2009 and December 31, 2008,
respectively.  The loan portfolio consists solely of domestic
loans.


Total
loans at September 30, 2009 (unaudited) and December 31, 2008 were as
follows:




September
      30,
              
              
              December
      31,2009
              
              
              2008As
      % of
              
              
              
              
              
              As
      % ofBalance
              
              
              Category
              
              
              Balance
              
              
              Category(dollars
      in thousands)Real
      estateConstruction
      & land development
              
              $
              79,294
              
              
              
              13.3
              %
              
              $
              92,029
              
              
              
              15.2
              %Farmland
              
              
              11,690
              
              
              
              2.0
              %
              
              
              16,403
              
              
              
              2.7
              %1-4
      Family
              
              
              74,597
              
              
              
              12.5
              %
              
              
              79,285
              
              
              
              13.1
              %Multifamily
              
              
              7,570
              
              
              
              1.3
              %
              
              
              15,707
              
              
              
              2.6
              %Non-farm
      non-residential
              
              
              288,312
              
              
              
              48.4
              %
              
              
              261,744
              
              
              
              43.0
              %Total
      real estate
              
              
              461,463
              
              
              
              77.4
              %
              
              
              465,168
              
              
              
              76.6
              %Agricultural
              
              
              19,599
              
              
              
              3.3
              %
              
              
              18,536
              
              
              
              3.0
              %Commercial
      and industrial
              
              
              97,243
              
              
              
              16.3
              %
              
              
              105,555
              
              
              
              17.4
              %Consumer
      and other
              
              
              17,692
              
              
              
              3.0
              %
              
              
              17,926
              
              
              
              3.0
              %Total
      loans before unearned income
              
              
              595,997
              
              
              
              100.0
              %
              
              
              607,185
              
              
              
              100.0
              %Less:
      unearned income
              
              
              (845
              )
              
              
              
              
              
              
              (816
              )Total
      loans after unearned income
              
              $
              595,152
              
              
              
              
              
              
              $
              606,369


The following table sets forth the
maturity and repricing of the loan portfolio and the allocation of fixed and
floating rate loans:





September
      30, 2009Fixed
              
              
              Floating
              
              
              Total(unaudited,
      in thousands)One
      year or less
              
              $
              232,229
              
              
              $
              107,102
              
              
              $
              339,331One
      to five years
              
              
              158,728
              
              
              
              44,076
              
              
              
              202,804Five
      to 15 years
              
              
              25,324
              
              
              
              -
              
              
              
              25,324Over
      15 years
              
              
              18,217
              
              
              
              -
              
              
              
              18,217Subtotal
              
              
              434,498
              
              
              
              151,178
              
              
              
              585,676Nonaccrual
      loans
              
              
              -
              
              
              
              -
              
              
              
              9,476Total
      loans after unearned income
              
              $
              434,498
              
              
              $
              151,178
              
              
              $
              595,152





The allowance for loan losses is
reviewed by Management on a monthly basis and additions are recorded in order to
maintain the allowance at an adequate level.  In assessing the
adequacy of the allowance, Management considers a variety of 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.


The allowance
for loan losses totaled $6.9 million or 1.16% of total loans at September 30,
2009 and $6.5 million or 1.07% of total loans at December 31,
2008.  Changes in the allowance for loan losses for the nine months
ended September 30, 2009 (unaudited) and the year ended December 31, 2008 are as
follows:


- 8
-
  September
      30,
              
              
              December
      31,2009
              
              
              2008(in
      thousands)Balance
      beginning of period
              
              $
              6,482
              
              
              $
              6,193Provision
      charged to expense
              
              
              2,091
              
              
              
              1,634Loans
      charged-off
              
              
              (1,812
              )
              
              
              (1,613
              )Recoveries
              
              
              134
              
              
              
              268Allowance
      for loan losses
              
              $
              6,895
              
              
              $
              6,482


The
following table sets forth, for the periods indicated, the allowance for loan
losses, amounts charged-off and recoveries of loans previously
charged-off:


Nine
      Months EndedSeptember
      30,2009
              
              
              2008(unaudited,
      in thousands)Balance
      at beginning of period
              
              $
              6,482
              
              
              $
              6,193Charge-offs:Real
      estate loans:Construction
      and land development
              
              
              (273
              )
              
              
              (166
              )Farmland
              
              
              -
              
              
              
              (10
              )One-
      to four- family residential
              
              
              (364
              )
              
              
              (151
              )Non-farm
      non-residential
              
              
              (547
              )
              
              
              (26
              )Commercial
      and industrial loans
              
              
              (207
              )
              
              
              (357
              )Consumer
      and other
              
              
              (421
              )
              
              
              (281
              )Total
      charge-offs
              
              
              (1,812
              )
              
              
              (991
              )Recoveries:Real
      estate loans:Construction
      and land development
              
              
              1
              
              
              
              1Farmland
              
              
              1
              
              
              
              -One-
      to four- family residential
              
              
              14
              
              
              
              4Non-farm
      non-residential
              
              
              -
              
              
              
              -Commercial
      and industrial loans
              
              
              18
              
              
              
              16Consumer
      and other
              
              
              100
              
              
              
              156Total
      recoveries
              
              
              134
              
              
              
              177Net
      charge-offs
              
              
              (1,678
              )
              
              
              (814
              )Provision
      for loan losses
              
              
              2,091
              
              
              
              1,099Balance
      at end of period
              
              $
              6,895
              
              
              $
              6,478


Note
5. Goodwill and Other Intangible Assets


The
Company accounts for goodwill and intangible assets in accordance with FASB ASC
350, Intangibles – Goodwill
and Other (SFAS No. 142).  Under FASB ASC 350, 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 FASB
ASC 350. The Company’s goodwill is tested for impairment on an annual basis, or
more often if events or circumstances indicate that there may be impairment.
Adverse changes in the economic environment, declining operations, or other
factors could result in a decline in the implied fair value of goodwill. If the
implied fair value is less than the carrying amount, a loss would be recognized
in other non-interest expense to reduce the carrying amount to implied fair
value of goodwill. A goodwill impairment test includes two steps. Step one, used
to identify potential impairment, compares the estimated fair value of a
reporting unit with its carrying amount, including goodwill. If the estimated
fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired. If the carrying amount of a reporting
unit exceeds its estimated fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if any.
Step two of the goodwill impairment test compares the implied estimated fair
value of reporting unit goodwill with the carrying amount of that goodwill. If
the carrying amount of goodwill for that reporting unit exceeds the implied fair
value of that unit’s goodwill, an impairment loss is recognized in an amount
equal to that excess. Other intangible assets continue to be amortized over
their useful lives. Goodwill was $2.0 million at September 30, 2009 and December
31, 2008.


- 9
-


Mortgage
servicing rights totaled $136,000 and core deposit intangibles totaled $1.8
million at September 30, 2009. The mortgage servicing rights and core deposit
intangibles are both 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.




As
      of September 30, 2009
              
              
              As
      of December 31, 2008Gross
      Carrying
              
              
              Accumulated
              
              
              Net
      Carrying
              
              
              Gross
      Carrying
              
              
              Accumulated
              
              
              Net
      CarryingAmount
              
              
              Amortization
              
              
              Amount
              
              
              Amount
              
              
              Amortization
              
              
              Amount(unaudited,
      in thousands)Core
      deposit intangibles
              
              $
              7,997
              
              
              $
              6,181
              
              
              $
              1,816
              
              
              $
              7,997
              
              
              $
              5,948
              
              
              $
              2,049Mortgage
      servicing rights
              
              
              157
              
              
              
              21
              
              
              
              136
              
              
              
              32
              
              
              
              3
              
              
              
              29Total
              
              $
              8,154
              
              
              $
              6,202
              
              
              $
              1,952
              
              
              $
              8,029
              
              
              $
              5,951
              
              
              $
              2,078





Note
6. Borrowings


Short
term borrowings totaled $11.5 million at September 30, 2009 and consists of $0.9
million in federal funds purchased, $6.0 million in repurchase agreements and
$4.7 million in outstanding borrowings on a line of credit.


In March 2009, the Company borrowed
$6.0 million on its available line of credit and injected the $6.0 million into
First Guaranty Bank to enhance capital. At September 30, 2009, the outstanding
balance on this line of credit totaled $4.7 million.  The interest
rate on the line of credit is a floating rate and is set at prime less 100 basis
points with a floor of four percent (4.00%). The Company repaid the debt in full
on October 20, 2009.


Long term borrowings decreased during
the first nine months of 2009 and ended at $0.8 million from $8.4 million at
December 31, 2008.  Long term borrowings at September 30, 2009
consisted of one Federal Home Loan Bank advance which matured on October 1,
2009.





Note
7. Income Taxes


The FASB
ASC 740-10, Income Taxes(FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109), clarifies the accounting for
uncertainty in income taxes and prescribes a recognition threshold and
measurement attribute for the consolidated financial statements recognition and
measurement of a tax position taken or expected to be taken in a tax return. The
Company does not believe it has any unrecognized tax benefits included in its
consolidated financial statements. The Company has not had any settlements in
the current period with taxing authorities, nor has it recognized tax benefits
as a result of a lapse of the applicable statute of limitations.


The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits in noninterest expense. During the quarters ended September 30, 2009
and 2008, the Company has not recognized any interest or penalties in its
consolidated financial statements, nor has it recorded an accrued liability for
interest or penalty payments.


At this
time, no tax years are under examination. With few exceptions, the Company is no
longer subject to U.S. federal, state or local income tax examinations for years
before 2005.





Note
8. Issuance of Preferred Stock


On August 28, 2009, the Company entered
into a Letter Agreement, which includes a Securities Purchase Agreement and a
Side Letter Agreement (together, the “Purchase Agreement”), with the United
States Department of the Treasury (“Treasury Department”) pursuant to which the
Company has issued and sold to the Treasury Department 2,069.9 shares of the
Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value
$1,000 per share for a total purchase price of $20.7 million. In addition to the
issuance of the Series A Stock, as a part of the transaction, the Company issued
to the Treasury Department a warrant to purchase 114.44444 shares of the
Company’s Fixed Rate Cumulative Preferred Stock, Series B, and immediately
following the issuance of the Series A stock, the Treasury Department exercised
its rights and acquired 103 of the Series B shares through a cashless exercise.
The newly issued Series A Stock, generally non-voting stock, pays cumulative
dividends of 5% for five years, and a rate of 9% dividends, per annum,
thereafter. The newly issued Series B Stock, generally non-voting, pays
cumulative dividends at a rate of 9% per annum. Both the Series A Stock and the
Series B Stock were issued in a private placement.


On July 8, 2009, the Company committed
to the Federal Reserve Bank (the “FRB”) and the Louisiana Office of Financial
Institution (the “OFI”) to inject $10 million in capital by September 15, 2009.
The issuance of preferred stock to the Treasury Department satisfied the $10
million capital injection commitment made to the FRB and OFI.





- 10
-





Note
9. Commitments and Contingencies


Prior to September 30, 2009, the
Company committed to purchase $10.0 million in municipal bonds from two local
municipalities.  During October 2009, the Company purchased $1.0
million of the above mentioned and the Company anticipates purchasing the
remaining $9.0 million prior to December 31, 2009.





Note
10.  Recent Accounting Pronouncements


In June 2009, the Financial
Accounting Standards Board (“FASB”) issued ASC 105,Generally Accepted Accounting
Principles(Statement No. 168, “The FASB Accounting Standards
Codification” and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162).ASC 105 states that
theFASB Accounting Standards
Codification(Codification) will become the
source of authoritative nongovernmental U.S. Generally Accepted Accounting
Principles (U.S.
GAAP).  The Codification does not change current U.S. GAAP but
is intended to simplify user access to all authoritative U.S. GAAP by providing
all the authoritative literature related to a particular topic in one
place.  All existing accounting standard documents will be superseded
and all other accounting literature not included in the Codification will be
considered nonauthoritative.  The Codification is effective for
interim and annual periods ending after September 15, 2009.  The
Codification became effective for the Company during its interim period
ending September 30, 2009 and did not have an impact on its financial
condition or results of operations.


On June 12, 2009, the FASB issued ASC
860, Transfers and Servicing
(SFAS No. 166, Accounting for Transfers of
Financial Assets), and FASB ASC 810, (SFAS No.167, Amendments to FASB
Interpretation No. 46(R)), which change the way entities account for
securitizations and special-purpose entities.


FASB ASC 860 will require more
information about transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related
to transferred financial assets. FASB ASC 860 also eliminates the concept of a
“qualifying special-purpose entity”, changes the requirements for derecognizing
financial assets and requires additional disclosures.


FASB ASC 810 changes how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance.


Both FASB ASC 860 and FASB ASC 810 will
be effective as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The recognition and measurement
provisions of FASB ASC 860 shall be applied to transfers that occur on or after
the effective date. Management has not determined the impact adoption may have
on the Company’s consolidated financial statements.


In May 2009, the FASB issued ASC 855,
Subsequent Events (SFAS
No. 165, Subsequent
Events). FASB ASC 855 establishes general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  It requires
entities to disclose the date through which it has evaluated subsequent events
and the basis for that date.  FASB ASC 855 is effective for interim
and annual periods ending after June 15, 2009.  FASB ASC 855 was
effective for the Company as of June 30, 2009.  The adoption of FASB
ASC 855 did not have a material impact on our financial condition, results of
operations, or disclosures.


In April 2009, the FASB issued ASC
820-10-65-4, Transition
Related to FASB Staff Position FAS 157-4.This ASC affirms that the
objective of fair value when the market for an asset is not active is the price
that would be received to sell the asset in an orderly transaction; includes
additional factors for determining whether there has been a significant decrease
in market activity for an asset when the market is inactive; eliminates the
presumption that all transactions are distressed unless proven otherwise
requiring an entity to base its conclusion on the weight of evidence; and
requires an entity to disclose a change in valuation technique resulting from
application of the FSP and to quantify its effects, if practicable. ASC
820-10-65-4 is effective for interim and annual periods ending after June 15,
2009 with early adoption permitted for periods ending after March 15, 2009. The
Company adopted this ASC in the second quarter.  The adoption had no
material effect on the results of operations or financial position.


In April
2009, the FASB issued ASC 320-10-65-1, Transition Related to FSP FAS 115-2
and FAS 124-2. This ASC changes existing guidance for determining whether
an impairment is other-than-temporary to debt securities; replaces the existing
requirement that the entity’s management assert it has both the intent and
ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security and (b)
it is more likely than not it will not have to sell the security before recovery
of its cost basis; requires that an entity recognize noncredit losses on
held-to-maturity debt securities in other comprehensive income and amortize the
amount over the remaining life of the security in a prospective manner by
offsetting the recorded value of the asset unless the security is subsequently
sold or there are credit losses; requires an entity to present the total
other-than-temporary impairment in the statement of earnings with an offset for
the amount recognized in other comprehensive income; and at adoption, requires
an entity to record a cumulative-effect adjustment as of the beginning of the
period of adoption to reclassify the noncredit component of a previously
recognized other-than-temporary impairment from retained earnings to accumulated
other comprehensive income if the entity does not intend to sell the security
and it is more likely than not that the entity will be required to sell the
security before recovery. FASB ASC 320-10-65-1 is effective for interim and
annual periods ending after June 15, 2009 with early adoption permitted for
periods ending after March 15, 2009. The Company adopted this ASC in the second
quarter.  The adoption had no material effect on the results of
operations or financial position.


- 11
-


In April
2009, the FASB issued ASC 825-10-65-1, Transition Related to FSP FAS 107-1
and APB 28-1.FSP 107-1 and APB 28-1. Under this ASC, a publicly traded
company shall include disclosures about the fair value of its financial
instruments whenever it issues summarized financial information for interim
reporting periods. In addition, an entity shall disclose in the body or in the
accompanying notes of its summarized financial information for interim reporting
periods and in its financial statements for annual reporting periods the fair
value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the statement of financial
position. FASB ASC 825-10-65-1 is effective for interim periods ending after
June 15, 2009 with early adoption permitted for periods ending after March 15,
2009. The Company adopted this ASC in the second quarter.  The
adoption had no material effect on the results of operations or financial
position.


In
December 2007, the FASB issued ASC 805, Business Combinations (SFAS
No. 141). FASB ASC 805establishes principles and
requirements for recognition and measurement of assets, liabilities and any
noncontrolling interest acquired due to a business combination.FASB ASC 805expands the definitions of a
business and a business combination, resulting in an increased number of
transactions or other events that will qualify as business combinations. UnderFASB ASC 805the entity that
acquires the business (the “acquirer”) will record 100 percent of all
assets and liabilities of the acquired business, including goodwill, generally
at their fair values. As such, an acquirer will not be permitted to recognize
the allowance for loan losses of the acquiree.FASB ASC
805requires the acquirer to recognize goodwill as of
the acquisition date, measured as a residual. In most business combinations,
goodwill will be recognized to the extent that the consideration transferred
plus the fair value of any noncontrolling interests in the acquiree at the
acquisition date exceeds the fair values of the identifiable net assets
acquired. UnderFASB ASC 805,
acquisition-related transaction and restructuring costs will be expensed as
incurred rather than treated as part of the cost of the acquisition and included
in the amount recorded for assets acquired.FASB ASC
805is effective for fiscal years beginning after
December 15, 2008. The impact on the Company’s financial condition or
results of operations is dependent on the extent of future business
combinations.





Note
11.  Subsequent Events


In March 2009 the Company drew $6.0
million on its available line of credit and injected the $6.0 million into the
First Guaranty Bank to enhance capital. At September 30, 2009, the outstanding
balance on this line of credit totaled $4.7 million.  The interest
rate on the line of credit is a floating rate and is set at prime less 100 basis
points with a floor of four percent (4.00%). The Company repaid the debt in full
on October 20, 2009.


On November
12, 2009, the Federal Deposit Insurance Corporation adopted a rule pursuant to
which all insured depository institutions will be required to prepay their
estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011
and 2012.  Under the rule, this pre-payment will be due on December
30, 2009.Based
on our deposits and assessment rate at September 30, 2009, we estimate that our
prepayment amount will be approximately $7.3 million. We expect that we will be
able to make the prepayment from available cash on hand.


Subsequent events have been evaluated
for their potential impact on the financial statements through November 12,
2009, which is the date these financial statements were issued.







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





The following management discussion and
analysis is intended to highlight the significant factors affecting the
Company's financial condition and results of operations presented in the
consolidated financial statements included in this Form 10-Q. This discussion is
designed to provide readers with a more comprehensive view of the operating
results and financial position than would be obtained from reading the
consolidated financial statements alone. Reference should be made to those
statements for an understanding of the following review and analysis. The
financial data for the three and  nine months ended September 30, 2009
and 2008 have been derived from unaudited consolidated financial statements and
include, in the opinion of management, all adjustments (consisting of normal
recurring accruals and provisions) necessary to present fairly the Company's
financial position and results of operations for such periods.





Special
Note Regarding Forward-Looking Statements


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


- 12
-


Third
Quarter Overview


Financial highlights for the third
quarter of 2009 are as follows:


·
            Net
      income for the third quarter of 2009 was $1.9 million with earnings per
      common share of $0.31. For the third quarter of 2008, the Company had a
      net loss totaling $0.8 million.  The loss recorded for the third
      quarter 2008 was a result of a $4.6 million, $3.0 million net of tax,
      other-than-temporary impairment (“OTTI”) charge recorded on the securities
      portfolio. Net income for the third quarter 2008 excluding the OTTI charge
      would have been $2.2 million. Year-to-date net income totaled $4.3 million
      as of September 30, 2009 and $3.6 million as of September 30,
      2008.


·
            Net
      interest income for the third quarter of 2009 and 2008 was $8.5 million
      and $8.2 million, respectively. The net interest margin was 3.8% for the
      third quarter 2009 and 4.3% for the third quarter 2008. Year-to-date net
      interest income as of September 30, 2009 and 2008 was $22.8 million and
      $24.1 million, respectively.  The year-to-date net interest
      margin was 3.3% as of September 30, 2009 and 4.3% for the same period in
      2008.


·
            The
      provision for loan losses for the third quarter of 2009 was $742,000
      compared to $407,000 for the third quarter of
  2008.


·
            Total
      assets as of September 30, 2009 were $934.9 million, an increase of $63.5
      million or 7.3% when compared to $871.4 million at December 31, 2008. The
      increase in assets primarily resulted from excess cash received from
      deposit growth which was ultimately invested in investment securities
      classified as available for sale.


·
            Investment
      securities totaled $248.6 million at September 30, 2009, an increase of
      $109.4 million when compared to $139.2 million at December 31, 2008. The
      increase in securities was a result of deploying cash on hand, cash from
      maturing time deposits with banks and cash from increases in deposits. At
      September 30, 2009, available for sale securities, at fair value totaled
      $245.9 million, an increase of $131.5 million when compared to December
      31, 2008. Held to maturity securities, at cost, totaled $2.7 million, a
      decrease of $22.1 million when compared to $24.8 million at December 31,
      2008.


·
            The
      net loan portfolio at September 30, 2009 totaled $588.3 million, a
      decrease of $11.6 million from the December 31, 2008 level of $599.9
      million. Net loans are reduced by the allowance for loan losses which
      totaled $6.9 million for September 30, 2009 and $6.5 million for December
      31, 2008.


·
            Non-performing
      assets at September 30, 2009 were $11.3 million, an increase of $1.4
      million compared to December 31,
2008.


·
            Total
      deposits increased $40.3 million or 5.2% in 2009 compared to December 31,
      2008. Of this increase, individual and business deposits increased by $5.9
      million and public fund deposits increased by $34.4
    million.


·
            Return
      on average assets for the quarters ended September 30, 2009 and 2008 were
      0.82% and -0.42%, respectively and return on average equity for the same
      periods were 9.80% and -4.82%,
respectively.


·
            As
      of September 30, 2009, the year-to-date return on average assets (“ROAA”)
      and return on average equity (“ROAE”) were 0.61% and 8.19% respectively.
      The year-to-date ROAA and ROAE were 0.61% and 7.04% for the same period in
      2008.


·
            The
      Company’s Board of Directors declared cash dividends of $0.16 per common
      share in each of the first three quarters of 2009 and
  2008.





Financial
Condition





Changes
in Financial Condition from December 31, 2008 to September 30, 2009





General. Total assets as of
September 30, 2009 were $934.9 million, an increase of $63.5 million or 7.3%
when compared to $871.4 million at December 31, 2008. The increase in assets
resulted primarily from cash received from increased deposits.  This
excess cash was ultimately used to purchase additional securities classified as
available for sale.  Investment securities increased $109.4 million
during the first nine months of 2009.





Cash and Cash
Equivalents.Cash and cash equivalents at September 30, 2009
totaled $52.6 million, a decrease of $25.4 million when compared to $78.0
million at December 31, 2008. Cash and due from banks decreased $62.1 million,
interest-earning demand deposits with banks increased $37.5 million and federal
funds sold decreased $0.8 million.  The decrease in cash and cash
equivalents reflects management’s decision to increase its investment in higher
yielding investment securities.





Investment
Securities.Investment securities at September 30, 2009
totaled $248.6 million, an increase of $109.4 million when compared to $139.2
million at December 31, 2008.  The net change in securities was a
result of the Company purchasing additional securities classified as available
for sale using cash on hand, cash received from maturing time deposits with
banks and cash received from increased deposits into investment
securities.


The
securities portfolio consisted principally of U.S. Government agency securities,
mortgage-backed obligations, asset-backed securities, corporate debt securities,
municipal bonds and mutual funds or other equity securities. The securities
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
assets.


At
September 30, 2009, $9.0 million or 3.6% of the securities portfolio was
scheduled to mature in less than one year. Securities with maturity dates over
15 years totaled 3.3% of the total portfolio. The average maturity of the
securities portfolio was 5.5 years.


At
September 30, 2009, securities totaling $245.9 million were classified as
available for sale and $2.7 million were classified as held to maturity,
compared to $114.4 million classified as available for sale and $24.8 million
classified as held to maturity at December 31, 2008.  The decrease in
held to maturity securities resulted primarily from called
securities.  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.


- 13
-


On
September 30, 2009, certain investment securities had continuous unrealized loss
positions for more than 12 months. As of September 30, 2009, the unrealized
losses on these securities totaled $2.0 million. Substantially all of these
losses were in corporate securities, preferred securities and asset-backed
securities. At September 30, 2009, 31 securities were graded below investment
grade with a total book value of $7.5 million and 11 securities had no rating
with a total book value of $0.8 million. All of the non-investment grade
securities referenced above were initially investment grade and have been
downgraded since purchase. As of September 30, 2009, the evaluation of
securities with continuous unrealized losses indicated that there was a credit
loss evident on Colonial National Bank and it was determined that this
investment was other-than-temporarily impaired. A non-cash other-than-temporary
impairment (“OTTI”) charge was recorded on this investment for the quarter
ending September 30, 2009. The OTTI charge recorded for the quarter ending
September 30, 2009 totaled $243,000 before tax and $157,000 after
tax.  See Note 3 of the Notes to the Consolidated Financial Statements
included in this Form 10-Q.


Average
securities as a percentage of average interest-earning assets were 26.0% for the
nine-month period ended September 30, 2009 and 16.7% for the same period in
2008. Most securities held at September 30, 2009 qualified as securities
pledgeable to collateralize repurchase agreements and public funds.Securities
pledged at September 30, 2009 totaled $105.0 million.





Loans.The
origination of loans is our primary use of our financial resources and
represents the largest component of earning assets. Total loans accounted for
63.7% of total assets at September 30, 2009, a decrease when compared to 69.6%
at December 31, 2008. There are no significant concentrations of credit to any
borrower. As of September 30, 2009, 77.4% of our loan portfolio was secured
primarily or secondarily by real estate. The largest portion of our loan
portfolio is in non-farm non-residential loans secured by real estate, which
accounts for 48.4% of our total portfolio.


Our loan portfolio at September 30,
2009 totaled $595.2 million, a decrease of approximately $11.2 million from the
December 31, 2008 level of $606.4 million. Total loans include $42.2 million in
syndicated loans acquired by assignment. Syndicated loans meet the same
underwriting criteria used when making in-house loans. The allowance for loan
losses totaled $6.9 million at September 30, 2009 and $6.5 million at December
31, 2008. Fixed rate loans increased from $309.6 million or 51.1% of the total
loan portfolio at December 31, 2008 to $434.5 million, or 73.0% of the total
loan portfolio at September 30, 2009. Fixed rate loans include loans with a
fixed rate until maturity and loans with variable rates with interest rate
floors in which the current variable interest rate is lower than the
floor.  During the nine months ended September 30, 2009, a significant
portion of new and renewed variable rate loans have been funded with interest
rate floors, which provides us with a minimum level of interest
income.  Loan charge-offs totaled $1.8 million during the first nine
months of 2009, compared to $1.0 million during the same period of
2008.  Recoveries totaled $134,000 and $177,000 during the first nine
months of 2009 and 2008, respectively.  See Note 4 to the interim
financial statements for more information on loans and the allowance for loan
losses.





Nonperforming
Assets.Nonperforming assets consist of loans on which interest is no longer
accrued, certain restructured loans where the interest rate or other terms have
been renegotiated and real estate acquired through foreclosure (other real
estate).


The
accrual of interest is discontinued on loans when management believes there is
reasonable uncertainty about the full collection of principal and interest or
when the loan is contractually past due ninety days or more and not fully
secured. If the principal amount of the loan is adequately secured, then
interest income on such loans is subsequently recognized only in periods in
which actual payments are received.











- 14
-







September
      30,
            
            
            December
      31,2009
            
            
            2008(in
      thousands)Non-accrual
      loans:Real
      estate loans:Construction
      and land development
            
            $
            3,046
            
            
            $
            1,644Farmland
            
            
            54
            
            
            
            182One-
      to four- family residential
            
            
            2,959
            
            
            
            1,445Non-farm
      non-residential
            
            
            1,870
            
            
            
            5,263Non-real
      estate loans:Commercial
      and industrial
            
            
            1,334
            
            
            
            275Consumer
      and other
            
            
            213
            
            
            
            320Total
      non-accrual loans
            
            
            9,476
            
            
            
            9,129Loans
      90 days and greater delinquentand
      still accruing:Real
      estate loans:Construction
      and land development
            
            
            -
            
            
            
            -One-
      to four- family residential
            
            
            646
            
            
            
            185Non-real
      estate loans:Commercial
      and industrial
            
            
            -
            
            
            
            17Consumer
      and other
            
            
            3
            
            
            
            3Total
      loans 90 days greaterdelinquent
      and still accruing
            
            
            649
            
            
            
            205Total
      non-performing loans
            
            
            10,125
            
            
            
            9,334Real
      estate owned:Real
      estate loans:Construction
      and land development
            
            
            197
            
            
            
            89One-
      to four- family residential
            
            
            524
            
            
            
            223Non-farm
      non-residential
            
            
            419
            
            
            
            256Total
      real estate owned
            
            
            1,140
            
            
            
            568Total
      non-performing assets
            
            $
            11,265
            
            
            $
            9,902





Nonperforming
assets totaled $11.3 million or 1.2% of total assets at September 30, 2009, an
increase of $1.4 million from December 31, 2008.  Management has not
identified additional information on any loans not already included in the
nonperforming asset total that indicates possible credit problems that could
cause doubt as to the ability of borrowers to comply with the loan repayment
terms in the future.


Nonaccrual
loans increased $0.3 million from December 31, 2008 to September 30,
2009.  There were increases in construction and land development
nonaccrual loans, one- to four- family nonaccrual loans and commercial and
industrial nonaccrual loans, which were partially offset with a large decrease
in non-farm non-residential nonaccrual loans.


During
the first nine months of 2009, there was a $1.4 million increase in construction
and land development nonaccrual loans. The increase in nonaccrual construction
and land development loans is partially related to one loan for $522,000 secured
by a subdivision development consisting of 17 remaining lots and 6.32 acres of
excess land. The loan to value is 58% and the property was appraised for
$896,000 in February 2005. The Company is currently in foreclosure and does not
anticipate any loss.  In addition, there is a townhome development in
which the Company has four of the units financed totaling approximately
$600,000.  This loan had a loan to value of 83%.  In the
fourth quarter of 2007, the properties securing this loan were appraised at
$180,000 each. The Company asked the borrower to pay the loans in full but the
borrower was unable to do so.  The Company has filed suit to repossess
the property and is currently awaiting the foreclosure sale. Also included in
nonaccrual construction and land development loans are two loans which account
for a significant portion of the total. One is in the amount of $1.7 million
which we are the participant of approximately $800,000. The collateral is a
subdivision development in a neighboring parish and the lead bank has filed suit
to foreclose on the property.  Since the beginning of 2009,
approximately $1.2 million in construction and land development nonaccrual loans
have been removed through foreclosures and payoffs.


- 15
-


There was
a $1.5 million increase in one- to four- family residential nonaccrual loans
during the first nine months of 2009. The increase in nonaccrual one- to four-
family residential loans resulted from a loan in the amount of $578,000 secured
by several rental houses in the Baton Rouge area.  The borrower has
filed Chapter 11 bankruptcy and the Company is waiting for a plan of repayment
to be filed with the bankruptcy court.  The Company has not been able
to determine the level of exposure, if any it will experience as a result of the
bankruptcy of the borrower. The Company is now receiving adequate protection
payments from the bankruptcy court.  Also, we have added a loan in the
amount of $800,000 which is secured by two townhomes and five lots in a golf
course community.  One of the townhomes is in the process of being
liquidated and the sale is anticipated in October 2009.  The borrower
is continuing to attempt to liquidate the remaining collateral to pay down the
loan.  Also included in this category are two loans in the amounts of
$194,000 and $120,000 that are properties which were flooded during Hurricane
Katrina. The borrowers have received commitments from the state to assist in
funding the rebuilding of the properties.


Non-farm
non-residential nonaccrual loans decreased $3.4 million from December 31, 2008
to September 30, 2009. The decrease was primarily the result of one loan secured
by real estate. The borrowers were able to put together a viable plan which was
confirmed by a bankruptcy trustee. The borrower had been making adequate
protection payments to the Company for several months prior to the plan being
confirmed. The Company also received a lump sum payment totaling $50,000 to
apply toward the indebtedness upon confirmation of the plan. Monthly
amortization payments began immediately after confirmation and are being paid as
agreed. The $1.9 million in non-farm non-residential nonaccrual loans at
September 30, 2009 included one loan totaling $700,000 which was for a steel
fabrication company that is still in operation.  This company is
currently making payments toward the loan to reduce the balance.  This
loan is secured by real estate and we currently have allocated $200,000 of the
loan loss reserve for this credit.


Non-real
estate commercial and industrial nonaccrual loans increased $1.1 million from
December 31, 2008 to September 30, 2009.  The largest loan in this
category totals $454,000 and is unsecured.  The borrower is in Chapter
11 bankruptcy and has reflected a net worth in excess of $20 million on the
bankruptcy schedules.  A plan is being developed to allocate cash from
one of the borrower’s partnerships to pay the unsecured
creditors.  Although this loan is unsecured, the Company currently
anticipates receiving 100% payment.  Another loan in this category
totals $178,000 and is secured by dental equipment.  We are in the
process of obtaining a judgment on this credit.  There are also some
smaller loans included in this nonaccrual category.  One is in the
amount of $86,000 and the Company is in the process of taking a mortgage on the
guarantor’s home to pay down a portion of the debt and renew the
balance.


Other
real estate increased during the first nine months of 2009 by
$572,000.  This increase is primarily from the addition of two
properties.  One of the properties is an 80 acre tract of land
recorded at $155,000.  This loan is guaranteed 90% by the Farm Service
Agency.  We currently have the property listed with a
realtor.  The other property is a warehouse in Southwest Louisiana
which is currently recorded at $351,000.  The Company is anticipating
having an auction in the near future to liquidate these properties.





Allowance for
Loan Losses.The Company maintains its allowance for loan losses at a
level it considers 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 the Company
determines 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 the Company's 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 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.


- 16
-


Provisions made pursuant to these
processes totaled $2.1 million in the first nine months of 2009 as compared to
$1.1 million for the same period in 2008. Provisions are necessary to maintain
the allowance at an adequate level based on loan risk factors and the levels of
net loan charge-offs. The provisions made in the first nine months of 2009 were
taken 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. Total charge-offs were $1.8 million for first nine months
of 2009 as compared to total charge-offs of $1.0 million for the same period in
2008. Recoveries were $134,000 for the first nine months of 2009 as compared to
recoveries of $177,000 for the same period in 2008.


Charged-off construction and land
development loans totaled $0.3 million for the first nine months of
2009.  The majority of this category is comprised of three
loans.  One loan was a construction loan in which we charged-off
$61,000.  The borrower had a dispute with the contractor and the
Bank.  The Bank settled out of court for the return of the
property.  Another loan was one made to renovate an apartment
complex.  The borrower defaulted and the Bank charged-off
approximately $60,000.  In addition, $100,000 was charged-off on a
loan made to add on to a commercial cabinet making facility.


During
the first nine months of 2009, charged-off one-to-four family residential real
estate loans totaled $0.4 million. These charged-off loans comprised eleven
small balance loans.


During
the same period, charged-off non-farm non-residential loans totaled $0.5
million. One of the loans was secured by commercial real estate and the
performance of this loan was primarily supported by the cash flows of the
business. The borrower of the commercial loan is a lumber milling and
distributing company that had been in business for many years. The loan
performed in accordance with its terms until the death of its owner. The
distress of the lumber loan resulted from a decrease in lumber prices during
2007 which adversely and significantly affected the borrower’s
business.  In January 2008, the Company was able to liquidate
receivables and repay a portion of the lumber loan reducing the principal
balance from approximately $1.0 million to $0.8 million. The property has been
liquidated and the balance of the loan has been fully
charged-off.  Also, in the third quarter approximately $200,000 was
charged-off on a loan that was made to add on to a commercial building. The
business was a cabinet making facility and the borrower decided to increase the
size of his business.  Ultimately sales slowed down and the borrower
was not able to sustain his business.


Charged-off
consumer and other loans totaled $0.4 million during the first nine months of
2009.  These charge-offs include approximately $80,000 in credit card
charge-offs with the remainder in consumer installment
charge-offs.  The consumer installment charge-offs include a number of
smaller loans and one larger loan in the amount of $70,000.  This loan
was a workout loan made to an individual who ultimately liquidated equipment
used in a dirt hauling business.  The $70,000 charged-off was the
residual balance remaining after liquidation.  This loan was made in
the owner’s personal name, therefore classifying it as a consumer
loan.


In some
instances, loans are placed on nonaccrual status. All accrued but uncollected
interest related to a loan is deducted from income in the period the loan is
assigned a nonaccrual status. During the period a loan is in nonaccrual status,
any cash receipts are first applied to the principal balance. Once the principal
balance has been fully recovered, any residual amounts are applied to expenses
resulting from the collection of the payment and to the recovery of any reversed
interest income and interest income that would have been due had the loan not
been placed on nonaccrual status.  As of September 30, 2009 and
December 31, 2008 the Company had loans totaling $9.5 million and $9.1 million,
respectively, on which the accrual of interest had been
discontinued.


The
allowance for loan losses at September 30, 2009 was $6.9 million or 1.16% of
total loans and 61.2% of nonperforming assets. 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.


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




September
      30,2009
              
              
              2008(unaudited,
      in thousands)Loans:Average
      outstanding balance
              
              $
              601,439
              
              
              $
              600,256Balance
      at end of period
              
              $
              595,152
              
              
              $
              605,399Allowance
      for Loan Losses:Balance
      at beginning of year
              
              $
              6,482
              
              
              $
              6,193Provision
      charged to expense
              
              
              2,091
              
              
              
              1,099Loans
      charged-off
              
              
              (1,812
              )
              
              
              (991
              )Recoveries
              
              
              134
              
              
              
              177Balance
      at end of period
              
              $
              6,895
              
              
              $
              6,478
  - 17
-


Premises and
Equipment.    A new branch facility located in
Benton, Louisiana is currently under construction and is anticipated to be
completed in the first quarter of 2010.  The total cost for the new
facility is estimated at $1.5 million, which includes land, building and all
furniture and equipment. The Company has agreed to sell the existing branch
location in Benton, Louisiana, for approximately $1.5 million.





Deposits.Managing
the mix and pricing the maturities of deposit liabilities is an important factor
affecting our ability to maximize our net interest margin. The strategies used
to manage interest-bearing deposit liabilities are designed to adjust as the
interest rate environment changes.  In this regard, management
regularly assesses our funding needs, deposit pricing and interest rate
outlooks.  From December 31, 2008 to September 30, 2009, total
deposits increased $40.3 million, or 5.2%, to $820.6 million at September 30,
2009 from $780.4 million at December 31, 2008.  During 2009, consumer
deposits decreased $12.0 million, business deposits increased $17.9 million and
public fund deposits increased $34.4 million.  Noninterest-bearing
demand deposits decreased by $1.4 million while interest-bearing deposits
increased by $41.6 million.


At
September 30, 2009, consumer deposits totaled $426.1 million, business deposits
totaled $134.4 million and public fund deposits totaled $260.1
million.  As of September 30, 2009, the aggregate amount of
outstanding certificates of deposit in amounts greater than or equal to $100,000
was approximately $303.6 million.


Average
noninterest-bearing deposits decreased to $117.6 million for the nine-month
period ended September 30, 2009 from $119.4 million for the nine-month period
ended September 30, 2008. Average noninterest-bearing deposits represented 13.7%
and 17.1% of average total deposits for the nine-month periods ended September
30, 2009 and 2008, respectively.


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


The
following table sets forth the composition of the Company’s deposits at
September 30, 2009 (unaudited) and December 31, 2008.




September
      30,
              
              
              December
      31,
              
              
              Increase/(Decrease)2009
              
              
              2008
              
              
              Amount
              
              
              Percent(dollars
      in thousands)Deposits:Noninterest-bearing
      demand
              
              $
              116,878
              
              
              $
              118,255
              
              
              $
              (1,377
              )
              
              
              -1.2
              %Interest-bearing
      demand
              
              
              181,140
              
              
              
              180,230
              
              
              
              910
              
              
              
              0.5
              %Savings
              
              
              42,990
              
              
              
              41,357
              
              
              
              1,633
              
              
              
              3.9
              %Time
              
              
              479,630
              
              
              
              440,530
              
              
              
              39,100
              
              
              
              8.9
              %Total
      deposits
              
              $
              820,638
              
              
              $
              780,372
              
              
              $
              40,266
              
              
              
              5.2
              %





Borrowings.The Company maintains borrowing relationships with other financial
institutions as well as the Federal Home Loan Bank on a short- and long-term
basis to meet liquidity needs. At September 30, 2009, short-term borrowings
totaled $11.5 million compared to $9.8 million at December 31,
2008.  Short-term borrowings included $6.0 million in repurchase
agreements at September 30, 2009 and $9.8 million in repurchase agreements at
December 31, 2008.  Also included in short-term borrowings at
September 30, 2009 was $0.9 million in overnight borrowings and $4.7 million
outstanding on the Company’s available line of credit.  The Company
fully repaid the outstanding $4.7 million line of credit on October 20,
2009.


Long-term
borrowings decreased in 2009 to $0.8 million from $8.4 million at December 31,
2008.  At September 30, 2009 long-term borrowings consisted of one
Federal Home Loan Bank advance which matured on October 1, 2009.


During
the first quarter of 2009, total assets increased to the extent that it resulted
in a reduction of regulatory capital ratios. As a result, in March 2009 the
Company borrowed $6.0 million on its available line of credit and injected the
$6.0 million into First Guaranty Bank to enhance capital. The interest rate on
the line of credit is a floating rate and is set at prime less 100 basis points
with a floor of four percent (4.00%). The Company repaid the debt in full on
October 20, 2009.


The average amount of total
borrowings for the nine months ended September 30, 2009 was $17.6 million,
compared to $12.8 million for the nine months ended September 30, 2008. At
September 30, 2009, the Company had $195.0 million in Federal Home Loan Bank
letters of credit outstanding obtained solely for collateralizing public
deposits.




Equity.Total equity increased to $94.5 million as of September 30, 2009 from
$66.6 million as of December 31, 2008.  The increase in stockholders’
equity resulted from the issuance of preferred stock totaling $20.7 million (see
Note 8 to the interim financial statements), net income of $4.3 million and the
change in accumulated other comprehensive income of $5.7 million, partially
offset by dividends paid to stockholders totaling $2.9 million.  Cash
dividends paid to common shareholders were $0.48 per share for the nine-month
periods ending September 30, 2009 and 2008.


- 18
-


Results
of Operations for the Nine Months and Three Months Ended September 30, 2009 and
September 30, 2008





Net income.For the quarter ending
September 30, 2009, First Guaranty Bancshares, Inc. had consolidated net income
of $1.9 million, a $2.8 million increase from the $0.8 million net loss reported
for the third quarter of 2008.  Net income for the nine months ended
September 30, 2009 was $4.3 million, an increase of $0.7 million from $3.6
million for the nine months ended September 30, 2008. The increase in net income
for the three and nine months ended September 30, 2009 primarily resulted from a
$4.6 million, $3.0 million net of tax, other-than-temporary impairment charge
recorded on the securities portfolio in the third quarter of 2008.  If
this charge had not been recorded in 2008, net income for the nine months ended
September 30, 2009 would have been lower than the same period in 2008 due to
decreased net interest income reflecting the change in the composition of our
deposits to higher cost time deposits, higher deposit insurance premiums and an
increase in the provision for loan losses.


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 may have a significant impact on a
financial institution’s performance. The impact of interest rate changes depends
on the sensitivity to changes of our interest-earning assets and
interest-bearing liabilities.


Net interest income for the
quarter ended September 30, 2009 was $8.5 million, an increase of $0.3
millionwhen compared
to $8.2million for
the third quarter in 2008. The net interest income for the third quarter 2009
increased due to volume, despite a decrease in the net interest spread and net
interest margin. Net interest income for the nine-month period ended September
30, 2009 totaled $22.8 million. This reflects a decrease of $1.3 million when
compared to the nine-month period ended September 30, 2008. This was due to
a  decrease in net interest spread and net interest margin as the
yield on our interest-earning assets decreased more than the cost of our
interest-bearing liabilities. This decrease was partially offset with an
increase in average interest-earning assets when comparing September 30, 2009 to
September 30, 2008.


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 nine months ending
September 30, 2009 was 83.4%, compared to 79.5% for the same period in
2008.


The following tables set forth
average balance sheets, average yields and costs, and certain other information
for the three months and nine months ended September 30, 2009 and 2008,
respectively. No tax-equivalent yield adjustments were made, as the effect
thereof was not material. All average balances are daily average balances.
Nonaccrual loans were included in the computation of average balances, but have
been reflected in the table as loans carrying a zero yield. The yields set forth
below include the effect of deferred fees, discounts and premiums that are
amortized or accreted to interest income or expense.


- 19
-
  Three
      Months Ended September 30,2009
              
              
              
              
              
              
              
              
              2008Average
              
              
              
              
              
              Yield/
              
              
              Average
              
              
              
              
              
              Yield/Balance
              
              
              Interest
              
              
              Rate
              
              
              Balance
              
              
              Interest
              
              
              Rate(dollars
      in thousands)AssetsInterest-earning
      assets:Interest-earning
      deposits with banks
              
              $
              39,374
              
              
              $
              63
              
              
              
              0.6
              %
              
              $
              1,666
              
              
              $
              8
              
              
              
              1.9
              %Securities
      (including FHLB stock)
              
              
              232,664
              
              
              
              3,039
              
              
              
              5.2
              %
              
              
              130,583
              
              
              
              1,695
              
              
              
              5.2
              %Federal
      funds sold
              
              
              18,417
              
              
              
              6
              
              
              
              0.1
              %
              
              
              4,833
              
              
              
              20
              
              
              
              1.6
              %Loans,
      net of unearned incomeincluding loans held for sale
              
              
              603,972
              
              
              
              9,077
              
              
              
              6.0
              %
              
              
              614,242
              
              
              
              10,107
              
              
              
              6.5
              %Total
      interest-earning assets
              
              
              894,427
              
              
              
              12,185
              
              
              
              5.4
              %
              
              
              751,324
              
              
              
              11,830
              
              
              
              6.3
              %Noninterest-earning
      assets:Cash
      and due from banks
              
              
              16,978
              
              
              
              
              
              
              
              
              
              
              
              19,527Premises
      and equipment, net
              
              
              16,155
              
              
              
              
              
              
              
              
              
              
              
              16,009Other
      assets
              
              
              8,836
              
              
              
              
              
              
              
              
              
              
              
              6,789Total
              
              $
              936,396
              
              
              
              
              
              
              
              
              
              
              $
              793,649Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Demand
      deposits
              
              $
              187,544
              
              
              
              296
              
              
              
              0.6
              %
              
              $
              204,352
              
              
              
              664
              
              
              
              1.3
              %Savings
      deposits
              
              
              41,549
              
              
              
              12
              
              
              
              0.1
              %
              
              
              43,157
              
              
              
              48
              
              
              
              0.4
              %Time
      deposits
              
              
              487,900
              
              
              
              3,286
              
              
              
              2.7
              %
              
              
              331,735
              
              
              
              2,782
              
              
              
              3.3
              %Borrowings
              
              
              17,633
              
              
              
              68
              
              
              
              1.5
              %
              
              
              20,311
              
              
              
              134
              
              
              
              2.6
              %Total
      interest-bearing liabilities
              
              
              734,626
              
              
              
              3,662
              
              
              
              2.0
              %
              
              
              599,555
              
              
              
              3,628
              
              
              
              2.4
              %Noninterest-bearing
      liabilities:Demand
      deposits
              
              
              116,757
              
              
              
              
              
              
              
              
              
              
              
              118,231Other
              
              
              6,853
              
              
              
              
              
              
              
              
              
              
              
              6,928Total
      liabilities
              
              
              858,236
              
              
              
              
              
              
              
              
              
              
              
              724,714Stockholders'
      equity
              
              
              78,160
              
              
              
              
              
              
              
              
              
              
              
              68,935Total
              
              $
              936,396
              
              
              
              
              
              
              
              
              
              
              $
              793,649Net
      interest income
              
              
              
              
              
              $
              8,523
              
              
              
              
              
              
              
              
              
              
              $
              8,202Net
      interest rate spread (1)
              
              
              
              
              
              
              
              
              
              
              3.4
              %
              
              
              
              
              
              
              
              
              
              
              3.9
              %Net
      interest-earning assets(2)
              
              $
              159,801
              
              
              
              
              
              
              
              
              
              
              $
              151,769Net
      interest margin (3)
              
              
              
              
              
              
              
              
              
              
              3.8
              %
              
              
              
              
              
              
              
              
              
              
              4.3
              %Average
      interest-earning assets tointerest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              121.8
              %
              
              
              
              
              
              
              
              
              
              
              125.3
              %





(1)  Net
interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.


(2)  Net
interest-earning assets represents total interest-earning assets less total
interest-bearing liabilities.


(3)  Net
interest margin represents net interest income divided by average total
interest-earning assets.





- 20
-
  Nine
      Months Ended September 30,2009
              
              
              2008Average
              
              
              
              
              
              Yield/
              
              
              Average
              
              
              
              
              
              Yield/Balance
              
              
              Interest
              
              
              Rate
              
              
              Balance
              
              
              Interest
              
              
              Rate(dollars
      in thousands)AssetsInterest-earning
      assets:Interest-earning
      deposits with banks
              
              $
              41,819
              
              
              $
              372
              
              
              
              1.2
              %
              
              $
              1,547
              
              
              $
              22
              
              
              
              1.9
              %Securities
      (including FHLB stock)
              
              
              237,778
              
              
              
              7,581
              
              
              
              4.3
              %
              
              
              124,538
              
              
              
              4,635
              
              
              
              5.0
              %Federal
      funds sold
              
              
              31,747
              
              
              
              33
              
              
              
              0.1
              %
              
              
              17,249
              
              
              
              378
              
              
              
              2.9
              %Loans,
      net of unearned incomeincluding loans held for sale
              
              
              601,573
              
              
              
              26,610
              
              
              
              5.9
              %
              
              
              601,040
              
              
              
              31,141
              
              
              
              6.9
              %Total
      interest-earning assets
              
              
              912,917
              
              
              
              34,596
              
              
              
              5.1
              %
              
              
              744,374
              
              
              
              36,176
              
              
              
              6.5
              %Noninterest-earning
      assets:Cash
      and due from banks
              
              
              17,913
              
              
              
              
              
              
              
              
              
              
              
              21,696Premises
      and equipment, net
              
              
              16,306
              
              
              
              
              
              
              
              
              
              
              
              16,147Other
      assets
              
              
              8,929
              
              
              
              
              
              
              
              
              
              
              
              5,923Total
              
              $
              956,065
              
              
              
              
              
              
              
              
              
              
              $
              788,140Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Demand
      deposits
              
              $
              212,569
              
              
              
              1,118
              
              
              
              0.7
              %
              
              $
              202,871
              
              
              
              2,305
              
              
              
              1.5
              %Savings
      deposits
              
              
              41,625
              
              
              
              89
              
              
              
              0.3
              %
              
              
              44,260
              
              
              
              150
              
              
              
              0.5
              %Time
      deposits
              
              
              485,629
              
              
              
              10,381
              
              
              
              2.9
              %
              
              
              331,837
              
              
              
              9,249
              
              
              
              3.7
              %Borrowings
              
              
              21,803
              
              
              
              228
              
              
              
              1.4
              %
              
              
              12,794
              
              
              
              345
              
              
              
              3.6
              %Total
      interest-bearing liabilities
              
              
              761,626
              
              
              
              11,816
              
              
              
              2.1
              %
              
              
              591,762
              
              
              
              12,049
              
              
              
              2.7
              %Noninterest-bearing
      liabilities:Demand
      deposits
              
              
              117,589
              
              
              
              
              
              
              
              
              
              
              
              119,371Other
              
              
              6,224
              
              
              
              
              
              
              
              
              
              
              
              8,270Total
      liabilities
              
              
              885,439
              
              
              
              
              
              
              
              
              
              
              
              719,403Stockholders'
      equity
              
              
              70,626
              
              
              
              
              
              
              
              
              
              
              
              68,737Total
              
              $
              956,065
              
              
              
              
              
              
              
              
              
              
              $
              788,140Net
      interest income
              
              
              
              
              
              $
              22,780
              
              
              
              
              
              
              
              
              
              
              $
              24,127Net
      interest rate spread (1)
              
              
              
              
              
              
              
              
              
              
              3.0
              %
              
              
              
              
              
              
              
              
              
              
              3.8
              %Net
      interest-earning assets(2)
              
              $
              151,291
              
              
              
              
              
              
              
              
              
              
              $
              152,612Net
      interest margin (3)
              
              
              
              
              
              
              
              
              
              
              3.3
              %
              
              
              
              
              
              
              
              
              
              
              4.3
              %Average
      interest-earning assets tointerest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              119.9
              %
              
              
              
              
              
              
              
              
              
              
              125.8
              %


(1)  Net
interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.


(2)  Net
interest-earning assets represents total interest-earning assets less total
interest-bearing liabilities.


(3)  Net
interest margin represents net interest income divided by average total
interest-earning assets.





Provision for Loan
Losses.Management assesses the allowance for loan losses on a
quarterly basis and makes provisions for loan losses as deemed appropriate in
order to maintain an adequate allowance for loan losses. Increases to the
allowance are made to the provision for loan losses and charged against
income.


Provisions for loan losses
totaled $0.7 million for the quarter ended September 30, 2009, an increase of
$0.3 million when compared to the same quarter in 2008. Year-to-date provisions
totaled $2.1 million for the first nine months of 2009 as compared to $1.1
million for the same period in 2008. Provisions are necessary to maintain the
allowance at an adequate level based on loan risk factors and the levels of net
loan charge-offs. The provisions made in the first nine months of 2009 and 2008
were taken 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. Total charge-offs were $1.8 million for the
first nine months of 2009 as compared to $1.0 million for the same period in
2008. Recoveries were $134,000 for the first nine months of 2009 as compared to
$177,000 for the same period in 2008.





Noninterest Income.Noninterest income includes deposit service charges, return check
charges, bankcard fees, other commissions and fees, gains and/or losses on sales
of securities and loans, and various other types of income.


Noninterest income for the
quarter ended September 30, 2009 totaled $1.3 million, an increase of $4.4
million when compared to the same period in 2008. This increase in noninterest
income resulted primarily from a decrease in losses on securities impairment
charges recorded in 2009 when compared to the same period in 2008.


- 21
-


Noninterest income for the first
nine months of 2009 totaled $4.1 million, up $4.3 million when compared to the
same period in 2008. This increase was primarily due to a $4.4 million decrease
in other-than-temporary impairment charges taken on securities in 2009.
Excluding these OTTI charges for both 2008 and 2009, noninterest income for the
first nine months of 2009 would have been lower than the same period in 2008 due
to a decrease in other noninterest income. This decrease in other noninterest
income during 2009 resulted from a large reimbursement which was received in
2008 for incorrect fees billed on our ATM services contract causing other
noninterest income in 2008 to be elevated.





Noninterest
Expense.  Noninterest expense includes salaries and employee
benefits, occupancy and equipment expense, net cost from other real estate and
repossessions, regulatory assessments and other types of expenses. Noninterest
expense for the third quarter in 2009 totaled $6.1 million, an increase of $0.2
million from the same period in 2008. The increase in noninterest expense
primarily resulted from increased regulatory assessment expenses due to a higher
level of regular quarterly premiums.


Noninterest
expense totaled $18.2 million for the nine months ended September 30, 2009,
compared to $17.3 million for the same period in 2008, an increase of $0.9
million. Salaries and benefits totaled $8.2 million for the first nine months of
2009, an increase of $0.3 million when compared to the same period in
2008.  At September 30, 2009, our full-time equivalent employees
totaled 229.5 compared to 225 full-time equivalent employees during the same
period of 2008. Occupancy and equipment expense totaled $2.1 million for the
first nine months of 2009, a decrease of $57,000 when compared to the same
period in 2008. Net cost of other real estate and repossessions increased
$66,000 when comparing the nine month periods ending 2009 and 2008. Regulatory
assessments totaled $1.3 million for the first nine months of 2009, an increase
of $0.9 million when compared to $0.4 million for the same period in 2008. The
increased regulatory assessment expenses resulted from a combination of an FDIC
special assessment of five basis points of total assets less Tier 1 Capital
which was estimated at $470,000 on June 30, 2009 and a higher level of regular
quarterly premiums totaling $874,000 for the first nine months of
2009.  Our regulatory capital ratios decreased during the second
quarter 2009 below “well capitalized” status based on regulatory standards,
which will cause increases in FDIC insurance assessments. During the third
quarter of 2009 our capital ratios returned to above “well capitalized” status
based on regulatory standards.  Other noninterest expense reflects a
decrease of $368,000 when comparing the nine-month periods ended 2009 and 2008
primarily due to a decrease in legal and professional fees.  The table
below presents the components of other noninterest expense as of the three
months and nine months ended September 30, 2009 and 2008.





Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008(in
      thousands)
              
              
              (in
      thousands)Other
      noninterest expense:Legal
      and professional fees
              
              $
              352
              
              
              $
              412
              
              
              $
              942
              
              
              $
              1,242Data
      processing
              
              
              464
              
              
              
              449
              
              
              
              1,352
              
              
              
              1,355Marketing
      and public relations
              
              
              354
              
              
              
              326
              
              
              
              821
              
              
              
              883Insurance
              
              
              57
              
              
              
              55
              
              
              
              169
              
              
              
              166Taxes
      - sales and capital
              
              
              166
              
              
              
              213
              
              
              
              702
              
              
              
              559Operating
      supplies
              
              
              141
              
              
              
              154
              
              
              
              389
              
              
              
              425Travel
      and lodging
              
              
              85
              
              
              
              95
              
              
              
              284
              
              
              
              307Postage
              
              
              52
              
              
              
              58
              
              
              
              164
              
              
              
              181Software
              
              
              80
              
              
              
              72
              
              
              
              213
              
              
              
              215Telephone
              
              
              47
              
              
              
              39
              
              
              
              140
              
              
              
              138Amortization
      of core deposit intangibles
              
              
              78
              
              
              
              78
              
              
              
              233
              
              
              
              233Other
              
              
              330
              
              
              
              239
              
              
              
              833
              
              
              
              906Total
      other expense
              
              $
              2,206
              
              
              $
              2,190
              
              
              $
              6,242
              
              
              $
              6,610





Income
Taxes.  The provision for income taxes totaled $1.0 million for
the quarter ended September 30, 2009 and the benefit for income taxes totaled
$0.5 million for the quarter ended September 30, 2008. The provision for income
taxes for the nine months ended September 30, 2009 increased $0.4 million to
$2.3 million from $1.9 million for the same period in 2008. The increase in the
provision for income taxes reflected higher income during both the three-month
and nine-month periods in 2009. In each of the nine months ended September 30,
2009 and 2008, the income tax provision approximated the normal statutory
rate.  The effective rates were 34.7% and 34.8%,
respectively.








Item
3.  Quantitative and Qualitative Disclosures about Market
Risk





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
principle 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.


- 22
-


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.  In addition, the level of interest rate
risk is also discussed and reviewed in the monthly Investment Committee
meetings, which consists of executive Management, other bank personnel and six
Bank Directors.


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


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


We
monitor interest rate risk using an interest sensitivity analysis set forth on
the following table. This analysis, which we prepare monthly, reflects the
maturity and repricing characteristics of assets and liabilities over various
time periods. The gap indicates whether more assets or liabilities are subject
to repricing over a given time period. The interest sensitivity analysis at
September 30, 2009 reflects a liability-sensitive position with a negative
cumulative gap on a one-year basis.




Interest
      Sensitivity Within3
      Months
              
              
              Over
      3 Months
              
              
              Total
              
              
              OverOr
      Less
              
              
              thru
      12 Months
              
              
              One
      Year
              
              
              One
      Year
              
              
              Total(unaudited,
      dollars in thousands)Earning
      Assets:Loans
      (including loans held for sale)
              
              $
              258,060
              
              
              $
              134,380
              
              
              $
              392,440
              
              
              $
              202,712
              
              
              $
              595,152Securities
      (including FHLB stock)
              
              
              2,815
              
              
              
              6,955
              
              
              
              9,770
              
              
              
              239,786
              
              
              
              249,556Federal
      funds sold
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      earning assets
              
              
              37,512
              
              
              
              13,123
              
              
              
              50,635
              
              
              
              -
              
              
              
              50,635Total
      earning assets
              
              
              298,387
              
              
              
              154,458
              
              
              
              452,845
              
              
              
              442,498
              
              
              $
              895,343Source
      of Funds:Interest-bearing
      accounts:Demand
      deposits
              
              
              126,375
              
              
              
              -
              
              
              
              126,375
              
              
              
              54,765
              
              
              
              181,140Savings
              
              
              10,747
              
              
              
              -
              
              
              
              10,747
              
              
              
              32,243
              
              
              
              42,990Time
      deposits
              
              
              154,212
              
              
              
              233,985
              
              
              
              388,197
              
              
              
              91,433
              
              
              
              479,630Short-term
      borrowings
              
              
              6,835
              
              
              
              4,660
              
              
              
              11,495
              
              
              
              -
              
              
              
              11,495Long-term
      borrowings
              
              
              -
              
              
              
              845
              
              
              
              845
              
              
              
              -
              
              
              
              845Noninterest-bearing,
      net
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              179,243
              
              
              
              179,243Total
      source of funds
              
              
              298,169
              
              
              
              239,490
              
              
              
              537,659
              
              
              
              357,684
              
              
              $
              895,343Period
      gap
              
              
              218
              
              
              
              (85,032
              )
              
              
              (84,814
              )
              
              
              84,814Cumulative
      gap
              
              $
              218
              
              
              $
              (84,814
              )
              
              $
              (84,814
              )
              
              $
              -Cumulative
      gap as apercent
      of earning assets
              
              
              0.02
              %
              
              
              -9.47
              %
              
              
              -9.47
              %
  - 23
-
  Liquidity
and Capital Resources





Liquidity.Liquidity refers to the
ability or flexibility to manage future cash flows to meet the needs of
depositors and borrowers and fund operations. Maintaining appropriate levels of
liquidity allows the Company to have sufficient funds available to meet customer
demand for loans, withdrawal of deposit balances and maturities of deposits and
other liabilities. Liquid assets include cash and due from banks,
interest-earning demand deposits with banks, federal funds sold and available
for sale investment securities. Including securities pledged to collateralize
public fund deposits, these assets represent 31.9% and 22.1% of the total
liquidity base at September 30, 2009 and December 31, 2008,
respectively.


Loans maturing within one year or
less at September 30, 2009 totaled $289.0 million.  At September 30,
2009, time deposits maturing within one year or less totaled $388.2
million.  Loan commitments maturing within one year or less at
September 30, 2009 totaled $20.0 million.


The Company maintained borrowing
availability with the Federal Home Loan Bank totaling $240.4 million and $226.5
million at September 30, 2009 and December 31, 2008, respectively.  As
of September 30, 2009, our net availability of borrowing capacity at the Federal
Home Loan Bank was $44.5 million, compared to $63.1 million at December 31,
2008.  This decrease in availability at Federal Home Loan Bank during
2009 resulted from an additional $40.0 million in letters of credit used solely
to pledge to public funds, which was partially offset by a $13.9 million
increase in availability and a decrease in borrowings of $6.6
million.  We also maintain federal funds lines of credit at three
correspondent banks with borrowing capacity of $70.2 million at September 30,
2009 and $78.2 million at December 31, 2008. As of September 30, 2009, the
Company had $5.5 million outstanding on these lines of credit. At December 31,
2008, the Company did not have an outstanding balance on these lines of credit.
Management believes there is sufficient liquidity to satisfy current operating
needs.


During the first quarter of 2009,
total assets increased to the extent that it resulted in a reduction of
regulatory capital ratios. As a result, in March 2009 the Company borrowed $6.0
million on its available line of credit and injected the $6.0 million into the
Bank to enhance capital. The interest rate on the line of credit is a floating
rate and is set at prime less 100 basis points with a floor of four percent
(4.00%). At September 30, 2009, $4.7 million was outstanding on this line of
credit.  The Company repaid the debt in full on October 20,
2009.





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


Total equity increased to $94.5
million as of September 30, 2009 from $66.6 million as of December 31,
2008.  The increase in stockholders’ equity resulted from the issuance
of preferred stock totaling $20.7 million (see Note 8 to the interim financial
statements), net income of $4.3 million and the change in accumulated other
comprehensive income of $5.7 million, partially offset by dividends paid to
stockholders totaling $2.9 million.





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


The calculated ratios for the
Bank are as follows at September 30, 2009: a Tier 1 leverage ratio of 8.80%
(compared to a “well capitalized” threshold of 5.0%); a Tier 1 risk-based
capital ratio of 10.70% (compared to a “well capitalized threshold of 6.00%);
and a total risk based capital ratio of 11.60% (compared to a “well capitalized
threshold of 10.00%).


At September 30, 2009, we
satisfied the minimum regulatory capital requirements and were “well
capitalized” within the meaning of federal regulatory requirements.






Ite m
4T. 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.


- 24
-


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







PART
II.  OTHER INFORMATION


Item
1.  Legal Proceedings


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





Item
1A.  Risk Factors


In addition to the other
information contained this Quarterly Report on Form 10-Q, the following risk
factors represent material updates and additions to the risk factors previously
disclosed in the Company’s Annual Report on Form 10-K for the Year Ended
December 31, 2008 and the Quarterly Report on Form 10-Q for the Quarter Ended
June 30, 2009, as filed with the Securities and Exchange
Commission.  Additional risks not presently known to us, or that we
currently deem immaterial, may also adversely affect our business, financial
condition or results of operations.  Further, to the extent that any
of the information contained in this Quarterly Report on Form 10-Q constitutes
forward-looking statements, the risk factors set forth below also are
cautionary statements identifying important factors that could cause our actual
results to differ materially from those expressed in any forward-looking
statements made by or on behalf of us.




The FDIC Has
Adopted A Rule That Will Require Us To Prepay Our FDIC Insurance
Premiums.
 
 On
November 12, 2009, the Federal Deposit Insurance Corporation adopted a rule
pursuant to which all insured depository institutions will be required to prepay
their estimated assessments for the fourth quarter of 2009, and for all of 2010,
2011 and 2012.  Under the rule, this pre-payment will be due on
December 30, 2009.  Under the rule, the assessment rate for the fourth
quarter of 2009 and for 2010 will be based on each institution’s total base
assessment rate for the third quarter of 2009, modified to assume that the
assessment rate in effect on September 30, 2009 had been in effect for the
entire third quarter, and the assessment rate for 2011 and 2012 will be equal to
the modified third quarter assessment rate plus an additional 3 basis
points.  In addition, each institution’s base assessment rate for each
period will be calculated using its third quarter assessment base, adjusted
quarterly for an estimated 5% annual growth rate in the assessment base through
the end of 2012. Based on our deposits and assessment rate at September 30,
2009, we estimate that our prepayment amount will be approximately $7.3 million.
We expect that we will be able to make the prepayment from available cash on
hand.


Our
FDIC Insurance Assessments Will Increase Due to the Bank Not Maintaining a “Well
Capitalized” Status.





Our
regulatory capital ratios decreased during the second quarter 2009 below “well
capitalized” status based on regulatory standards.  At June 30, 2009,
we satisfied the minimum regulatory capital requirements and were “adequately
capitalized” within the meaning of federal regulatory
requirements.  Our FDIC insurance assessments will increase due to
this change in regulatory capital status.  During the third quarter of
2009, our regulatory capital ratios increased back to “well capitalized”
status.





We
Hold Certain Intangible Assets that Could Be Classified as Impaired in the
Future.  If These Assets Are Considered to Be Either Partially or
Fully Impaired in the Future, Our Earnings and the Book Values of These Assets
Would Decrease.





Pursuant
to FASB ASC 350, Intangibles –
Goodwill and Other (SFAS No. 142),we are required to test our
goodwill and core deposit intangible assets for impairment on a periodic basis.
The impairment testing process considers a variety of factors, including the
current market price of our common shares, the estimated net present value of
our assets and liabilities and information concerning the terminal valuation of
similarly situated insured depository institutions. The market price for our
common shares was above our tangible book value at October 1, 2008, the date of
our impairment testing, and at September 30, 2009.  During the last
quarter of 2009, impairment testing will be performed as of October 1, 2009. If
there is a decline in the market value of our common shares and a decline in the
market prices of the common shares of similarly situated insured depository
institutions during future reporting periods it is possible that future
impairment testing could result in a partial or full impairment of the value of
our goodwill or core deposit intangible assets, or both. If an impairment
determination is made in a future reporting period, our earnings and the book
value of these intangible assets will be reduced by the amount of the
impairment. If an impairment loss is recorded, it will have little or no impact
on the tangible book value of our common shares or our regulatory capital
levels.


- 25
-


Our
participation in the U.S. Treasury’s Capital Purchase Program imposes
restrictions on us that limit our ability to perform certain equity
transactions, including the payment of dividends and common stock
purchases.





On August
28, 2009, we issued and sold $20.7 million in Fixed Rate Cumulative Perpetual
Preferred Stock, Series A and a warrant to purchase shares of the Company’s
Fixed Rate Cumulative Preferred Stock, Series B to the Treasury Department as
part of the Capital Purchase Program. The Series A preferred shares will pay a
cumulative dividend rate of five percent (5%) per annum for the first five years
and will reset to a rate of nine percent (9%) per annum after year five.
Immediately following the issuance of the Series A Preferred Stock and the
Warrant, the Treasury Department exercised its rights under the Warrant to
acquire shares of the Series B Preferred Stock through a cashless exercise. The
Series B Preferred Stock pays cumulative dividends at a rate of nine percent
(9%) per annum.  The Series B Preferred Stock generally has the same
rights and privileges as the Series A Preferred Stock. The dividends and
potential increase in dividends if we do not redeem the preferred stock may
significantly impact our operating results, liquidity, and capital
position.





Pursuant
to the Purchase Agreement, prior to August 28, 2012, unless the Company has
redeemed the Series A Preferred Stock and the Series B Preferred Stock or the
Treasury Department has transferred the Series A Preferred Stock and the Series
B Preferred Stock to a third party, the ability of the Company to declare or pay
any dividend or make any distribution on its capital stock or other equity
securities of any kind of the Company will be subject to restriction, including
a restriction against (1) increasing the quarterly cash dividend per share to an
amount larger than the last quarterly cash dividend paid on the common stock
prior to November 17, 2008, $0.16 per share, or (2) redeeming, purchasing or
acquiring any shares of its common stock or other equity or capital securities,
other than in connection with benefit plans consistent with past practice and
certain circumstances specified in the Purchase Agreement.  In
addition, prior to August 28, 2012, the Company may not redeem any of the Series
A Preferred Stock or Series B Preferred Stock except with the proceeds of a
qualified equity offering.





Following
August 28, 2012 and until August 28, 2019 (unless the Series A Preferred Stock
and Series B Preferred Stock has been redeemed or transferred to a third party),
the Company may not, without the consent of the Treasury Department, pay any
dividends on its capital stock that are in the aggregate greater than 103% of
any dividends in the prior fiscal quarter.  In addition, prior to
August 28, 2019 (unless the Series A Preferred Stock and Series B Preferred
Stock has been redeemed or transferred to a third party) the Company may not
repurchase or acquire any equity security of the Company without the consent of
the Treasury Department other than in certain circumstances specified in the
Purchase Agreement.  Following August 28, 2019, the Company may not
pay any dividend or repurchase any equity securities without the consent of the
Treasury Department unless the Series A Preferred Stock and the Series B
Preferred Stock have been redeemed or the United States Treasury has transferred
the securities.  In addition, no shares of the Series B Preferred
Stock may be redeemed unless all the shares of Series A Preferred Stock have
been redeemed.





In
addition, under the Articles of Amendment for the Series A Preferred Stock and
the Series B Preferred Stock, the Company’s ability to declare or pay dividends
or repurchase its common stock or other equity or capital securities will be
subject to restrictions in the event that it fails to declare and pay or set
aside for payment full dividends on the Series A Preferred Stock and the Series
B Preferred Stock, respectively.





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds


Item 2 is nonapplicable and is
therefore not included.





Item
3.  Defaults Upon Senior Securities





The
Company was in default of one covenant imposed on its line of credit during the
second quarter of 2009. The covenant states that each of the Company’s
subsidiaries must maintain a “Well Capitalized” categorization as defined by the
federal regulatory requirements at all times.  For the quarter ended
June 30, 2009, First Guaranty Bank did not maintain a “Well Capitalized”
status.  The Company requested and received a waiver of this covenant
for the second quarter of 2009. During the third quarter of 2009, First Guaranty
Bank returned to a “Well Capitalized” status.  At no time was the
Company in default in the payment of principal or interest on the line of
credit. On October 20, 2009, the Company repaid the outstanding balance on this
line of credit.





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


Item 4 is non-applicable and is
therefore not included.





Item
5.  Other Information


Item 5 is non-applicable and is
therefore not included.


- 26
-


Item
6.  Exhibits


1. Consolidated financial
statements


The information required by this
item is included as Part I herein.





2. Consolidated financial statements
schedules


The information
required by this item is not applicable and therefore is not
included.





3. Exhibits




ExhibitNumber
              
              Exhibit14.0
              
              Code
      of Ethics31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
              
              Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.32.2
              
              Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.


- 27
-














SIGNATURES










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


authorized.











FIRST GUARANTY
BANCSHARES, INC.











Date:           November
13,
2009                                                                    
By: /s/ Alton B. Lewis


Alton B. Lewis


Chief Executive
Officer








Date:           November
13,
2009                                                                 By:  
/s/ Michele E.
LoBianco


Michele E.
LoBianco


Chief Financial
Officer


Secretary and
Treasurer






- 28
-