UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


Form
10-Q








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


THE
SECURITIES EXCHANGE ACT OF 1934





For
the Quarter Ended June 30, 2010


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
June 30, 2010, the registrant had 5,559,644 shares of $1 par value common stock
which were issued and outstanding.


PART
I.   FINANCIAL INFORMATION


Item
1.  Consolidated Financial




FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      BALANCE SHEETS
                (dollars
      in thousands, except share data)   June
      30,
                
                
                December
      31,2010
                
                
                2009Assets
                
                (unaudited)Cash
      and cash equivalents:Cash
      and due from banks
                
                $
                34,354
                
                
                $
                33,425Interest-earning
      demand deposits with banks
                
                
                41
                
                
                
                14Federal
      funds sold
                
                
                1,004
                
                
                
                13,279Cash
      and cash equivalents
                
                
                35,399
                
                
                
                46,718Investment
      securities:Available
      for sale, at fair value
                
                
                339,867
                
                
                
                249,480Held
      to maturity, at cost (estimated fair value of $12,462)
                
                
                -
                
                
                
                12,349Investment
      securities
                
                
                339,867
                
                
                
                261,829Federal
      Home Loan Bank stock, at cost
                
                
                1,840
                
                
                
                2,547Loans
      held for sale
                
                
                39
                
                
                
                -Loans,
      net of unearned income
                
                
                622,607
                
                
                
                589,902Less:
      allowance for loan losses
                
                
                8,625
                
                
                
                7,919Net
      loans
                
                
                613,982
                
                
                
                581,983Premises
      and equipment, net
                
                
                17,082
                
                
                
                16,704Goodwill
                
                
                1,999
                
                
                
                1,999Intangible
      assets, net
                
                
                1,828
                
                
                
                1,893Other
      real estate, net
                
                
                1,607
                
                
                
                658Accrued
      interest receivable
                
                
                5,984
                
                
                
                5,807Other
      assets
                
                
                6,547
                
                
                
                10,709Total
      Assets
                
                
                1,026,174
                
                
                
                930,847Liabilities
      and Stockholders' EquityDeposits:Noninterest-bearing
      demand
                
                $
                122,888
                
                
                $
                131,818Interest-bearing
      demand
                
                
                195,486
                
                
                
                188,252Savings
                
                
                44,029
                
                
                
                40,272Time
                
                
                522,550
                
                
                
                439,404Total
      deposits
                
                
                884,953
                
                
                
                799,746Short-term
      borrowings
                
                
                21,137
                
                
                
                11,929Accrued
      interest payable
                
                
                2,855
                
                
                
                2,519Long-term
      borrowings
                
                
                15,011
                
                
                
                20,000Other
      liabilities
                
                
                2,047
                
                
                
                1,718Total
      Liabilities
                
                
                926,003
                
                
                
                835,912Stockholders'
      EquityPreferred
      stock:Series
      A - $1,000 par value - authorized 5,000 shares; issuedand outstanding 2,069.9 shares
                
                
                19,743
                
                
                
                19,630Series
      B - $1,000 par value - authorized 5,000 shares; issuedand outstanding 103 shares
                
                
                1,129
                
                
                
                1,140Common
      stock:$1
      par value - authorized 100,600,000 shares; issued andoutstanding 5,559,644 shares
                
                
                5,560
                
                
                
                5,560Surplus
                
                
                26,459
                
                
                
                26,459Retained
      earnings
                
                
                43,587
                
                
                
                40,069Accumulated
      other comprehensive income
                
                
                3,693
                
                
                
                2,077Total
      Stockholders' Equity
                
                
                100,171
                
                
                
                94,935Total
      Liabilities and Stockholders' Equity
                
                $
                1,026,174
                
                
                $
                930,847See
      Notes to Consolidated Financial Statements.





2





FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF INCOME (unaudited)
                (dollars
      in thousands, except per share
data)  Six
      Months
                
                
                Three
      MonthsEnded
      June 30,
                
                
                Ended
      June 30,2010
                
                
                
                2009*
                
                
                
                2010
                
                
                
                2009*Interest
      Income:Loans
      (including fees)
                
                $
                17,888
                
                
                $
                17,530
                
                
                $
                9,184
                
                
                $
                8,873Loans
      held for sale
                
                
                4
                
                
                
                3
                
                
                
                3
                
                
                
                2Deposits
      with other banks
                
                
                19
                
                
                
                309
                
                
                
                10
                
                
                
                84Securities
      (including FHLB stock)
                
                
                6,944
                
                
                
                4,542
                
                
                
                3,525
                
                
                
                2,468Federal
      funds sold
                
                
                5
                
                
                
                27
                
                
                
                3
                
                
                
                10Total
      Interest Income
                
                
                24,860
                
                
                
                22,411
                
                
                
                12,725
                
                
                
                11,437Interest
      Expense:Demand
      deposits
                
                
                430
                
                
                
                604
                
                
                
                229
                
                
                
                284Savings
      deposits
                
                
                21
                
                
                
                77
                
                
                
                11
                
                
                
                36Time
      deposits
                
                
                5,529
                
                
                
                7,095
                
                
                
                2,811
                
                
                
                3,503Borrowings
                
                
                70
                
                
                
                159
                
                
                
                29
                
                
                
                98Total
      Interest Expense
                
                
                6,050
                
                
                
                7,935
                
                
                
                3,080
                
                
                
                3,921Net
      Interest Income
                
                
                18,910
                
                
                
                14,476
                
                
                
                9,645
                
                
                
                7,516Provision
      for loan losses
                
                
                1,302
                
                
                
                1,349
                
                
                
                623
                
                
                
                701Net
      Interest Income after Provision for Loan Losses
                
                
                17,608
                
                
                
                13,127
                
                
                
                9,022
                
                
                
                6,815Noninterest
      Income:Service
      charges, commissions and fees
                
                
                1,998
                
                
                
                2,020
                
                
                
                1,015
                
                
                
                1,040Net
      gains on sale of securities
                
                
                1,366
                
                
                
                10
                
                
                
                1,105
                
                
                
                10Loss
      on securities impairment
                
                
                -
                
                
                
                -
                
                
                
                
                
                
                
                -Net
      gains on sale of loans
                
                
                151
                
                
                
                272
                
                
                
                92
                
                
                
                192Other
                
                
                706
                
                
                
                520
                
                
                
                367
                
                
                
                243Total
      Noninterest Income
                
                
                4,221
                
                
                
                2,822
                
                
                
                2,579
                
                
                
                1,485Noninterest
      Expense:Salaries
      and employee benefits
                
                
                5,844
                
                
                
                5,493
                
                
                
                2,946
                
                
                
                2,667Occupancy
      and equipment expense
                
                
                1,508
                
                
                
                1,411
                
                
                
                756
                
                
                
                728Net
      cost from other real estate & repossessions
                
                
                164
                
                
                
                180
                
                
                
                100
                
                
                
                201Regulatory
      assessment
                
                
                746
                
                
                
                1,307
                
                
                
                390
                
                
                
                935Other
                
                
                4,440
                
                
                
                4,563
                
                
                
                2,254
                
                
                
                2,417Total
      Noninterest Expense
                
                
                12,702
                
                
                
                12,954
                
                
                
                6,446
                
                
                
                6,948Income
      Before Income Taxes
                
                
                9,127
                
                
                
                2,995
                
                
                
                5,155
                
                
                
                1,352Provision
      for income taxes
                
                
                3,165
                
                
                
                1,039
                
                
                
                1,776
                
                
                
                469Net
      Income
                
                
                5,962
                
                
                
                1,956
                
                
                
                3,379
                
                
                
                883Preferred
      stock dividends
                
                
                (666
                )
                
                
                0
                
                
                
                (333
                )
                
                
                0Income
      Available to Common Shareholders
                
                $
                5,296
                
                
                $
                1,956
                
                
                $
                3,046
                
                
                $
                883Per
      Common Share:Earnings
                
                $
                0.95
                
                
                $
                0.35
                
                
                $
                0.49
                
                
                $
                0.16Cash
      dividends paid
                
                $
                0.32
                
                
                $
                0.32
                
                
                $
                0.16
                
                
                $
                0.16Average
      Common Shares Outstanding
                
                
                5,559,644
                
                
                
                5,559,644
                
                
                
                5,559,644
                
                
                
                5,559,644*RestatedSee
      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, 2008 as previously reported
                
                $
                -
                
                
                $
                -
                
                
                $
                5,560
                
                
                $
                26,459
                
                
                $
                37,769
                
                
                $
                (3,158
                )
                
                $
                66,630Corection
      of an error
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,143
                )
                
                
                -
                
                
                
                (1,143
                )Balance
      December 31, 2008 as restated
                
                
                -
                
                
                
                -
                
                
                
                5,560
                
                
                
                26,459
                
                
                
                36,626
                
                
                
                (3,158
                )
                
                
                65,487Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,956
                
                
                
                -
                
                
                
                1,956Change
      in unrealized losson
      available for sale securities,net
      of reclassification adjustments and taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                464
                
                
                
                464Comprehensive
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,420Cash
      dividends on common stock ($0.32 per share)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,779
                )
                
                
                -
                
                
                
                (1,779
                )Balance
      June 30, 2009 (unaudited) as restated
                
                $
                -
                
                
                $
                -
                
                
                $
                5,560
                
                
                $
                26,459
                
                
                $
                36,803
                
                
                $
                (2,694
                )
                
                $
                66,128Balance
      December 31, 2009
                
                $
                19,630
                
                
                $
                1,140
                
                
                $
                5,560
                
                
                $
                26,459
                
                
                $
                40,069
                
                
                $
                2,077
                
                
                $
                94,935Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,962
                
                
                
                -
                
                
                
                5,962Change
      in unrealized gainon
      available for sale securities,net
      of reclassification adjustments and taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,616
                
                
                
                1,616Comprehensive
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,578Cash
      dividends on common stock ($0.32 per share)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,778
                )
                
                
                -
                
                
                
                (1,778
                )Preferred
      stock dividend, amortization and accretion
                
                
                113
                
                
                
                (11
                )
                
                
                -
                
                
                
                -
                
                
                
                (666
                )
                
                
                -
                
                
                
                (564
                )Balance
      June 30, 2010 (unaudited)
                
                $
                19,743
                
                
                $
                1,129
                
                
                $
                5,560
                
                
                $
                26,459
                
                
                $
                43,587
                
                
                $
                3,693
                
                
                $
                100,171
  See
      Notes to Consolidated Financial Statements




4


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

                  (in
      thousands)  Six
      Months Ended June 30,2010
                
                
                
                2009*Cash
      Flows From Operating ActivitiesNet
      income
                
                $
                5,962
                
                
                $
                1,956Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Provision
      for loan losses
                
                
                1,302
                
                
                
                1,349Depreciation
      and amortization
                
                
                710
                
                
                
                698Amortization
      of discount on investments
                
                
                (96
                )
                
                
                (458
                )Gain
      on call of securities
                
                
                (1,366
                )
                
                
                (10
                )Gain
      on sale of assets
                
                
                (150
                )
                
                
                (160
                )ORE
      writedowns and loss on disposition
                
                
                80
                
                
                
                125FHLB
      stock dividends
                
                
                (2
                )
                
                
                (2
                )Net
      decrease in loans held for sale
                
                
                (39
                )
                
                
                (147
                )Change
      in other assets and liabilities, net
                
                
                4,105
                
                
                
                1,521Net
      Cash Provided By Operating Activities
                
                
                10,506
                
                
                
                4,872Cash
      Flows From Investing ActivitiesProceeds
      from sales, maturities and calls of HTM securities
                
                
                12,726
                
                
                
                21,971Proceeds
      from sales, maturities and calls of AFS securities
                
                
                460,221
                
                
                
                1,114,597Funds
      invested in AFS securities
                
                
                (547,297
                )
                
                
                (1,251,666
                )Proceeds
      from sale of Federal Home Loan Bank stock
                
                
                1,294
                
                
                
                -Funds
      invested in Federal Home Loan Bank stock
                
                
                (585
                )
                
                
                -Proceeds
      from maturities of time deposits with banks
                
                
                -
                
                
                
                7,868Net
      (increase)  decrease in loans
                
                
                (34,457
                )
                
                
                (2,112
                )Purchases
      of premises and equipment
                
                
                (938
                )
                
                
                (320
                )Proceeds
      from sales of other real estate owned
                
                
                128
                
                
                
                258Net
      Cash Used In Investing Activities
                
                
                (108,908
                )
                
                
                (109,404
                )Cash
      Flows From Financing ActivitiesNet
      increase in deposits
                
                
                85,207
                
                
                
                72,004Net
      increase in federal funds purchased and short-term
    borrowings
                
                
                9,207
                
                
                
                16,426Repayment
      of long-term borrowings
                
                
                (4,989
                )
                
                
                (4,987
                )Dividends
      paid
                
                
                (2,342
                )
                
                
                (890
                )Net
      Cash Provided By Financing Activities
                
                
                87,083
                
                
                
                82,553Net
      (Decrease) Increase In Cash and Cash Equivalents
                
                
                (11,319
                )
                
                
                (21,979
                )Cash
      and Cash Equivalents at the Beginning of the Period
                
                
                46,718
                
                
                
                78,017Cash
      and Cash Equivalents at the End of the Period
                
                $
                35,399
                
                
                $
                56,038Noncash
      Activities:Loans
      transferred to foreclosed assets
                
                $
                1,156
                
                
                $
                864Cash
      Paid During The Period:Interest
      on deposits and borrowed funds
                
                $
                5,714
                
                
                $
                6,498Income
      taxes
                
                $
                3,300
                
                
                $
                2,900*RestatedSee
      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, 2009.


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


In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair presentation of the
consolidated financial statements. Those adjustments are of a normal recurring
nature. The results of operations for the three and six-month periods ended June
30, 2010 and 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. The presentation does not take
into effect the recently enacted Dodd-Frank Wall Street Reform and Consumer
Protection Act.





Note
2.  Correction of an Error


During 2009, the Company discovered
errors related to the calculation of interest expense and prepaid assets for the
years ending 2008, 2007 and 2006.  The errors were reported and
corrected in the financial statements for the year ended 2009.Net income previously reported for the three
month period ended June 30, 2009 totaled $1.3 million compared to restated net
income which totaled $0.9 million, a net decrease of $0.4
million.  Net Income for the six month period ending June 30, 2009
totaled $2.4 million compared to a restated net income which totaled $2.0
million, a net decrease of $0.4 million.  Beginning retained earnings
at December 31, 2009 have been decreased by $1.1 million.





Note
3. 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 $26.5 million at June 30, 2010.
The fair value of impaired loans is measured by either 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).





6


Other Real Estate Owned (OREO).As of June 30, 2010, the Company has $1.6 million in OREO and foreclosed
property, which includes all real estate, other than bank premises used in bank
operations, owned or controlled by the Company, including real estate acquired
in settlement of loans. Properties are recorded at the balance of the loan or at
estimated fair value less estimated selling costs, whichever is less, at the
date acquired. Fair values of OREO at June 30, 2010 are determined by sales
agreement or appraisal, and costs to sell are estimated based on the terms and
conditions of the sales agreement. Inputs include appraisal values on the
properties or recent sales activity for similar assets in the property’s market,
and thus OREO measured at fair value would be classified within Level 2 of the
hierarchy. In accordance with the OREO treatment described, the Company included
property write-downs of $46,000 and $23,000 for the three months ended June 30,
2010 and 2009, respectively  For the six months ended June 30, 2010,
the company had write downs of $82,000 compared to $41,000 for the six months
ended June 30, 2009.


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 June 30, 2010, segregated by the level
of the valuation inputs within the fair value hierarchy utilized to measure fair
value:





Fair
      Value Measurements atJune
      30, 2010, UsingQuotedPrices
      InActiveMarkets
              SignificantAssets/Liabilities
              
              For
              Other
              SignificantMeasured
      at Fair
              
              Identical
              Observable
              UnobservableValue
              
              Assets
              Inputs
              InputsJune
      30, 2010
              
              (Level
      1)
              (Level
      2)
              (Level
      3)(unaudited, dollars in thousands)Securities
      available for sale
              $                  339,867
              
              $           99,739
              $         231,740
              $             8,388





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


Gains and
losses (realized and unrealized) included in earnings (or changes in net assets)
for the first six months of 2010 on a recurring basis are reported in
noninterest income or other comprehensive income as follows:





OtherNoninterest
              
              
              ComprehensiveIncome
              
              
              Income(unaudited,
      in thousands)Total
      gains included in earnings
              
              
              1,366
              
              
              
              -(or
      changes in net assets)Increase
      in unrealized gains relating to assets
              
              
              -
              
              
              
              1,616still
      held at June 30, 2010





The gain
above included $0.4 million in gains associated with the sale of held to
maturity investments.


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 six
months ended June 30, 2010.


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


The
Company has chosen not to elect the fair value option for any items that are not
already required to be measured at fair value in accordance with accounting
principles generally accepted in the United States, and as such has not included
any gains or losses in earnings for the six months ended June 30,
2010.








7


Note
4. Loans and Allowance for Loan Losses


Loans, net of unearned income, totaled
$622.6 million at June 30, 2010 and $589.9 million at December 31, 2009. At June
30, 2010, $39,000 in loans were held for sale and no loans were held for sale at
December 31, 2009. The loan portfolio is the largest component of assets with
total loans, net of allowance for loan losses, accounting for 59.8% and 62.5% of
total assets as of June 30, 2010 and December 31, 2009,
respectively.  The loan portfolio consists solely of domestic
loans.


Total
loans at June 30, 2010 (unaudited) and December 31, 2009 were as
follows:





June
      30,
              
              
              December
      31,2010
              
              
              2009As
      % of
              
              
              
              
              
              As
      % ofBalance
              
              
              Category
              
              
              Balance
              
              
              Category(dollars
      in thousands)Real
      estateConstruction
      & land development
              
              $
              69,642
              
              
              
              11.2
              %
              
              $
              78,686
              
              
              
              13.3
              %Farmland
              
              
              11,859
              
              
              
              1.9
              %
              
              
              11,352
              
              
              
              1.9
              %1-4
      Family
              
              
              78,725
              
              
              
              12.6
              %
              
              
              77,470
              
              
              
              13.1
              %Multifamily
              
              
              15,570
              
              
              
              2.5
              %
              
              
              8,927
              
              
              
              1.5
              %Non-farm
      non-residential
              
              
              308,635
              
              
              
              49.5
              %
              
              
              300,673
              
              
              
              51.0
              %Total
      real estate
              
              
              484,430
              
              
              
              77.7
              %
              
              
              477,108
              
              
              
              80.8
              %Agricultural
              
              
              22,617
              
              
              
              3.6
              %
              
              
              14,017
              
              
              
              2.4
              %Commercial
      and industrial
              
              
              91,844
              
              
              
              14.8
              %
              
              
              82,348
              
              
              
              13.9
              %Consumer
      and other
              
              
              24,552
              
              
              
              3.9
              %
              
              
              17,226
              
              
              
              2.9
              %Total
      loans before unearned income
              
              
              623,443
              
              
              
              100.1
              %
              
              
              590,699
              
              
              
              100.0
              %Less:
      unearned income
              
              
              (837
              )
              
              
              
              
              
              
              (797
              )Total
      loans after unearned income
              
              $
              622,607
              
              
              
              
              
              
              $
              589,902





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





June
      30, 2010Fixed
              
              
              Floating
              
              
              Total(unaudited,
      in thousands)One
      year or less
              
              $
              77,057
              
              
              $
              183,423
              
              
              $
              260,480One
      to five years
              
              $
              182,228
              
              
              $
              118,069
              
              
              $
              300,297Five
      to 15 years
              
              $
              2,762
              
              
              $
              31,859
              
              
              $
              34,621Over
      15 years
              
              $
              1,067
              
              
              $
              6,372
              
              
              $
              7,439Subtotal
              
              $
              263,114
              
              
              $
              339,723
              
              
              $
              602,837Non-Accrual
      Loans
              
              
              
              
              
              
              
              
              
              $
              19,770Total
      Loans
              
              
              
              
              
              
              
              
              
              $
              622,607Percent
      of Loan Portfolio Fixed Loans
              
              
              43.6%Percent
      of Loan Portfolio Floating Loans
              
              
              56.4%





The
majority of floating rate loans have interest rate floors.  As of June
30th,
2010 $290.5 million of these loans were at the floor rate.





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.




8


The allowance for loan losses totaled
$8.6 million or 1.39% of total loans at June 30, 2010 and $7.9 million or 1.34%
of total loans at December 31, 2009.  Changes in the allowance for
loan losses for the six months ended June 30, 2010 (unaudited) and the year
ended December 31, 2009 are as follows:




June
      30,
              
              
              December 31,2010
              
              
              2009(unaudited,
      in thousands)Balance
      beginning of period
              
              $
              7,919
              
              
              $
              6,482Provision
      charged to expense
              
              
              1,302
              
              
              
              4,155Loans
      charged-off
              
              
              (726
              )
              
              
              (2,879
              )Recoveries
              
              
              130
              
              
              
              161Allowance
      for loan losses
              
              $
              8,625
              
              
              $
              7,919




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




Six
      Months EndedJune 30,2010
              
              
              2009(unaudited,
      in thousands)Balance
      at beginning of period
              
              $
              7,919
              
              
              $
              6,482Charge-offs:Real
      estate loans:Construction
      and land development
              
              
              (5
              )
              
              
              (63
              )One-
      to four- family residential
              
              
              (262
              )
              
              
              (355
              )Non-farm
      non-residential
              
              
              (75
              )
              
              
              (336
              )Commercial
      and industrial loans
              
              
              (182
              )
              
              
              (120
              )Consumer
      and other
              
              
              (202
              )
              
              
              (339
              )Total
      charge-offs
              
              
              (726
              )
              
              
              (1,213
              )Recoveries:Real
      estate loans:Construction
      and land development
              
              
              1
              
              
              
              1Farmland
              
              
              -
              
              
              
              1One-
      to four- family residential
              
              
              8
              
              
              
              10Commercial
      and industrial loans
              
              
              63
              
              
              
              15Consumer
      and other
              
              
              58
              
              
              
              56Total
      recoveries
              
              
              130
              
              
              
              83Net
      charge-offs
              
              
              (596
              )
              
              
              (1,130
              )Provision
      for loan losses
              
              
              1,302
              
              
              
              1,349Balance
      at end of period
              
              $
              8,625
              
              
              $
              6,701


Note
5. Goodwill and Other Intangible Assets


The
Company accounts for goodwill and intangible assets in accordance with ASC 350,
Intangibles – Goodwill and
Other (ASC 350).  Under 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 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 June 30, 2010 and December 31,
2009.




9


Mortgage
servicing rights totaled $0.2 million and core deposit intangibles totaled $1.6
million at June 30, 2010. 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 June 30, 2010
              
              
              
              As
      of December 31, 2009Gross
      Carrying
              
              
              Accumulated
              
              
              Net
      Carrying
              
              
              Gross
      Carrying
              
              
              Accumulated
              
              
              Net
      CarryingAmount
              
              
              Amortization
              
              
              Amount
              
              
              Amount
              
              
              Amortization
              
              
              Amount(unaudited,
      in thousands)Core
      deposit intangibles
              
              $
              7,997
              
              
              $
              6,348
              
              
              $
              1,649
              
              
              $
              7,997
              
              
              $
              6,240
              
              
              $
              1,757Mortgage
      servicing rights
              
              
              200
              
              
              
              21
              
              
              
              179
              
              
              
              157
              
              
              
              21
              
              
              
              136Total
              
              $
              8,197
              
              
              $
              6,369
              
              
              $
              1,828
              
              
              $
              8,154
              
              
              $
              6,261
              
              
              $
              1,893





Note
6. Borrowings


At June
30, 2010, short-term borrowings totaled $21.1 million, consisting of $6.2
million repurchase agreements and $14.9 million in federal funds
purchased.


Long term borrowings decreased during
the first six months of 2010 and totaled $15.0 million compared to $20.0 million
at December 31, 2009. At June 30, 2010, long-term debt consisted of two advances
from the Federal Home Loan Bank. On November 20, 2009, the Company obtained an
original $10.0 million amortizing advance at a rate of 0.861% with maturity in
December 1, 2010. The Company makes monthly principal and interest payments. On
December 18, 2009, the Company obtained a $10.0 million interest only advance
with a rate of 0.480%. The Company makes monthly interest payments with the
balloon note due on December 20, 2010.





Note
7. Income Taxes


The ASC
740-10, Income Taxes,
clarifies the accounting for uncertainty in income taxes and prescribes a
recognition threshold and measurement attribute for the consolidated financial
statements recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Company does not believe it has any unrecognized tax
benefits included in its consolidated financial statements. The Company has not
had any settlements in the current period with taxing authorities, nor has it
recognized tax benefits as a result of a lapse of the applicable statute of
limitations.


The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits in noninterest expense. During the three and six months ended June 30,
2010 and 2009, 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.  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.  Recent Accounting Pronouncements


In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.”
ASU 2010-06 amends Topic 820 by requiring more robust disclosures about
(i) the different classes of assets and liabilities measured at fair value,
(ii) the valuation techniques and inputs used, (iii) the activity in
Level 3 fair value measurements, and (iv) the transfers between Levels 1,
2, and 3. Among other things, ASU 2010-06 requires separate disclosures about
purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements as opposed to presenting such activity on a net
basis. The new disclosures required by ASU 2010-06 are effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disclosures about the roll forward of activity in Level 3 fair value
measurements which are effective for interim and annual periods beginning after
December 15, 2010. The provisions of ASU 2010-06 did not have a material
impact on the Company’s financial position, results of operations or liquidity,
but it will require expansion of the Company’s future disclosures about fair
value measurements.


In
December 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic
860): Accounting for Transfers of Financial Assets.” ASU 2009-16 amends Topic
860 and is intended to improve financial reporting by eliminating the exceptions
for qualifying special-purpose entities from the consolidation guidance and the
exception that permitted sale accounting for certain mortgage securitizations
when a transferor has not surrendered control over the transferred financial
assets. In addition, ASU 2009-16 requires enhanced disclosures about the risks
to which a transferor continues to be exposed because of its continuing
involvement in transferred financial assets. The provisions of ASU 2009-16 were
effective for interim and annual reporting periods beginning after
November 15, 2009. The adoption of ASU 2009-16 did not have a material
impact on the Company’s financial position, results of operations or
liquidity.





10





ASU -
Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosure
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses.The objective of this ASU is for an entity to provide disclosures
that facilitate financial statement users’ evaluation of the
following:


·
            The
      nature of credit risk inherent in the entity’s portfolio of financing
      receivables;


·
            How
      that risk is analyzed and assessed in arriving at the allowance for credit
      losses; and


·
            The
      changes and reasons for those changes in the allowance for credit
      losses.





To
achieve these objectives, an entity should provide disclosures on a
disaggregated basis on two defined levels: (1) portfolio segment; and (2) class
of financing receivable. The ASU makes changes to existing disclosure
requirements and includes additional disclosure requirements about financing
receivables, including:


·
            Credit
      quality indicators of financing receivables at the end of the reporting
      period by class of financing
receivables;


·
            The
      aging of past due financing receivables at the end of the reporting period
      by class of financing receivables;
and


·
            The
      nature and extent of troubled debt restructurings that occurred during the
      period by class of financing receivables and their effect on the allowance
      for credit losses.





For
public entities, the disclosures as of the end of a reporting period are
effective for interim and annual reporting periods ending on or after December
15, 2010. The disclosures about activity that occurs during a reporting period
are effective for interim and annual reporting periods beginning on or after
December 15, 2010.   The adoption of this standard will require
additional disclosures.





ASU -
Accounting Standards Update No. 2010-18, Receivables (Topic 310): Effect of a
Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a
Single Asset. This ASU codifies the consensus reached in EITF Issue No.
09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is
Accounted for as a Single Asset.” The amendments to the FASB Accounting Standards
CodificationTM (Codification) provide that modifications of loans that are
accounted for within a pool under Subtopic 310-30 do not result in the removal
of those loans from the pool even if the modification of those loans would
otherwise be considered a troubled debt restructuring. An entity will continue
to be required to consider whether the pool of assets in which the loan is
included is impaired if expected cash flows for the pool change. ASU 2010-18
does not affect the accounting for loans under the scope of Subtopic 310-30 that
are not accounted for within pools. Loans accounted for individually under
Subtopic 310-30 continue to be subject to the troubled debt restructuring
accounting provisions within Subtopic 310-40.





ASU
2010-18 is effective prospectively for modifications of loans accounted for
within pools under Subtopic 310-30 occurring in the first interim or annual
period ending on or after July 15, 2010. Early application is permitted. Upon
initial adoption of ASU 2010-18, an entity may make a one-time election to
terminate accounting for loans as a pool under Subtopic 310-30. This election
may be applied on a pool-by-pool basis and does not preclude an entity from
applying pool accounting to subsequent acquisitions of loans with credit
deterioration.  The adoption of this update is not expected to have an
impact on the consolidated financial statements.





ASU -
Accounting Standards Update (ASU) No. 2010-11, Derivatives and Hedging (Topic 815):
Scope Exception Related to Embedded Credit Derivatives. The FASB believes
this ASU clarifies the type of embedded credit derivative that is exempt from
embedded derivative bifurcation requirements. Specifically, only one form of
embedded credit derivative qualifies for the exemption - one that is related
only to the subordination of one financial instrument to another. As a result,
entities that have contracts containing an embedded credit derivative feature in
a form other than such subordination may need to separately account for the
embedded credit derivative feature.





The
amendments in the ASU are effective for each reporting entity at the beginning
of its first fiscal quarter beginning after June 15, 2010. Early adoption is
permitted at the beginning of each entity’s first fiscal quarter beginning after
March 5, 2010.  The adoption of this update is not expected to have an
impact on the consolidated financial statements.





Note
9.  Subsequent Events





New
Federal Legislation





Congress
has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection
Act which will significantly change the current bank regulatory structure and
affect the lending, investment, trading and operating activities of financial
institutions and their holding companies.  The Dodd-Frank Act will
eliminate the Office of Thrift Supervision.  The Dodd-Frank Act also
authorizes the Board of Governors of the Federal Reserve System to supervise and
regulate all savings and loan holding companies, in addition to bank holding
companies which it currently regulates.  As a result, the Federal
Reserve Board’s current regulations applicable to bank holding companies,
including holding company capital requirements, will apply to savings and loan
holding companies.  The Dodd-Frank Act also requires the Federal
Reserve Board to set minimum capital levels for bank holding companies that are
as stringent as those required for the insured depository subsidiaries, and the
components of Tier 1 capital would be restricted to capital instruments that are
currently considered to be Tier 1 capital for insured depository
institutions.  Bank holding companies with assets of less than $500
million are exempt from these capital requirements.  Under the
Dodd-Frank Act, the proceeds of trust preferred securities are excluded from
Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank
or savings and loan holding companies with less than $15 billion of
assets.  The legislation also establishes a floor for capital of
insured depository institutions that cannot be lower than the standards in
effect today, and directs the federal banking regulators to implement new
leverage and capital requirements within 18 months that take into account
off-balance sheet activities and other risks, including risks relating to
securitized products and derivatives.




11


The
Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with
broad powers to supervise and enforce consumer protection laws.  The
Consumer Financial Protection Bureau has broad rule-making authority for a wide
range of consumer protection laws that apply to all banks and savings
institutions such as the Bank, including the authority to prohibit “unfair,
deceptive or abusive” acts and practices.  The Consumer Financial
Protection Bureau has examination and enforcement authority over all banks and
savings institutions with more than $10 billion in assets.  Banks and
savings institutions with $10 billion or less in assets will be examined by
their applicable bank regulators.  The new legislation also weakens
the federal preemption available for national banks and federal savings
associations, and gives state attorneys general the ability to enforce
applicable federal consumer protection laws.




The
legislation also broadens the base for Federal Deposit Insurance Corporation
insurance assessments.  Assessments will now be based on the average
consolidated total assets less tangible equity capital of a financial
institution.  The Dodd-Frank Act also permanently increases the
maximum amount of deposit insurance for banks, savings institutions and credit
unions to $250,000 per depositor, retroactive to January 1, 2009, and
non-interest bearing transaction accounts have unlimited deposit insurance
through December 31, 2013.  Lastly, the Dodd-Frank Act will increase
stockholder influence over boards of directors by requiring companies to give
stockholders a non-binding vote on executive compensation and so-called “golden
parachute” payments, and authorizing the Securities and Exchange Commission to
promulgate rules that would allow stockholders to nominate their own candidates
using a company’s proxy materials.  The legislation also directs the
Federal Reserve Board to promulgate rules prohibiting excessive compensation
paid to bank holding company executives, regardless of whether the company is
publicly traded or not.





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 months and six months ended June 30 ,2010 and 2009
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





New
Federal Legislation





Congress
has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection
Act which will significantly change the current bank regulatory structure and
affect the lending, investment, trading and operating activities of financial
institutions and their holding companies.  The Dodd-Frank Act will
eliminate the Office of Thrift Supervision.  The Dodd-Frank Act also
authorizes the Board of Governors of the Federal Reserve System to supervise and
regulate all savings and loan holding companies, in addition to bank holding
companies which it currently regulates.  As a result, the Federal
Reserve Board’s current regulations applicable to bank holding companies,
including holding company capital requirements, will apply to savings and loan
holding companies.  The Dodd-Frank Act also requires the Federal
Reserve Board to set minimum capital levels for bank holding companies that are
as stringent as those required for the insured depository subsidiaries, and the
components of Tier 1 capital would be restricted to capital instruments that are
currently considered to be Tier 1 capital for insured depository
institutions.  Bank holding companies with assets of less than $500
million are exempt from these capital requirements.  Under the
Dodd-Frank Act, the proceeds of trust preferred securities are excluded from
Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank
or savings and loan holding companies with less than $15 billion of
assets.  The legislation also establishes a floor for capital of
insured depository institutions that cannot be lower than the standards in
effect today, and directs the federal banking regulators to implement new
leverage and capital requirements within 18 months that take into account
off-balance sheet activities and other risks, including risks relating to
securitized products and derivatives.




The
Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with
broad powers to supervise and enforce consumer protection laws.  The
Consumer Financial Protection Bureau has broad rule-making authority for a wide
range of consumer protection laws that apply to all banks and savings
institutions such as the Bank, including the authority to prohibit “unfair,
deceptive or abusive” acts and practices.  The Consumer Financial
Protection Bureau has examination and enforcement authority over all banks and
savings institutions with more than $10 billion in assets.  Banks and
savings institutions with $10 billion or less in assets will be examined by
their applicable bank regulators.  The new legislation also weakens
the federal preemption available for national banks and federal savings
associations, and gives state attorneys general the ability to enforce
applicable federal consumer protection laws.




The
legislation also broadens the base for Federal Deposit Insurance Corporation
insurance assessments.  Assessments will now be based on the average
consolidated total assets less tangible equity capital of a financial
institution.  The Dodd-Frank Act also permanently increases the
maximum amount of deposit insurance for banks, savings institutions and credit
unions to $250,000 per depositor, retroactive to January 1, 2009, and
non-interest bearing transaction accounts have unlimited deposit insurance
through December 31, 2013.  Lastly, the Dodd-Frank Act will increase
stockholder influence over boards of directors by requiring companies to give
stockholders a non-binding vote on executive compensation and so-called “golden
parachute” payments, and authorizing the Securities and Exchange Commission to
promulgate rules that would allow stockholders to nominate their own candidates
using a company’s proxy materials.  The legislation also directs the
Federal Reserve Board to promulgate rules prohibiting excessive compensation
paid to bank holding company executives, regardless of whether the company is
publicly traded or not.




Second
Quarter Overview
 Financial highlights for the second
quarter of 2010 and 2009 restated are as follows:
 ·
              Net
      income for the second quarter of 2010 and 2009 was $3.4 million and $0.9
      million respectively, with earnings per common share of $0.49 and $0.16
      respectively. Net income for the six months ending June 30, 2010 was $6.0
      million compared to $2.0 million for the six months ended June 30, 2009
      with earnings per share of $0.95 and $0.35 respectively.  The
      increase in net income was primarily the result of an increase in net
      interest income. The Company also recognized gains from sales of
      securities.
 ·
              Net
      interest income for the second quarter of 2010 and 2009 was $9.6 million
      and $7.5 million, respectively. Net interest income for the six months
      ending June 30, 2010 was $18.9 million compared to $14.5 million for the
      same period in 2009.  The net interest margin for the bank was
      4.13% at the end of the second quarter 2010 and 3.41% at the end of the
      second quarter 2009.
 ·
              The
      provision for loan losses for the second quarter of 2010 was $0.6 million
      compared to $0.7 million for the second quarter of 2009.  The
      provision for loan loss for the six months ending June 30, 2010 was $1.3
      million compared to $1.3 million for the six months ended June 30,
      2009.
 ·
              Total
      assets at June 30, 2010 were $1.0 billion, an increase of $95.3 million or
      10.2% when compared to $930.8 million at December 31, 2009. The increase
      in assets primarily resulted from excess cash received from deposit growth
      which was ultimately invested in loans, securities investments,
      interest-earning deposits with banks and federal funds
    sold.
 ·
              Investment
      securities totaled $339.9 million at June 30, 2010, an increase of $78.0
      million when compared to $261.8 million at December 31, 2009. At June 30,
      2010, available for sale securities, at fair value, totaled $339.9
      million, an increase of $90.4 million when compared to December 31, 2009.
      Held to maturity securities, at cost, totaled $0.0 dollars as of June 30,
      2010, the company did not have any securities in the held to maturity
      category.  This was a decrease of $12.3 million when compared to
      $12.3 million at December 31, 2009.


13


·
            The
      net loan portfolio at June 30, 2010 totaled $614.0 million, an increase of
      $32.0 million from the December 31, 2009 level of $582.0 million. Net
      loans are reduced by the allowance for loan losses which totaled $8.6
      million for June 30, 2010 and $7.9 million for December 31,
      2009.


·
            Non-performing
      assets at June 30, 2010 were $23.1 million, an increase of $7.4 million
      compared to December 31,
2009.


·
            Total
      deposits increased $85.2 million or 10.6% in the first six months of 2010
      compared to the year ended December 31, 2009. Of this increase, individual
      and business deposits increased by $39.6 million and public fund deposits
      increased by $45.6 million.


·
            Return
      on average assets for the three months ending June 30, 2010 and June 30,
      2009 was 1.39% and 0.37% respectively. Return on average assets for the
      six months ended June 30, 2010 and June 30, 2009 were 1.24% and 0.41%,
      respectively.  Return on average common equity for the three
      months ending June 30, 2010 and June 30, 2009 were 19.2% and 5.4%
      respectively.  Return on average common equity for the six month
      period ending June 30, 2010 and June 30, 2009 was 16.8% and 5.9%,
      respectively.


·
            The
      Company’s Board of Directors declared cash dividends of $0.16 per common
      share in the second quarter of 2010 and
2009.





Financial
Condition





Changes
in Financial Condition from December 31, 2009 to June 30, 2010





General. Total assets as of June
30, 2010 were $1.0 billion, an increase of $95.3 million or 10.2% when compared
to $930.8 million at December 31, 2009. The increase in assets resulted
primarily from cash received from increased deposits. This excess cash was
ultimately used to fund loans, securities investments, increase interest-earning
demand deposits with banks and federal funds purchased.





Cash and Cash
Equivalents.Cash and cash equivalents at June 30, 2010
totaled $35.4 million, a decrease of $11.3 million when compared to $46.7
million at December 31, 2009. Cash and due from banks decreased $1.0 million,
interest-earning demand deposits with banks increased $27,000 and federal funds
sold decreased $12.3 million. The decrease in cash and cash equivalents was
primarily a result of deploying excess liquidity into investments and
loans.





Investment
Securities.Investment securities at June 30, 2010 totaled
$339.9 million, an increase of $78.0 million when compared to $261.8 million at
December 31, 2009.


The
securities portfolio consisted principally of U.S. Government agency securities,
mortgage-backed obligations, 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 June
30, 2010, $22.9 million or 6.76% of the securities portfolio was scheduled to
mature in less than one year. Securities with maturity dates over 10 years
totaled $62.3 million or 18.3% of the total portfolio. The average maturity of
the securities portfolio was 2.95 years.  The average maturity of the
securities portfolio is affected by call options that are influenced by market
interest rates.


At June
30, 2010, securities totaling $339.9 million were classified as available for
sale and no securities were classified as held to maturity, compared to $249.5
million classified as available for sale and $12.3 million classified as held to
maturity at December 31, 2009.  The company sold all securities
classified for held to maturity as part of its strategy to manage interest rate
risk.  The proceeds from the sale of these securities was used to fund
loans and other investments.  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.


On June
30, 2010, certain investment securities had continuous unrealized loss positions
for more than 12 months. As of June 30, 2010, the unrealized losses on these
securities totaled $0.6 million. Substantially all of these losses were in
corporate securities, preferred securities and preferred stocks. At June 30,
2010, 27 securities were graded below investment grade with a total book value
of $6.6 million, and three securities had no rating with a total book value of
$0.2 million. All of the non-investment grade securities referenced above were
initially investment grade and have been downgraded since purchase. As of June
30, 2010, the evaluation of securities with continuous unrealized losses
indicated that no investments were other-than-temporarily impaired.


Average
securities as a percentage of average interest-earning assets were 30.1% for the
six-month period ended June 30, 2010 and 24.9% for the same period in 2009. At
June 30, 2010, the U.S Government agency securities, mortgage-backed
obligations, and municipal bonds qualified as securities pledgeable to
collateralize repurchase agreements and public funds.Securities
pledged at June 30, 2010 totaled $221.9 million.





Loans.The
origination of loans is the primary use of our financial resources and
represents the largest component of earning assets. Net total loans accounted
for 59.8% of total assets at June 30, 2010, a decrease when compared to 62.5% at
December 31, 2009. There are no significant concentrations of credit to any
borrower. As of June 30, 2010, 77.7% 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 49.5%
of our total portfolio.


Our loan portfolio at June 30, 2010
totaled $614.0 million, an increase of approximately $32.0 million from the
December 31, 2009 level of $582.0 million. Total loans include $45.7 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 $8.6 million at June 30, 2010 and $7.9 million at
December 31, 2009.  Loan charge-offs totaled $0.7 million during the
first six months of 2010, compared to $1.2 million during the same period of
2009. Recoveries totaled $130,000 and $83,000 during the first six months of
2010 and 2009, respectively.  See Note 4 of the Notes to Consolidated
Financial Statements for more information on loans and the allowance for loan
losses.





14


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.


The table below sets forth the amounts
and categories of our non-performing assets at June 30, 2010 (unaudited) and
December 31, 2009.






June
      30,
              
              
              December 31,2010
              
              
              2009(in
      thousands)Non-accrual
      loans:Real estate loans:Construction and land development
              
              $
              3,352
              
              
              $
              2,841Farmland
              
              
              82
              
              
              
              54One- to four- family residential
              
              
              5,913
              
              
              
              2,814Non-farm non-residential
              
              
              8,815
              
              
              
              7,439Non-real
      estate loans:Commercial and industrial
              
              
              1,475
              
              
              
              830Consumer and other
              
              
              130
              
              
              
              205Total non-accrual loans
              
              
              19,767
              
              
              
              14,183Loans
      90 days and greater delinquentand
      still accruing:Real estate loans:One- to four- family residential
              
              
              1,693
              
              
              
              757Non-real estate loans:Consumer and other
              
              
              -
              
              
              
              28Total loans 90 days greaterdelinquent and still accruing
              
              
              1,693
              
              
              
              785Total
      nonperforming loans
              
              
              21,460
              
              
              
              14,968Real
      estate owned:Real
      estate loans:One- to four- family residential
              
              
              1,295
              
              
              
              292Non-farm non-residential
              
              
              312
              
              
              
              366Total real estate owned
              
              
              1,607
              
              
              
              658Total nonperforming assets
              
              $
              23,067
              
              
              $
              15,626







Nonperforming
assets totaled $23.1 million or 2.2% of total assets at June 30, 2010, an
increase of $7.4 million from December 31, 2009. 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 $5.6 million from December 31, 2009 to June 30, 2010. There were
increases in construction and land Development nonaccrual loans, one- to four-
family nonaccrual loans, non-farm non-residential nonaccrual loans and
commercial and industrial nonaccrual loans, which were partially offset with
decreases in construction and land development nonaccrual loans.




15




During
the first six months of 2010, there was a $0.5 million increase in construction
and land development nonaccrual loans. The increase in nonaccrual is mostly due
to a loan in the amount of $1.9 million that is secured by acreage in Northern
Louisiana. The property is currently in foreclosure and a loss is expected and
we have reserved accordingly for the credit.  In addition we were able
to remove some loans from non-accrual since December 2009. Two of the loans were
townhome developments, consisting of six units, totaling $0.6 million that were
foreclosed on and booked into other real estate. Also, we booked additional
properties to other real estate owned from a loan in the amount of $0.3 million
secured by lots in a subdivision. We also received payment in full on another
loan in the amount of $0.5 million that was secured by lots in a
subdivision.




There was
a $3.1 million increase in one- to four- family residential nonaccrual loans
during the first six months of 2010. The increase in nonaccrual one- to four-
family residential loans resulted from two loans, one of which has a balance of
$1.8 million and is currently in bankruptcy. The house is located in a gated
community and we anticipate no exposure on this property. This loan paid down
from $3.0 million in the last 15 months from the liquidation of other assets of
the borrower. The second loan is in the amount of $1.6 million and is also in
foreclosure. We also expect this property to go to foreclosure sale in July,
2010.




Non-farm
non-residential nonaccrual loans increased $1.4 million from December 31, 2009
to June 30, 2010. This category comprises of primarily two loans. One loan
totaling $1.1 million is currently in foreclosure. It is secured by a commercial
building.




Non-real
estate commercial and industrial nonaccrual loans increased $0.7 million from
December 31, 2009 to June 30, 2010. The largest loan addition to this category
totals $0.4 million and is secured by oil well equipment. The borrower has a
tentative agreement to sell the equipment and pay the loan in full. In addition
we added a loan in the amount of $0.5 million secured by Medicare receivables.
We have written a portion of this loan off and currently have a balance of $0.3
million as of June 30, 2010. We currently have approximately $0.4 million in
receivables that have not been collected, however due to the slowing of the
collections of the receivables; we have reserved $0.3 million against this
credit.




Other
real estate increased during the first six months of 2010 by $0.9 million. This
increase is primarily from the addition of six properties in a townhome
development mentioned in the nonaccrual construction and land development
section above as well as five lots in a subdivision that were also referred to
in the construction and land development section..




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.




16




Provisions
made pursuant to these processes totaled $1.3 million in the first six months of
2010 as compared to $1.3 million for the same period in 2009. 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
six months of 2010 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 $0.7 million
for first six months of 2010 as compared to total charge-offs of $1.2 million
for the same period in 2009. Recoveries were $130,000 for the first six months
of 2010 as compared to recoveries of $83,000 for the same period in
2009.




Charged-off
Real Estate loans totaled $342,000 for the first six months of 2010. The
majority of this category is comprised of a few loans. One loan was made to a
contractor to complete a project for one of our mortgage loan customers. The
bank took a second mortgage on his house. The borrower was able to refinance his
house and we were able to cash out on a portion of our loan, however did have to
charge-off approximately $75,000. The second loan is in the amount of $560,000
secured by rental property. The borrower is in bankruptcy and the plan calls for
a lower amount of principal to be paid because of decreased property. We wrote
the loan down $106,000 to the amount of the bankruptcy plan. In addition the
bank wrote off $74,000 on a building that was formerly a car dealership. There
were some possible environmental concerns and we only had a second mortgage. The
property sold for enough at the foreclosure sale to pay off the first mortgage
to another bank and to allow some proceeds to be applied toward the bank’s debt.
Another $67,000 was charged off, in which the bank foreclosed upon five lots in
a subdivision. After the property was appraised it resulted in the write off of
a portion of the debt.




Charged-off
commercial and industrial loans totaled $182,000 for the first six months of
2010. This category is comprised of two loans in which we charged-off $125,000
on one of the loans because it is secured by Medicare receivables as well as
some patient receivables and collection of the receivables has slowed. The
second loan had a balance of $25,000 on a $50,000 committed line of credit and
the credit was unsecured.




Charged-off
consumer loans and credit cards totaled $202,000 for the first six months of
2010. This category is comprised of smaller consumer loans.




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 June 30, 2010 and December 31, 2009 the
Company had loans totaling $19.8 million and $14.2 million, respectively, on
which the accrual of interest had been discontinued.




The
allowance for loan losses at June 30, 2010 was $8.6 million or 1.39% of total
loans and 40.3% 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.





June
      30.,2010
              
              
              2009(unaudited,
      in thousands)Loans:Average
      outstanding balance
              
              $
              593,620
              
              
              $
              600,202Balance
      at end of period
              
              $
              622,607
              
              
              
              606,487Allowance
      for Loan Losses:Balance
      at beginning of year
              
              $
              7,919
              
              
              $
              6,482Provision
      charged to expense
              
              
              1,302
              
              
              
              1,349Loans
      charged-off
              
              
              (726
              )
              
              
              (1,213
              )Recoveries
              
              
              130
              
              
              
              83Balance
      at end of period
              
              $
              8,625
              
              
              $
              6,701




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, 2009 to June 30, 2010, total deposits
increased $85.2 million, or 10.7%, to $885.0 million at June 30, 2010 from
$779.7 million at December 31, 2009.  During 2010, consumer and
business deposits increased $70.8 million and public fund deposits increased
$13.5 million.  Noninterest-bearing demand deposits decreased $8.9
million while interest-bearing deposits increased by $94.1 million when
comparing June 30, 2010 to December 31, 2009.




17


At June
30, 2010, consumer deposits totaled $451.2 million, business deposits totaled
$119.6 million and public fund deposits totaled $314.1 million. As of June 30,
2010, the aggregate amount of outstanding certificates of deposit in amounts
greater than or equal to $100,000 was approximately $300.5 million.


Average
noninterest-bearing deposits increased to $129.3 million for the six-month
period ended June 30, 2010 from $117.8 million for the six-month period ended
June 30, 2009. Average noninterest-bearing deposits represented 13.8% and 13.4%
of average total deposits for the six-month periods ended June 30, 2010 and
2009, 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 June 30,
2010 (unaudited) and December 31, 2009.





June
      30,
              
              
              December 31,
              
              
              Increase/(Decrease)2010
              
              
              2009
              
              
              Amount
              
              
              Percent(dollars
      in thousands)Deposits:Noninterest-bearing
      demand
              
              $
              122,888
              
              
              $
              131,818
              
              
              $
              (8,930
              )
              
              
              -6.8
              %Interest-bearing
      demand
              
              
              195,486
              
              
              
              188,252
              
              
              
              7,234
              
              
              
              3.8
              %Savings
              
              
              44,029
              
              
              
              40,272
              
              
              
              3,757
              
              
              
              9.3
              %Time
              
              
              522,550
              
              
              
              439,404
              
              
              
              83,146
              
              
              
              18.9
              %Total
      deposits
              
              $
              884,954
              
              
              $
              799,746
              
              
              $
              85,207
              
              
              
              10.7
              %





Borrowings.
The Company maintains borrowing relationships with other financial institutions
as well as the Federal Home Loan Bank on a short- and long-term basis to meet
liquidity needs. At June 30, 2010, short-term borrowings totaled $21.1 million
compared to $11.9 million at December 31, 2009.  At June 30, 2010,
short-term borrowings consisted of $6.2 million repurchase agreements and $14.9
million in federal funds purchased.  At December 31, 2009, short term
borrowings consisted solely of $11.9 million of repurchase agreements..
Overnight repurchase agreement balances are monitored daily for sufficient
collateralization.


Long-term
borrowings totaled $15 million at June 30, 2010 compared to $20.0 million at
December 31, 2009. At June 30, 2010 long-term borrowings consisted of two
Federal Home Loan Bank advances. See Note 6 of the Notes to Consolidated
Financial Statements.


The average amount of total
borrowings for the six months ended June 30, 2010 totaled $26.2 million,
compared to $19.0 million for the six months ended June 30, 2009. At June 30,
2010, the Company had $145.0 million in Federal Home Loan Bank letters of credit
outstanding obtained solely for collateralizing public
deposits.


Equity.Total equity increased to $100.2 million as of June 30, 2010 from $94.9
million as of December 31, 2009. The increase in stockholders’ equity resulted
from net income of $6.0 million and the change in accumulated other
comprehensive income of $1.6 million, partially offset by dividends paid to
common stockholders totaling $1.8 million and preferred stock dividends totaling
$0.6 million. Cash dividends paid to common shareholders were $0.32 per share
for the six-month periods ending June 30, 2010 and 2009.





Results
of Operations for the Six Months and Three Months Ended June 30, 2010 and June
30, 2009





Net
income.For the
quarter ending June 30, 2010, First Guaranty Bancshares, Inc. had consolidated
net income of $3.4 million, a $2.5 million increase from the $0.9 million of net
income reported for the second quarter of 2009.  Net income for the
six months ended June 30, 2010 was $6.0 million, a increase of $4.0 million from
$2.0 million for the six months ended June 30, 2009. The increase in net
income for the three and six months ended June 30, 2010 resulted from increased
net interest income, gains on sales of securities, and reduced non interest
expense.


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.




18


Net
interest income for the quarter ended June 30, 2010 was $9.6 million, an
increase of $2.1 millionwhen compared
to $7.5million for
the second quarter in 2009. Net interest income for the six-month period ended
June 30, 2010 totaled $18.9 million. This reflects an increase of $4.4 million
when compared to the six-month period ended June 30, 2009.  The
increase in net interest income for both the three month and six month periods
reflected an increase in net interest spread and net interest margin as the
yield on our interest-earning assets increased more than the cost of our
interest-bearing liabilities.


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 six
months ending June 30, 2010 was 81.1%, compared to 84.1% for the same period in
2009.


The
following table sets forth average balance sheets, average yields and costs, and
certain other information for the six months ended June 30, 2010 and 2009,
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.





Six
      Months Ended June 30,2010
              2009*
      RestatedAverage
              
              
              
              
              
              Yield/
              
              
              Average
              
              
              
              
              
              Yield/Balance
              
              
              Interest
              
              
              Rate
              
              
              Balance
              
              
              Interest
              
              
              Rate(unaudited,
      dollars in thousands)AssetsInterest-earning
      assets:Interest-earning
      deposits with banks
              
              $
              16,930
              
              
              $
              19
              
              
              
              0.22
              %
              
              $
              43,062
              
              
              $
              309
              
              
              
              1.45
              %Securities
      (including FHLB stock)
              
              
              291,286
              
              
              
              6,944
              
              
              
              4.81
              %
              
              
              240,377
              
              
              
              4,542
              
              
              
              3.81
              %Federal
      funds sold
              
              
              10,072
              
              
              
              5
              
              
              
              0.13
              %
              
              
              38,522
              
              
              
              27
              
              
              
              0.14
              %Loans,
      net of unearned incomeincluding loans held for sale
              
              
              593,620
              
              
              
              17,892
              
              
              
              6.08
              %
              
              
              600,202
              
              
              
              17,533
              
              
              
              5.89
              %Total
      interest-earning assets
              
              
              911,908
              
              
              
              24,860
              
              
              
              5.50
              %
              
              
              922,163
              
              
              
              22,411
              
              
              
              4.90
              %Noninterest-earning
      assets:Cash
      and due from banks
              
              
              17,947
              
              
              
              
              
              
              
              
              
              
              
              18,388Premises
      and equipment, net
              
              
              17,140
              
              
              
              
              
              
              
              
              
              
              
              16,202Other
      assets
              
              
              19,689
              
              
              
              
              
              
              
              
              
              
              
              9,166Total
              
              $
              966,684
              
              
              
              
              
              
              
              
              
              
              $
              965,919Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Demand
      deposits
              
              $
              201,847
              
              
              $
              430
              
              
              
              0.43
              %
              
              $
              225,289
              
              
              $
              604
              
              
              
              0.54
              %Savings
      deposits
              
              
              42,060
              
              
              
              21
              
              
              
              0.10
              %
              
              
              41,663
              
              
              
              77
              
              
              
              0.37
              %Time
      deposits
              
              
              465,481
              
              
              
              5,529
              
              
              
              2.40
              %
              
              
              484,474
              
              
              
              7,095
              
              
              
              2.95
              %Borrowings
              
              
              30,515
              
              
              
              70
              
              
              
              0.47
              %
              
              
              23,921
              
              
              
              159
              
              
              
              1.34
              %Total
      interest-bearing liabilities
              
              
              739,903
              
              
              
              6,050
              
              
              
              1.65
              %
              
              
              775,347
              
              
              
              7,935
              
              
              
              2.06
              %Noninterest-bearing
      liabilities:Demand
      deposits
              
              
              127,203
              
              
              
              
              
              
              
              
              
              
              
              117,943Other
              
              
              7,316
              
              
              
              
              
              
              
              
              
              
              
              5,986Total
      liabilities
              
              
              874,422
              
              
              
              
              
              
              
              
              
              
              
              899,276Stockholders'
      equity
              
              
              92,261
              
              
              
              
              
              
              
              
              
              
              
              66,795Total
              
              $
              966,684
              
              
              
              
              
              
              
              
              
              
              $
              966,071Net
      interest income
              
              
              
              
              
              $
              18,810
              
              
              
              
              
              
              
              
              
              
              $
              14,476Net
      interest rate spread (1)
              
              
              
              
              
              
              
              
              
              
              3.85
              %
              
              
              
              
              
              
              
              
              
              
              2.84
              %Net
      interest-earning assets(2)
              
              $
              172,005
              
              
              
              
              
              
              
              
              
              
              $
              146,816Net
      interest margin (3)
              
              
              
              
              
              
              
              
              
              
              4.16
              %
              
              
              
              
              
              
              
              
              
              
              3.17
              %Average
      interest-earning assets tointerest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              123.25
              %
              
              
              
              
              
              
              
              
              
              
              118.94
              %





(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.





19





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 as loan losses and charged against
income.


Provisions
for loan losses totaled $0.6 million for the quarter ended June 30, 2010, a
decrease of $0.1 million when compared to the same quarter in 2009. Year-to-date
provisions totaled $1.3 million for the first six months of 2010 as compared to
$1.3 million for the same period in 2009. 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 six months of 2010 and
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 $0.7 million for the
first six months of 2010 as compared to $1.2 million for the same period in
2009. Recoveries were $130,000 for the first six months of 2010 as compared to
$83,000 for the same period in 2009.





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 June 30, 2010 totaled $2.6 million, an increase of
$1.1 million when compared to the same period in 2009. This increase in
noninterest income resulted primarily from realized gains on sales of securities
totaling $1.1 million..


Noninterest
income for the first six months of 2010 totaled $4.2 million, an increase of
$1.4 million when compared to the same period in 2009.





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 second quarter in 2010 totaled $6.4 million, a decrease of $0.5
million from the same period in 2009.







Six
      Months Ended June 30,
              
              
              Three
      Months Ended June 30,2010
              
              
              2009
              
              
              2010
              
              
              2009(unaudited,
      in thousands)
              
              
              (unaudited,
      in thousands)Other
      noninterest expense:Legal
      and professional fees
              
              $
              688
              
              
              $
              590
              
              
              $
              376
              
              
              $
              299Data
      processing
              
              
              983
              
              
              
              890
              
              
              
              460
              
              
              
              451Marketing
      and public relations
              
              
              584
              
              
              
              467
              
              
              
              299
              
              
              
              272Taxes
      - sales, capital and franchise
              
              
              378
              
              
              
              321
              
              
              
              197
              
              
              
              158Operating
      supplies
              
              
              346
              
              
              
              248
              
              
              
              206
              
              
              
              127Travel
      and lodging
              
              
              190
              
              
              
              199
              
              
              
              103
              
              
              
              105Other
              
              
              1,271
              
              
              
              1,848
              
              
              
              613
              
              
              
              1,005Total
      other expense
              
              $
              4,440
              
              
              $
              4,563
              
              
              $
              2,254
              
              
              $
              2,417





Income
Taxes.  The provision for income taxes totaled $1.8 million and
$0.5 million for the quarters ended June 30, 2010 and 2009, respectively. The
provision for income taxes for the six months ended June 30, 2010 increased $2.1
million to $3.2 million from $1.0 million for the same period in 2009. The
increase in the provision for income taxes reflected increased income during
both the three-month and six-month periods in 2010. In each of the six months
ended June 30, 2010 and 2009, the income tax provision approximated the normal
statutory rate.  The effective rates were 34.6% and 34.7%,
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.




20


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.









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)
              
              $
              105,290
              
              
              $
              155,190
              
              
              $
              260,480
              
              
              
              362,127
              
              
              $
              622,607Securities
      (including FHLB stock)
              
              
              14,354
              
              
              
              10,441
              
              
              
              24,795
              
              
              
              316,912
              
              
              
              341,707Federal
      funds sold
              
              
              1,004
              
              
              
              -
              
              
              
              1,004
              
              
              
              -
              
              
              
              1,004Other
      earning assets
              
              
              41
              
              
              
              -
              
              
              
              41
              
              
              
              -
              
              
              
              41Total
      earning assets
              
              
              120,689
              
              
              
              165,631
              
              
              
              286,320
              
              
              
              679,039
              
              
              $
              965,359Source
      of Funds:Interest-bearing
      accounts:Demand
      deposits
              
              
              146,606
              
              
              
              -
              
              
              
              146,606
              
              
              
              48,880
              
              
              
              195,486Savings
              
              
              11,007
              
              
              
              -
              
              
              
              11,007
              
              
              
              33,022
              
              
              
              44,029Time
      deposits
              
              
              162,815
              
              
              
              128,230
              
              
              
              291,045
              
              
              
              231,505
              
              
              
              522,550Short-term
      borrowings
              
              
              21,137
              
              
              
              -
              
              
              
              21,137
              
              
              
              -
              
              
              
              21,137Long-term
      borrowings
              
              
              -
              
              
              
              15,011
              
              
              
              15,011
              
              
              
              -
              
              
              
              15,011Noninterest-bearing,
      net
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              167,146
              
              
              
              167,146Total
      source of funds
              
              
              341,565
              
              
              
              143,241
              
              
              
              484,806
              
              
              
              480,553
              
              
              $
              965,359Period
      gap
              
              
              (220,876
              )
              
              
              22,390
              
              
              
              (198,486
              )
              
              
              198,486Cumulative
      gap
              
              $
              (220,876
              )
              
              $
              (198,486
              )
              
              $
              (198,486
              )
              
              $
              -Cumulative
      gap as apercent
      of earning assets
              
              
              -22.88
              %
              
              
              -20.56
              %
              
              
              -20.56
              %





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 36.6% and 31.8% of the total
liquidity base at June 30, 2010 and December 31, 2009,
respectively.


Loans
maturing within one year or less at June 30, 2010 totaled $260.5 million. At
June 30, 2010, time deposits maturing within one year or less totaled $291
million.  Loan commitments maturing within one year or less at June
30, 2010 totaled $25.1 million.




21


The
Company maintained a net borrowing availability capacity at the Federal Home
Loan Bank totaling $72.6 million and $92.9 million at June 30, 2010 and December
31, 2009, respectively.  This decrease in availability at Federal Home
Loan Bank during 2010 resulted from an additional $5.0 million in letters of
credit used solely to pledge to public funds, increase in borrowings of $14.9
million, and an adjustment to the borrowing base. We also maintain federal funds
lines of credit at three correspondent banks with borrowing capacity of $63.2
million at June 30, 2010 and December 31, 2009, respectively. At June 30, 2010
and December 31, 2009, the Company did not have an outstanding balance on these
lines of credit. Management believes there is sufficient liquidity to satisfy
current operating needs.


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


Total
equity increased to $101.2 million as of June 30, 2010 from $94.9 million as of
December 31, 2009. The increase in stockholders’ equity resulted from net income
of $6.0 million and the change in accumulated other comprehensive income of $1.6
million, partially offset by dividends paid to common stockholders totaling $1.8
million and preferred stock dividends totaling $0.6 million. Cash dividends paid
to common shareholders were $0.32 per share for the six-month periods ending
June 30, 2010 and 2009.





Regulatory
Capital .




At June
30, 2010, we satisfied the minimum regulatory capital requirements and were
“well capitalized” within the meaning of federal regulatory
requirements.





Item
4T. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures














PART
II.  OTHER INFORMATION





Item
1.  Legal Proceedings







Item
1A.  Risk Factors







22


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






Item
3.  Defaults Upon Senior Securities







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


The Company’s Annual Meeting of Stockholders was held on May 20,
2010.





With respect to the election of 3 directors to serve one year and until their
successors are elected and qualified, the following are the numbers of shares
voted for each nominee:





Nominees
              
              For
              
              
              AgainstWilliam
      K. Hood
              
              
              3,178,940
              
              
              
              27Alton
      B. Lewis
              
              
              3,153,942
              
              
              
              25,025Marshall
      T. Reynolds
              
              
              3,178,340
              
              
              
              627


There were no abstentions or broker non-votes.





Item
5.   Other Information


A vote was taken to approve an advisory non-binding vote to approve our employee
compensation plan  and policies.





For
              
              Against3,097,934
              
              28,700





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








Exhibit


Number                 Exhibit


14.0
              Code
      of Ethics


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


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




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


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








23





SIGNATURES











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











FIRST GUARANTY BANCSHARES, INC.


Date: August 13, 2010
              By:
              /s/ Alton
      B. LewisChief
      Executive Officer


Date: August 13, 2010
                By:
                /s/ Eric
      J. DoschEric
      J. DoschChief
      Financial OfficerSecretary
      and Treasurer