UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549











Form
10-Q











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


THE
SECURITIES EXCHANGE ACT OF 1934





For
the Quarter Ended September 30, 2008


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 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
October 31, 2008, the registrant had 5,559,644 shares of $1 par value common
stock which were issued and outstanding.


- 1 -




PART
I.  FINANCIAL INFORMATION




Item
1.  Consolidated Financial Statements





FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      BALANCE SHEETS(dollars
      in thousands, except share data)September
      30,
                                                                      
                                                                      
                                                                      December
      31,2008
                                                                      
                                                                      
                                                                      2007Assets
                                                                      
                                                                      (unaudited)Cash
      and cash equivalents:Cash
      and due from banks
                                                                      
                                                                      $
                                                                      19,726
                                                                      
                                                                      
                                                                      $
                                                                      22,778Interest-earning
      demand deposits with banks
                                                                      
                                                                      
                                                                      48,441
                                                                      
                                                                      
                                                                      
                                                                      30Federal
      funds sold
                                                                      
                                                                      
                                                                      584
                                                                      
                                                                      
                                                                      
                                                                      35,869Cash
      and cash equivalents
                                                                      
                                                                      
                                                                      68,751
                                                                      
                                                                      
                                                                      
                                                                      58,677Interest-earning
      time deposits with banks
                                                                      
                                                                      
                                                                      99
                                                                      
                                                                      
                                                                      
                                                                      2,188Investment
      securities:Available
      for sale, at fair value
                                                                      
                                                                      
                                                                      101,028
                                                                      
                                                                      
                                                                      
                                                                      105,570Held
      to maturity, at cost (estimated fair value of$33,157
      and $36,206, respectively)
                                                                      
                                                                      
                                                                      34,317
                                                                      
                                                                      
                                                                      
                                                                      36,498Investment
      securities
                                                                      
                                                                      
                                                                      135,345
                                                                      
                                                                      
                                                                      
                                                                      142,068Federal
      Home Loan Bank stock, at cost
                                                                      
                                                                      
                                                                      2,333
                                                                      
                                                                      
                                                                      
                                                                      955Loans
      held for sale
                                                                      
                                                                      
                                                                      380
                                                                      
                                                                      
                                                                      
                                                                      3,959Loans,
      net of unearned income
                                                                      
                                                                      
                                                                      605,399
                                                                      
                                                                      
                                                                      
                                                                      575,256Less:
      allowance for loan losses
                                                                      
                                                                      
                                                                      6,478
                                                                      
                                                                      
                                                                      
                                                                      6,193Net
      loans
                                                                      
                                                                      
                                                                      598,921
                                                                      
                                                                      
                                                                      
                                                                      569,063Premises
      and equipment, net
                                                                      
                                                                      
                                                                      15,799
                                                                      
                                                                      
                                                                      
                                                                      16,240Goodwill
                                                                      
                                                                      
                                                                      2,146
                                                                      
                                                                      
                                                                      
                                                                      1,911Intangible
      assets, net
                                                                      
                                                                      
                                                                      2,150
                                                                      
                                                                      
                                                                      
                                                                      2,383Other
      real estate, net
                                                                      
                                                                      
                                                                      664
                                                                      
                                                                      
                                                                      
                                                                      373Accrued
      interest receivable
                                                                      
                                                                      
                                                                      5,180
                                                                      
                                                                      
                                                                      
                                                                      5,126Other
      assets
                                                                      
                                                                      
                                                                      4,547
                                                                      
                                                                      
                                                                      
                                                                      4,388Total
      Assets
                                                                      
                                                                      $
                                                                      836,315
                                                                      
                                                                      
                                                                      $
                                                                      807,331Liabilities
      and Stockholders' EquityDeposits:Noninterest-bearing
      demand
                                                                      
                                                                      $
                                                                      116,641
                                                                      
                                                                      
                                                                      $
                                                                      120,740Interest-bearing
      demand
                                                                      
                                                                      
                                                                      204,247
                                                                      
                                                                      
                                                                      
                                                                      223,142Savings
                                                                      
                                                                      
                                                                      41,633
                                                                      
                                                                      
                                                                      
                                                                      45,044Time
                                                                      
                                                                      
                                                                      352,943
                                                                      
                                                                      
                                                                      
                                                                      334,168Total
      deposits
                                                                      
                                                                      
                                                                      715,464
                                                                      
                                                                      
                                                                      
                                                                      723,094Short-term
      borrowings
                                                                      
                                                                      
                                                                      41,321
                                                                      
                                                                      
                                                                      
                                                                      10,401Accrued
      interest payable
                                                                      
                                                                      
                                                                      2,953
                                                                      
                                                                      
                                                                      
                                                                      2,956Long-term
      borrowings
                                                                      
                                                                      
                                                                      10,000
                                                                      
                                                                      
                                                                      
                                                                      3,093Other
      liabilities
                                                                      
                                                                      
                                                                      2,270
                                                                      
                                                                      
                                                                      
                                                                      1,254Total
      Liabilities
                                                                      
                                                                      
                                                                      772,008
                                                                      
                                                                      
                                                                      
                                                                      740,798Stockholders'
      EquityCommon
      stock:$1
      par value - authorized 100,600,000 shares; issued andoutstanding
      5,559,644 shares
                                                                      
                                                                      
                                                                      5,560
                                                                      
                                                                      
                                                                      
                                                                      5,560Surplus
                                                                      
                                                                      
                                                                      26,459
                                                                      
                                                                      
                                                                      
                                                                      26,459Retained
      earnings
                                                                      
                                                                      
                                                                      35,802
                                                                      
                                                                      
                                                                      
                                                                      34,849Accumulated
      other comprehensive loss
                                                                      
                                                                      
                                                                      (3,514
                                                                      )
                                                                      
                                                                      
                                                                      (335
                                                                      )Total
      Stockholders' Equity
                                                                      
                                                                      
                                                                      64,307
                                                                      
                                                                      
                                                                      
                                                                      66,533Total
      Liabilities and Stockholders' Equity
                                                                      
                                                                      $
                                                                      836,315
                                                                      
                                                                      
                                                                      $
                                                                      807,331See
      Notes to Consolidated Financial Statements.
  - 2 -
  FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF INCOME (unaudited)(dollars
      in thousands, except per share data)Three
      Months
                                                                                                  
                                                                                                  
                                                                                                  Nine
      MonthsEnded
      September 30,
                                                                                                  
                                                                                                  
                                                                                                  Ended
      September 30,2008
                                                                                                  
                                                                                                  
                                                                                                  2007
                                                                                                  
                                                                                                  
                                                                                                  2008
                                                                                                  
                                                                                                  
                                                                                                  2007Interest
      Income:Loans
      (including fees)
                                                                                                  
                                                                                                  $
                                                                                                  10,105
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  12,459
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  31,104
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  34,115Loans
      held for sale
                                                                                                  
                                                                                                  
                                                                                                  2
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  196
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  37
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  267Deposits
      with other banks
                                                                                                  
                                                                                                  
                                                                                                  8
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  16
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  22
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  62Securities
      (including FHLB stock)
                                                                                                  
                                                                                                  
                                                                                                  1,695
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,092
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  4,635
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  6,565Federal
      funds sold
                                                                                                  
                                                                                                  
                                                                                                  20
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  25
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  378
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  273Total
      Interest Income
                                                                                                  
                                                                                                  
                                                                                                  11,830
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  14,788
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  36,176
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  41,282Interest
      Expense:Demand
      deposits
                                                                                                  
                                                                                                  
                                                                                                  664
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1,580
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,305
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  4,865Savings
      deposits
                                                                                                  
                                                                                                  
                                                                                                  48
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  66
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  150
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  171Time
      deposits
                                                                                                  
                                                                                                  
                                                                                                  2,782
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  3,538
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  9,249
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  9,758Borrowings
                                                                                                  
                                                                                                  
                                                                                                  134
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  495
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  345
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  970Total
      Interest Expense
                                                                                                  
                                                                                                  
                                                                                                  3,628
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  5,679
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  12,049
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  15,764Net
      Interest Income
                                                                                                  
                                                                                                  
                                                                                                  8,202
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  9,109
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  24,127
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  25,518Provision
      for loan losses
                                                                                                  
                                                                                                  
                                                                                                  407
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  71
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1,099
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  679Net
      Interest Income after Provision for Loan Losses
                                                                                                  
                                                                                                  
                                                                                                  7,795
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  9,038
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  23,028
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  24,839Noninterest
      Income:Service
      charges, commissions and fees
                                                                                                  
                                                                                                  
                                                                                                  1,034
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  962
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  3,009
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,797Net
      (losses) gains on sale of securities
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (180
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  3
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (408
                                                                                                  )Loss
      on securities impairment
                                                                                                  
                                                                                                  
                                                                                                  (4,611
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (4,611
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  -Net
      gains on sale of loans
                                                                                                  
                                                                                                  
                                                                                                  7
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  32
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  182
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  108Other
                                                                                                  
                                                                                                  
                                                                                                  392
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  256
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1,219
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  808Total
      Noninterest Income
                                                                                                  
                                                                                                  
                                                                                                  (3,178
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  1,070
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (198
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  3,305Noninterest
      Expense:Salaries
      and employee benefits
                                                                                                  
                                                                                                  
                                                                                                  2,700
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,483
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  7,878
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  7,073Occupancy
      and equipment expense
                                                                                                  
                                                                                                  
                                                                                                  743
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  672
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,173
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1,907Net
      cost from other real estate & repossessions
                                                                                                  
                                                                                                  
                                                                                                  116
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  175
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  200
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  599Other
                                                                                                  
                                                                                                  
                                                                                                  2,351
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,369
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  7,022
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  6,201Total
      Noninterest Expense
                                                                                                  
                                                                                                  
                                                                                                  5,909
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  5,699
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  17,273
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  15,780(Loss)
      Income Before Income Taxes
                                                                                                  
                                                                                                  
                                                                                                  (1,292
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  4,408
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  5,557
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  12,364(Benefit)
      Provision for income taxes
                                                                                                  
                                                                                                  
                                                                                                  (457
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  1,589
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1,935
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  4,329Net
      (Loss) Income
                                                                                                  
                                                                                                  $
                                                                                                  (835
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  2,819
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  3,622
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  8,035Per
      Common Share:Earnings
                                                                                                  
                                                                                                  $
                                                                                                  (0.15
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  0.51
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  0.65
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  1.45Cash
      dividends paid
                                                                                                  
                                                                                                  $
                                                                                                  0.16
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  0.16
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  0.48
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  0.47Average
      Common Shares Outstanding
                                                                                                  
                                                                                                  
                                                                                                  5,559,644
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  5,559,644
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  5,559,644
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  5,559,644See
      Notes to Consolidated Financial Statements
  - 3 -
  FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY(dollars
      in thousands, except per share data)AccumulatedCommon
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    OtherStock
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    Retained
                                                                                                    
                                                                                                    
                                                                                                    Comprehensive$1
      Par
                                                                                                    
                                                                                                    
                                                                                                    Surplus
                                                                                                    
                                                                                                    
                                                                                                    Earnings
                                                                                                    
                                                                                                    
                                                                                                    Loss
                                                                                                    
                                                                                                    
                                                                                                    TotalBalance
      December 31, 2006
                                                                                                    
                                                                                                    $
                                                                                                    5,560
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    26,459
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    28,089
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (905
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    59,203Net
      income
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    8,035
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    8,035Change
      in unrealized losson
      available for sale securities,net
      of reclassification adjustments and taxes
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    396
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    396Comprehensive
      income
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    8,431Cash
      dividends on common stock ($0.47 per share)
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (2,612
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (2,612
                                                                                                    )Balance
      September 30, 2007 (unaudited)
                                                                                                    
                                                                                                    $
                                                                                                    5,560
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    26,459
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    33,512
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (509
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    65,022Balance
      December 31, 2007
                                                                                                    
                                                                                                    $
                                                                                                    5,560
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    26,459
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    34,849
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (335
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    66,533Net
      income
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,622
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,622Change
      in unrealized losson
      available for sale securities,net
      of reclassification adjustments and taxes
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (3,179
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (3,179
                                                                                                    )Comprehensive
      income
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    443Cash
      dividends on common stock ($0.48 per share)
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (2,669
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (2,669
                                                                                                    )Balance
      September 30, 2008 (unaudited)
                                                                                                    
                                                                                                    $
                                                                                                    5,560
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    26,459
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    35,802
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (3,514
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    64,307See
      Notes to Consolidated Financial Statements
  - 4 -
  FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF CASH FLOWS (unaudited)(in
      thousands)Nine
      Months Ended September 30,2008
                                                                    
                                                                    
                                                                    2007Cash
      Flows From Operating ActivitiesNet
      income
                                                                    
                                                                    $
                                                                    3,622
                                                                    
                                                                    
                                                                    $
                                                                    8,035Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Provision
      for loan losses
                                                                    
                                                                    
                                                                    1,099
                                                                    
                                                                    
                                                                    
                                                                    679Depreciation
      and amortization
                                                                    
                                                                    
                                                                    1,109
                                                                    
                                                                    
                                                                    
                                                                    150Amortization
      of discount on investments
                                                                    
                                                                    
                                                                    (642
                                                                    )
                                                                    
                                                                    
                                                                    -(Gain)
      Loss on call / sale of securities
                                                                    
                                                                    
                                                                    (3
                                                                    )
                                                                    
                                                                    
                                                                    408Gain
      on sale of assets
                                                                    
                                                                    
                                                                    (182
                                                                    )
                                                                    
                                                                    
                                                                    (108
                                                                    )Other
      than temporary impairment charge on securities
                                                                    
                                                                    
                                                                    4,611
                                                                    
                                                                    
                                                                    
                                                                    -ORE
      writedowns and loss on disposition
                                                                    
                                                                    
                                                                    35
                                                                    
                                                                    
                                                                    
                                                                    410FHLB
      stock dividends
                                                                    
                                                                    
                                                                    (26
                                                                    )
                                                                    
                                                                    
                                                                    (98
                                                                    )Net
      decrease (increase) in loans held for sale
                                                                    
                                                                    
                                                                    3,579
                                                                    
                                                                    
                                                                    
                                                                    (599
                                                                    )Change
      in other assets and liabilities, net
                                                                    
                                                                    
                                                                    2,534
                                                                    
                                                                    
                                                                    
                                                                    (1,086
                                                                    )Net
      Cash Provided By Operating Activities
                                                                    
                                                                    
                                                                    15,736
                                                                    
                                                                    
                                                                    
                                                                    7,791Cash
      Flows From Investing ActivitiesProceeds
      from maturities and calls of HTM securities
                                                                    
                                                                    
                                                                    2,180
                                                                    
                                                                    
                                                                    
                                                                    395Proceeds
      from maturities, calls and sales of AFS securities
                                                                    
                                                                    
                                                                    625,460
                                                                    
                                                                    
                                                                    
                                                                    444,307Funds
      invested in AFS securities
                                                                    
                                                                    
                                                                    (629,698
                                                                    )
                                                                    
                                                                    
                                                                    (388,855
                                                                    )Proceeds
      from sale of Federal Home Loan Bank stock
                                                                    
                                                                    
                                                                    505
                                                                    
                                                                    
                                                                    
                                                                    1,755Funds
      invested in Federal Home Loan Bank stock
                                                                    
                                                                    
                                                                    (1,857
                                                                    )
                                                                    
                                                                    
                                                                    -Proceeds
      from maturities of time deposits with banks
                                                                    
                                                                    
                                                                    2,089
                                                                    
                                                                    
                                                                    
                                                                    -Net
      increase in loans
                                                                    
                                                                    
                                                                    (31,514
                                                                    )
                                                                    
                                                                    
                                                                    (41,264
                                                                    )Purchase
      of premises and equipment
                                                                    
                                                                    
                                                                    (446
                                                                    )
                                                                    
                                                                    
                                                                    (592
                                                                    )Proceeds
      from sales of other real estate owned
                                                                    
                                                                    
                                                                    232
                                                                    
                                                                    
                                                                    
                                                                    2,887Cash
      paid in excess of cash received in acquisition
                                                                    
                                                                    
                                                                    (84
                                                                    )
                                                                    
                                                                    
                                                                    (10,646
                                                                    )Net
      Cash (Used In) Provided By Investing Activities
                                                                    
                                                                    
                                                                    (33,133
                                                                    )
                                                                    
                                                                    
                                                                    7,987Cash
      Flows From Financing ActivitiesNet
      (decrease) increase in deposits
                                                                    
                                                                    
                                                                    (7,687
                                                                    )
                                                                    
                                                                    
                                                                    10,166Net
      increase in federal funds purchased and short-term
    borrowings
                                                                    
                                                                    
                                                                    30,920
                                                                    
                                                                    
                                                                    
                                                                    39,181Proceeds
      from long-term borrowings
                                                                    
                                                                    
                                                                    10,000
                                                                    
                                                                    
                                                                    
                                                                    -Repayment
      of long-term borrowings
                                                                    
                                                                    
                                                                    (3,093
                                                                    )
                                                                    
                                                                    
                                                                    (64,791
                                                                    )Dividends
      paid
                                                                    
                                                                    
                                                                    (2,669
                                                                    )
                                                                    
                                                                    
                                                                    (2,612
                                                                    )Net
      Cash Provided By (Used In) Financing Activities
                                                                    
                                                                    
                                                                    27,471
                                                                    
                                                                    
                                                                    
                                                                    (18,056
                                                                    )Net
      Decrease In Cash and Cash Equivalents
                                                                    
                                                                    
                                                                    10,074
                                                                    
                                                                    
                                                                    
                                                                    (2,278
                                                                    )Cash
      and Cash Equivalents at the Beginning of the Period
                                                                    
                                                                    
                                                                    58,677
                                                                    
                                                                    
                                                                    
                                                                    24,817Cash
      and Cash Equivalents at the End of the Period
                                                                    
                                                                    $
                                                                    68,751
                                                                    
                                                                    
                                                                    $
                                                                    22,539Noncash
      Activities:Loans
      transferred to foreclosed assets
                                                                    
                                                                    $
                                                                    557
                                                                    
                                                                    
                                                                    $
                                                                    978Cash
      Paid During The Period:Interest
      on deposits and borrowed funds
                                                                    
                                                                    $
                                                                    12,052
                                                                    
                                                                    
                                                                    $
                                                                    15,802Income
      taxes
                                                                    
                                                                    $
                                                                    1,200
                                                                    
                                                                    
                                                                    $
                                                                    4,400See
      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 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, 2007.


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 nine-month periods ended September 30,
2007 and 2008 are not necessarily indicative of the results expected for the
full year.


The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. Material
estimates that are susceptible to significant change in the near term are the
allowance for loan losses, valuation of goodwill, intangible assets and other
purchase accounting adjustments.





Note
2. Fair Value


Effective
January 1, 2008, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” for financial
assets and liabilities. SFAS 157 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. SFAS 157 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.


The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of September 30, 2008, segregated by the
level of the valuation inputs within the fair value hierarchy utilized to
measure fair value:




Fair
      Value Measurements atSeptember
      30, 2008, UsingQuotedPrices
      InActiveMarkets
                    SignificantAssets/Liabilities
                    
                    For
                    Other
                    SignificantMeasured
      at Fair
                    
                    Identical
                    Observable
                    UnobservableValue
                    
                    Assets
                    Inputs
                    Inputs(Dollars
      in millions)
                    September
      30, 2008
                    
                    (Level
      1)
                    (Level
      2)
                    (Level
      3)Securities
      available for sale
                    $                      101.0
                    
                    $               17.4
                    $               83.1
                    $                 0.5





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. Level 3 inputs were used for the September 30,
2008 market valuation on ALESCO and TRAPEZA asset backed securities. Cash flow
valuations were done on these securities to facilitate in the calculation of the
other than temporary impairment charge taken on securities in the third quarter
2008 (see Note 3).


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 $11.5 million at September 30,
2008. The fair value of impaired loans is measured by either the obtainable
market price (Level 1), the fair value of the collateral as determined by
appraisals or independent valuation (Level 2), or the present value of expected
future cash flows discounted at the effective interest rate of the loan (Level
3).





Certain
non-financial assets and non-financial liabilities are measured at fair value on
a non-recurring basis including assets and liabilities related to reporting
units measured at fair value in the testing of goodwill impairment, as well as
intangible assets and other non-financial long-lived assets measured at fair
value for impairment assessment. The Company will defer application of SFAS 157
for nonfinancial assets and nonfinancial liabilities until January 1,
2009.





Note
3. Securities Impairment


On
September 7, 2008 the U.S. Treasury and the Federal Housing Finance Agency
(FHFA) announced that Fannie Mae and Freddie Mac were being placed under
conservatorship and giving management control to their regulator, the FHFA. Key
provisions of the U.S. Government’s Plan announced to date are as
follows:





·
            Dividends
      on Fannie Mae and Freddie Mac common and preferred stock were
      eliminated.


·
            Fannie
      Mae and Freddie Mac will be required to reduce their mortgage portfolios
      over time.


·
            The
      U.S. Government agreed to provide equity capital to cover mortgage
      defaults in return for $1 billion of senior preferred stock in Fannie
      Mae and Freddie Mac and warrants for the purchase of 79.9% of the common
      stock of Fannie Mae and Freddie
Mac.


·
            The
      U.S. Government also announced that the U.S. Treasury would provide
      secured loans to Fannie Mae and Freddie Mac as needed until the end of
      2009 and that the U.S. Treasury plans to purchase mortgage backed
      securities from Fannie Mae and Freddie Mac in the open
    market.





At September 30, 2008, First Guaranty
Bank had three securities totaling $3,046,000, on a cost basis, of preferred
stock of Fannie Mae and Freddie Mac which had unrealized losses of $1,991,000
and $1,010,000, respectively, debt securities totaling $727,000 and $240,000
issued by Lehman Brothers and Washington Mutual which had unrealized losses of
$634,000 and $239,000, respectively.  The Bank also owns $510,000 and
$739,000 in asset backed securities issued by TRAPEZA and ALESCO (CDOs) which
had unrealized losses of $344,000 and $409,000, respectively.  The
impact of the above actions and concerns in the market place about the future
value of the preferred stock of Fannie Mae and Freddie Mac, as well as the
bankruptcy of Lehman Brothers, the acquisition of Washington Mutual by J.P.
Morgan and the material decrease in values in asset-backed securities due to the
lack of trading has made it unclear when and if the value of these investments
will improve in the future. Given the above developments, the Bank’s management
and Chairman of the Board of Directors met on October 14, 2008 to review the
most recent developments and concluded that the Bank’s investment in the
preferred stock, debt securities and asset-backed securities were other than
temporarily impaired. Following a full board review of the foregoing, on October
16, 2008, the Bank recorded a non-cash other-than-temporary impairment (“OTTI”)
on these investments for the quarter ending September 30,
2008.





The OTTI charges recorded for the
quarter ending September 30, 2008 totaled $4.6 million before tax, $3.0 million
after tax, and consisted of the following:




Number
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  Unrealized
      Loss
                                  
                                  
                                  
                                  
                                  
                                  EndingSecurity
      Name
                                  
                                  Owned
                                  
                                  Security
      Type
                                  
                                  Book
      Value
                                  
                                  
                                  Market
      Value
                                  
                                  
                                  at 09/30/08
                                  
                                  
                                  OTTI
      Charge
                                  
                                  
                                  Book
      ValueTRAPEZA
                                  
                                  
                                  2
                                  
                                  Asset-backed
                                  
                                  $
                                  510,065
                                  
                                  
                                  $
                                  165,727
                                  
                                  
                                  $
                                  (344,339
                                  )
                                  
                                  $
                                  337,933
                                  
                                  
                                  $
                                  172,132ALESCO
                                  
                                  
                                  3
                                  
                                  Asset-backed
                                  
                                  
                                  738,729
                                  
                                  
                                  
                                  329,882
                                  
                                  
                                  
                                  (408,848
                                  )
                                  
                                  
                                  399,445
                                  
                                  
                                  
                                  339,284FNMA
                                  
                                  
                                  2
                                  
                                  Preferred
      Stock
                                  
                                  
                                  2,019,840
                                  
                                  
                                  
                                  29,000
                                  
                                  
                                  
                                  (1,990,840
                                  )
                                  
                                  
                                  1,990,840
                                  
                                  
                                  
                                  29,000FHLMC
                                  
                                  
                                  1
                                  
                                  Preferred
      Stock
                                  
                                  
                                  1,026,313
                                  
                                  
                                  
                                  16,500
                                  
                                  
                                  
                                  (1,009,813
                                  )
                                  
                                  
                                  1,009,813
                                  
                                  
                                  
                                  16,500Lehman
      Brothers
                                  
                                  
                                  3
                                  
                                  Corporate
                                  
                                  
                                  727,371
                                  
                                  
                                  
                                  93,750
                                  
                                  
                                  
                                  (633,621
                                  )
                                  
                                  
                                  633,621
                                  
                                  
                                  
                                  93,750Washington
      Mutual
                                  
                                  
                                  1
                                  
                                  Corporate
                                  
                                  
                                  239,514
                                  
                                  
                                  
                                  300
                                  
                                  
                                  
                                  (239,214
                                  )
                                  
                                  
                                  239,214
                                  
                                  
                                  
                                  300TOTAL
                                  
                                  
                                  12
                                  
                                  
                                  
                                  $
                                  5,261,832
                                  
                                  
                                  $
                                  635,158
                                  
                                  
                                  $
                                  (4,626,674
                                  )
                                  
                                  $
                                  4,610,866
                                  
                                  
                                  $
                                  650,966





Note
4. Loans and Allowance for Loan Losses


Loans, net of unearned income, totaled
$605.4 million at September 30, 2008 and $575.3 million at December 31,
2007.  The Company also held $0.4 million and $4.0 million in loans
held for sale at September 30, 2008 and December 31, 2007,
respectively.  The loan portfolio is the largest component of assets
with total loans accounting for 72.4% and 71.3% of total assets as of September
30, 2008 and December 31, 2007, respectively.  The loan portfolio
consists solely of domestic loans.




- 6 -


Total
loans at September 30, 2008 (unaudited) and December 31, 2007 were as
follows:


September
      30,
                                                  
                                                  
                                                  December
      31,2008
                                                  
                                                  
                                                  2007As
      % of
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  As
      % ofBalance
                                                  
                                                  
                                                  Category
                                                  
                                                  
                                                  Balance
                                                  
                                                  
                                                  Category(dollars
      in thousands)Real
      estateConstruction
      & land development
                                                  
                                                  $
                                                  85,155
                                                  
                                                  
                                                  
                                                  14.1
                                                  %
                                                  
                                                  $
                                                  98,127
                                                  
                                                  
                                                  
                                                  17.0
                                                  %Farmland
                                                  
                                                  
                                                  13,783
                                                  
                                                  
                                                  
                                                  2.3
                                                  %
                                                  
                                                  
                                                  23,065
                                                  
                                                  
                                                  
                                                  4.0
                                                  %1-4
      Family
                                                  
                                                  
                                                  84,526
                                                  
                                                  
                                                  
                                                  13.9
                                                  %
                                                  
                                                  
                                                  84,640
                                                  
                                                  
                                                  
                                                  14.7
                                                  %Multifamily
                                                  
                                                  
                                                  15,831
                                                  
                                                  
                                                  
                                                  2.6
                                                  %
                                                  
                                                  
                                                  13,061
                                                  
                                                  
                                                  
                                                  2.3
                                                  %Non-farm
      non-residential
                                                  
                                                  
                                                  267,542
                                                  
                                                  
                                                  
                                                  44.1
                                                  %
                                                  
                                                  
                                                  236,474
                                                  
                                                  
                                                  
                                                  41.1
                                                  %Total
      real estate
                                                  
                                                  
                                                  466,837
                                                  
                                                  
                                                  
                                                  77.0
                                                  %
                                                  
                                                  
                                                  455,367
                                                  
                                                  
                                                  
                                                  79.1
                                                  %Agricultural
                                                  
                                                  
                                                  23,859
                                                  
                                                  
                                                  
                                                  3.9
                                                  %
                                                  
                                                  
                                                  16,816
                                                  
                                                  
                                                  
                                                  2.9
                                                  %Commercial
      and industrial
                                                  
                                                  
                                                  95,940
                                                  
                                                  
                                                  
                                                  15.8
                                                  %
                                                  
                                                  
                                                  81,073
                                                  
                                                  
                                                  
                                                  14.1
                                                  %Consumer
      and other
                                                  
                                                  
                                                  19,430
                                                  
                                                  
                                                  
                                                  3.2
                                                  %
                                                  
                                                  
                                                  22,517
                                                  
                                                  
                                                  
                                                  3.9
                                                  %Total
      loans before unearned income
                                                  
                                                  
                                                  606,066
                                                  
                                                  
                                                  
                                                  100.0
                                                  %
                                                  
                                                  
                                                  575,773
                                                  
                                                  
                                                  
                                                  100.0
                                                  %Less:
      unearned income
                                                  
                                                  
                                                  (667
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (517
                                                  )Total
      loans after unearned income
                                                  
                                                  $
                                                  605,399
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  575,256




The following table sets forth the
maturity distribution of the loan portfolio and the allocation of fixed and
floating rate loans at September 30, 2008:


September
      30, 2008Fixed
                                                                                    
                                                                                    
                                                                                    Floating
                                                                                    
                                                                                    
                                                                                    Total(in
      thousands)One
      year or less
                                                                                    
                                                                                    $
                                                                                    103,039
                                                                                    
                                                                                    
                                                                                    $
                                                                                    301,974
                                                                                    
                                                                                    
                                                                                    $
                                                                                    405,013One
      to five years
                                                                                    
                                                                                    
                                                                                    107,943
                                                                                    
                                                                                    
                                                                                    
                                                                                    32,947
                                                                                    
                                                                                    
                                                                                    
                                                                                    140,890Five
      to 15 years
                                                                                    
                                                                                    
                                                                                    33,894
                                                                                    
                                                                                    
                                                                                    
                                                                                    658
                                                                                    
                                                                                    
                                                                                    
                                                                                    34,552Over
      15 years
                                                                                    
                                                                                    
                                                                                    14,158
                                                                                    
                                                                                    
                                                                                    
                                                                                    328
                                                                                    
                                                                                    
                                                                                    
                                                                                    14,486Subtotal
                                                                                    
                                                                                    
                                                                                    259,034
                                                                                    
                                                                                    
                                                                                    
                                                                                    335,907
                                                                                    
                                                                                    
                                                                                    
                                                                                    594,941Nonaccrual
      loans
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    10,458Total
      loans after unearned income
                                                                                    
                                                                                    $
                                                                                    259,034
                                                                                    
                                                                                    
                                                                                    $
                                                                                    335,907
                                                                                    
                                                                                    
                                                                                    $
                                                                                    605,399





In the third quarter of 2008, the
Company began using new risk categories in the calculation of the allowance for
loan losses. Management evaluated the loan loss risk methodology and revised the
allowance calculation to include additional risk codes to further divide the
loan portfolio into more specific risk pools. During the third quarter 2008, the
revisions to the allowance for loan losses calculation did not have a material
impact on the allowance. The calculation has continued to include historical
trends and current economic factors.  The allowance for loan losses
totaled $6.5 million or 1.07% of total loans at September 30, 2008 and $6.2
million or 1.08% of total loans at December 31, 2007.


Changes in the allowance for loan
losses for the nine months ended September 30, 2008 (unaudited) and the year
ended December 31, 2007 are as follows:




September
      30,
                          
                          
                          December
      31,2008
                          
                          
                          2007(in
      thousands)Balance
      beginning of period
                          
                          $
                          6,193
                          
                          
                          $
                          6,675Additional
      provision from acquisition
                          
                          
                          -
                          
                          
                          
                          325Provision
      charged to expense
                          
                          
                          1,099
                          
                          
                          
                          1,918Loans
      charged off
                          
                          
                          (991
                          )
                          
                          
                          (3,885
                          )Recoveries
                          
                          
                          177
                          
                          
                          
                          1,160Allowance
      for loan losses
                          
                          $
                          6,478
                          
                          
                          $
                          6,193
  - 7 -


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


Nine
      Months EndedSeptember
      30,
                            
                            
                            September
      30,2008
                            
                            
                            2007(in
      thousands)Balance
      at beginning of period
                            
                            $
                            6,193
                            
                            
                            $
                            6,675Charge-offs:Real
      estate loans:Construction
      and land development
                            
                            
                            (166
                            )
                            
                            
                            (387
                            )Farmland
                            
                            
                            (10
                            )
                            
                            
                            -One-
      to four- family residential
                            
                            
                            (151
                            )
                            
                            
                            (123
                            )Non-farm
      non-residential
                            
                            
                            (26
                            )
                            
                            
                            (750
                            )Commercial
      and industrial loans
                            
                            
                            (357
                            )
                            
                            
                            (228
                            )Consumer
      and other
                            
                            
                            (281
                            )
                            
                            
                            (405
                            )Total
      charge-offs
                            
                            
                            (991
                            )
                            
                            
                            (1,893
                            )Recoveries:Real
      estate loans:Construction
      and land development
                            
                            
                            1
                            
                            
                            
                            786Farmland
                            
                            
                            -
                            
                            
                            
                            14One-
      to four- family residential
                            
                            
                            4
                            
                            
                            
                            13Non-farm
      non-residential
                            
                            
                            -
                            
                            
                            
                            5Commercial
      and industrial loans
                            
                            
                            16
                            
                            
                            
                            124Consumer
      and other
                            
                            
                            156
                            
                            
                            
                            150Total
      recoveries
                            
                            
                            177
                            
                            
                            
                            1,092Net
      charge-offs
                            
                            
                            (814
                            )
                            
                            
                            (801
                            )Provision
      for loan losses
                            
                            
                            1,099
                            
                            
                            
                            679Additional
      provision from acquisition
                            
                            
                            -
                            
                            
                            
                            325Balance
      at end of period
                            
                            $
                            6,478
                            
                            
                            $
                            6,878




In July 2007, the Company signed
a Final Release and Settlement Agreement with BankInsurance, Inc., the Company’s
insurance company, for a claim made by the Company under the Financial
Institution Bond. Under this Release and Agreement, the Company received $1.1
million as a settlement for mortgage loan irregularities discovered in 2005.
After attorney fees and expenses, the Company recorded a loan recovery totaling
$731,000 in July 2007. This transaction also resulted in a reversal of the
provision totaling $300,000 also recorded in July 2007.




Note
5. Goodwill and Other Intangible Assets
 The Company accounts for goodwill
and intangible assets in accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets”. Under SFAS No. 142, goodwill and intangible assets deemed to
have indefinite lives are no longer amortized, but are subject to annual
impairment tests in accordance with the provision of SFAS No. 142. Other
intangible assets continue to be amortized over their useful lives. Goodwill for
the quarter ended September 30, 2008 was $2.1 million compared to $1.9 million
at December 31, 2007.


Mortgage
servicing rights totaled $24,000 at September 30, 2008. Other intangible assets
recorded include core deposit intangibles, which are subject to amortization.
The core deposits reflect the value of deposit relationships, including the
beneficial rates, which arose from the purchase of other financial institutions
and the purchase of various banking center locations from one single financial
institution.




- 8 -


The
following table summarizes the Company’s purchased accounting intangible assets
subject to amortization.




As
      of September 30, 2008
                                                    
                                                    
                                                    As
      of December 31, 2007Gross
      Carrying
                                                    
                                                    
                                                    Accumulated
                                                    
                                                    
                                                    Net
      Carrying
                                                    
                                                    
                                                    Gross
      Carrying
                                                    
                                                    
                                                    Accumulated
                                                    
                                                    
                                                    Net
      CarryingAmount
                                                    
                                                    
                                                    Amortization
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    Amortization
                                                    
                                                    
                                                    Amount(in
      thousands, unaudited)Core
      deposit intangibles
                                                    
                                                    $
                                                    7,997
                                                    
                                                    
                                                    $
                                                    5,871
                                                    
                                                    
                                                    $
                                                    2,126
                                                    
                                                    
                                                    $
                                                    7,997
                                                    
                                                    
                                                    $
                                                    5,638
                                                    
                                                    
                                                    $
                                                    2,359Mortgage
      servicing rights
                                                    
                                                    
                                                    24
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    24
                                                    
                                                    
                                                    
                                                    24
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    24Total
                                                    
                                                    $
                                                    8,021
                                                    
                                                    
                                                    $
                                                    5,871
                                                    
                                                    
                                                    $
                                                    2,150
                                                    
                                                    
                                                    $
                                                    8,021
                                                    
                                                    
                                                    $
                                                    5,638
                                                    
                                                    
                                                    $
                                                    2,383





Note
6.  Subordinated Debentures


In July 2008, the Company requested
regulatory approval for the redemption of the junior subordinated debentures. As
a condition of the approval of the redemption, the Federal Reserve Bank of
Atlanta requested, until further notice, that the Company obtain prior written
approval before incurring any indebtedness, declaring or paying any corporate
dividends or redeeming any corporate stock. Also, the Louisiana Office of
Financial Institutions requested that the Bank obtain prior approval before
paying any dividends until compliant with LSA-R.S. 6:263(C).


On August 8, 2008, $3.1 million in
junior subordinated debentures were redeemed. These debentures were issued in
August 2003 for a 30 year period, callable after 5 years, at a rate of LIBOR
plus 300 basis points. In 2007, the Company assumed the $3.1 million in
subordinated debentures in the Homestead Bancorp, Inc. acquisition. The Company
repaid the debt with $1.0 million in cash and borrowed the remaining amount by
drawing on its line of credit at a rate of prime less 100 basis points. The
balance of the debt on September 30, 2008 was $1.5 million and the Company
anticipates repaying the debt by December 31, 2008.





Note
7. Income Taxes


On
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes(“FIN48”).  FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes,
and prescribes a recognition threshold and measurement attribute for the
consolidated financial statements recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Company does not believe it
has any unrecognized tax benefits included in its consolidated financial
statements. The Company has not had any settlements in the current period with
taxing authorities, nor has it recognized tax benefits as a result of a lapse of
the applicable statute of limitations.


The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits in noninterest expense. During the quarters ended September 30, 2008
and 2007, the Company has not recognized any interest or penalties in its
consolidated financial statements, nor has it recorded an accrued liability for
interest or penalty payments.


At this
time, no tax years are under examination. With few exceptions, the Company is no
longer subject to U.S. federal, state or local income tax examinations for years
before 2004.





Note
8.  Merger and Acquisition Activity


On July 16, 2008, First Community
Holding Company (“First Community”) advised First Guaranty Bancshares, Inc. (the
“Company”) that it was terminating the Agreement and Plan of Reorganization (the
“Agreement”) by and between the Company and First Community pursuant to section
6.1(c) of the Agreement which requires that the merger be completed by July 16,
2008.  As of July 16, 2008, the Company had not received regulatory
approval to complete the merger.  No termination penalties or fees
were incurred.  All of the associated costs with the merger were
expensed in the third quarter 2008 and totaled $114,000.





Note
9.  Recent Accounting Pronouncements


In October 2008, the Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position (FSP) 157-3,
Determining the Fair Value of
a Financial Asset in a Market That is Not Active, which clarifies the
application of Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements, in
an inactive market. Application issues clarified include: how management’s
internal assumptions should be considered when measuring fair value when
relevant observable data do not exist; how observable market information in a
market that is not active should be considered when measuring fair value; and
how the use of market quotes should be considered when assessing the relevance
of observable and unobservable data available to measure fair value. FSP 157-3
is effective immediately and resulted in a material impact on the Company’s
financial condition or results of operations for the third quarter 2008 (see
Note 3).


In June 2008, the FASB ratified EITF
Issue No. 08-3, Accounting for Lessees for
Maintenance Deposits Under Lease Arrangements, (EITF 08-3). EITF 08-3
provides guidance for accounting of nonrefundable maintenance deposits. EITF
08-3 is effective for fiscal years beginning after December 15, 2008. We
anticipate the adoption of EITF 08-3 will not have a significant impact to the
Company’s financial condition or results of operations.


In May 2008, the FASB issued SFAS
No. 162, The Hierarchy of
Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements that are
presented in conformity with generally accepted accounting principles in
the United States. This Statement is effective 60 days following the Securities
and Exchange Commission’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. We anticipate
the adoption of SFAS 162 will not have a significant impact to the Company’s
financial condition or results of operations.




- 9 -


In
May 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-a, Accounting for Convertible
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). The FSP requires that proceeds from the issuance of
convertible debt instruments be allocated between debt (at a discount) and an
equity component. The debt discount will be amortized over the period the
convertible debt is expected to be outstanding as additional non-cash interest
expense. This FSP is effective for fiscal years beginning after
December 15, 2008, and will be applied retrospectively to prior periods. We
anticipate the adoption of  APB 14-a will not have a significant
impact to the Company’s financial condition or results of
operations.


In April 2008, the FASB issued FASB
Staff Position (FSP) 142-3,
Determination of the Useful Life of Intangible Assets, (FSP 142-3). FSP
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. FSP 142-3 is effective for fiscal years beginning after
December 15, 2008. We anticipate the adoption of FSP 142-3 will not have a
significant impact to the Company’s financial condition or results of
operations.


In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133. This Statement changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. This Statement encourages, but does
not require, comparative disclosures for earlier periods at initial adoption. We
anticipate the adoption of SFAS No. 161 will not have a significant impact to
the Company’s financial condition or results of operations.


In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS 160, Non-controlling
Interests in Consolidated Financial Statements, an Amendment of ARB 51.
SFAS 160 establishes new accounting and reporting standards for
non-controlling interests in a subsidiary. SFAS 160 will require entities
to classify non-controlling interests as a component of stockholders’ equity and
will require subsequent changes in ownership interests in a subsidiary to be
accounted for as an equity transaction. SFAS 160 will also require entities
to recognize a gain or loss upon the loss of control of a subsidiary and to
re-measure any ownership interest retained at fair value on that date. This
statement also requires expanded disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. SFAS 160 is effective on a prospective basis for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008, except for the presentation and disclosure
requirements, which are required to be applied retrospectively. We anticipate
the adoption of SFAS No. 160 will not have a significant impact to the Company’s
financial condition or results of operations


In
December 2007, FASB issued SFAS No. 141R, Business Combinations (“SFAS
No. 141R”) which applies to all business combinations. The statement requires
most identifiable assets, liabilities, non-controlling interests, and goodwill
acquired in a business combination to be recorded at “full fair value.” All
business combinations will be accounted for by applying the acquisition method
(previously referred to as the purchase method). Companies will have to identify
the acquirer; determine the acquisition date and purchase price; recognize at
their acquisition-date fair values the identifiable assets acquired, liabilities
assumed, and any non-controlling interests in the acquiree, and recognize
goodwill or, in the case of a bargain purchase, a gain. SFAS No. 141R is
effective for periods beginning on or after December 15, 2008, and early
adoption is prohibited. It will be applied to business combinations occurring
after the effective date. We anticipate the adoption of SFAS No. 141R will not
have a significant impact to the Company’s financial condition or results of
operations.


In
November 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at
Fair Value Through Earnings (“SAB No. 109”). SAB No. 109 rescinds SAB No.
105’s prohibition on inclusion of expected net future cash flows related to loan
servicing activities in the fair value measurement of a written loan commitment.
SAB No. 109 applies to any loan commitments for which fair value accounting is
elected under SFAS No. 159. SAB No. 109 is effective prospectively for
derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007. We anticipate the adoption of SAB No. 109 will not
have a significant impact to the Company’s financial condition or results of
operations.




Note
10. Subsequent Events
 The
Company will conduct its annual impairment test of goodwill as of October 1,
2008.  Impairment charges, if any, will be recorded on or before
December 31, 2008.


- 10 -




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




The following management discussion and
analysis is intended to highlight the significant factors affecting the
Company's financial condition and results of operations presented in the
consolidated financial statements included in this Form 10-Q. This discussion is
designed to provide readers with a more comprehensive view of the operating
results and financial position than would be obtained from reading the
consolidated financial statements alone. Reference should be made to those
statements for an understanding of the following review and analysis. The
financial data for the three and  nine months ended September 30, 2008
and 2007 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, which could
cause our actual results and experience to differ from the anticipated results
and expectations, expressed in such forward-looking statements.





Third
Quarter Overview


Financial highlights for the third
quarter of 2008 are as follows:




·
            For
      the third quarter of 2008, the Company had a net loss totaling $0.8
      million with year-to-date income totaling $3.6 million.  The
      loss recorded for the third quarter 2008 was a result of a $4.6 million,
      $3.0 million net of tax, other than temporary impairment (“OTTI”) charge
      recorded on the securities portfolio. Net income for the third quarter
      2008 excluding the OTTI charge would have been $2.2
      million.  The Company had net income of $2.8 million for the
      third quarter 2007 with year–to-date net income in 2007 totaling $8.0
      million.


·
            Net
      interest income for the third quarter of 2008 and 2007 was $8.2 million
      and $9.1 million, respectively. The net interest margin was 4.3% for the
      third quarter 2008 and 4.8% for the third quarter
  2007.


·
            The
      provision for loan losses for the third quarter of 2008 was $0.4 million
      compared to $0.1 million for the third quarter of
  2007.


·
            Noninterest
      income for the third quarter of 2008 reflects a loss of $3.2 million
      compared with $1.0 million in noninterest income for the same period in
      2007. This loss reflected a $4.6 million other than temporary impairment
      charge taken on securities in the third quarter
  2008.


·
            Noninterest
      expense for the third quarter of 2008 was $5.9 million, an increase of
      $0.2 million when compared to the third quarter of 2007. The largest
      increases in noninterest expense were in salaries and employee benefits
      and occupancy and equipment expense when comparing third quarter 2008 to
      third quarter 2007. The increase in salaries resulted from the additional
      key management personnel including an Internal Audit Manager and a Chief
      Credit Officer. The increase in employee benefits resulted from a $50,000
      contribution to the employee stock ownership plan. The increase in
      occupancy expense resulted from an increase in the cost of utilities and
      an increase in depreciation.


·
            Total
      assets as of September 30, 2008 were $836.3 million, an increase of $29.0
      million or 3.6% when compared to $807.3 million at December 31, 2007 with
      the largest increases in cash and cash equivalents and loans, partially
      offset with decreases in interest-earning time deposits with banks and
      investment securities.


·
            Cash
      and cash equivalents totaled $68.8 million at September 30, 2008, an
      increase of $10.1 million when compared to $58.7 million at December 31,
      2007. Interest-earning demand deposits with banks increased $48.4 million
      due primarily to a quarter end test on our line of credit at Federal Home
      Loan Bank of $35.0 million, which we deposited in our interest-earning
      checking account at the Federal Home Loan Bank.  Cash and due
      from banks decreased $3.0 million and federal funds sold decreased $35.3
      million.


·
            Investment
      securities totaled $135.3 million at September 30, 2008, a decrease of
      $6.7 million when compared to $142.1 million at December 31, 2007. At
      September 30, 2008, available for sale securities, at fair value totaled
      $101.0 million, a decrease of $4.5 million when compared to December 31,
      2007. Held to maturity securities, at cost totaled $34.3 million, a
      decrease of $2.2 million when compared to $36.5 million at December 31,
      2007.


·
            The
      net loan portfolio at September 30, 2008 totaled $598.9 million, an
      increase of $29.9 million or 5.2% from the December 31, 2007 level of
      $569.1 million. Net loans reflect a reduction for the allowance for loan
      losses which totaled $6.5 million for September 30, 2008 and $6.2 million
      for December 31, 2007.


·
            Non-performing
      assets ended at $11.2 million at September 30, 2008, a decrease of $34,000
      when compared to December 31, 2007.


·
            Total
      deposits decreased $7.6 million or 1.1% in 2008 when compared to December
      31, 2007. Individual and business deposits decreased by $9.5 million and
      deposits from public fund deposits increased by $1.9
    million.




- 11 -




·
            At
      September 30, 2008, short-term borrowings were $41.3 million and consisted
      of $35.0 million in federal funds purchased, $4.8 million in repurchase
      agreements and $1.5 million in other short-term borrowings. Long-term
      borrowings were $10.0 million at September 30, 2008 reflecting an increase
      of $6.9 million from December 31, 2007. The change in long-term borrowings
      in 2008 resulted from a new $10.0 million FHLB advance partially offset by
      redeeming $3.1 million in trust preferred
debt.


·
            Stockholders’
      equity ended at $64.3 million at September 30, 2008, a decrease of $2.2
      million when compared to December 31, 2007. The decrease in equity
      resulted from the change in accumulated other comprehensive income of $3.2
      million and dividends paid on common stock totaling $2.7 million,
      partially offset by net income of $3.6
million.


·
            As
      of September 30, 2008, the year-to-date return on average assets (“ROAA”)
      and return on average equity (“ROAE”) were 0.61% and 7.04% respectively,
      or 1.12% and 12.88% excluding the OTTI charge on securities taken in third
      quarter 2008. The year-to-date ROAA and ROAE were 1.45% and 17.01% for the
      same period in 2007. The ROAA and ROAE for the third quarter 2008 were
      -0.42% and -4.82% respectively, or 1.09% and 12.52% excluding the OTTI
      charge, compared to 1.45% and 17.00% for the third quarter
      2007.


·
            The
      Company’s Board of Directors declared cash dividends of $0.16 per common
      share in each of the first three quarters in 2008, a 2.2% increase
      compared to the same period in
2007.





Financial
Condition





Changes
in Financial Condition from December 31, 2007 to September 30, 2008





General. Total assets as of
September 30, 2008 were $836.3 million, an increase of $29.0 million or 3.6%
when compared to $807.3 million at December 31, 2007. The increase in assets
resulted from increases in cash and cash equivalents and loans, with decreases
in interest-earning time deposits with banks and investment securities. Other
assets also slightly increased in 2008.





Cash and Cash
Equivalents.Cash
and cash equivalents at September 30, 2008 totaled $68.8 million, an increase of
$10.1 million when compared to $58.7 million at December 31, 2007. Cash and due
from banks decreased $3.1 million, interest-earning demand deposits with banks
increased $48.4 million and federal funds sold decreased $35.3
million.  At September 30, 2008, the Company tested its line of credit
with Federal Home Loan Bank for $35.0 million and deposited the funds into an
interest-earning demand deposit. The increase in interest-earning demand
deposits and the decrease in federal funds sold both resulted from a higher
interest rate earned on interest-earning demand deposits than the interest
earned on federal funds sold at September 30, 2008.





Investment
Securities.Investment securities at September 30, 2008
totaled $135.3 million, a decrease of $6.7 million when compared to $142.1
million at December 31, 2007.  The net change in securities was
primarily a result of the Company redeploying investment maturities into loans
which currently provide higher yields than investment securities.


The
securities portfolio consisted principally of U.S. Government agency securities,
mortgage-backed obligations, asset-backed securities, corporate debt securities
and mutual funds or other equity securities. The securities portfolio provides
us with a relatively stable source of income and provides a balance to interest
rate and credit risks as compared to other categories of assets.


At
September 30, 2008, $35.4 million or 25.7% of securities (including Federal Home
Loan Bank of Dallas stock) and mutual funds and other equity securities were
scheduled to mature in less than one year. This includes $18.0 million in
discount notes that are being used solely for pledging purposes. When excluding
these securities, only 1.3% of securities mature in less than one year.
Securities with maturity dates over 15 years totaled 7.24% of the total
portfolio. The average maturity of the securities portfolio was 8.3
years.


At
September 30, 2008, securities totaling $101.0 million were classified as
available for sale and $34.3 million were classified as held to maturity,
compared to $105.6 million classified as available for sale and $36.5 million
classified as held to maturity at December 31, 2007.  Management
periodically assesses the quality of our investment holdings using procedures
similar to those used in assessing the credit risks inherent in the loan
portfolio. At September 30, 2008, management concluded that a $4.6 million
before tax other than temporary impairment charge was needed for securities that
had an amortized cost greater than their recoverable value (see Note
3).


Average
securities as a percentage of average interest-earning assets were 16.7% for the
nine-month period ended September 30, 2008 and 23.0% for the same period in
2007. Most securities held at September 30, 2008 qualified as securities
pledgeable to collateralize repurchase agreements and public funds.Securities
pledged at September 30, 2008 totaled $73.9 million.





Mortgage Loans
Held forSale. Loans held for sale
decreased $3.6 million to $0.4 million at September 30, 2008 compared to $4.0
million at December 31, 2007.





Loans.The
origination of loans is our primary use of our financial resources and
represents the largest component of earning assets. Total loans accounted for
72.4% of total assets at September 30, 2008, compared to 71.3% of total assets
at December 31, 2007. There are no significant concentrations of credit to any
borrower or industry. As of September 30, 2008, 67.9% of our loan portfolio was
secured primarily or secondarily by real estate. The largest portion of our loan
portfolio is non-farm non-residential loans secured by real estate, which
accounts for 44.2% of our total portfolio.




- 12 -




Our net loan portfolio at
September 30, 2008 totaled $598.9 million, an increase of approximately $29.8
million from the December 31, 2007 level of $569.1 million. The increase in net
loans includes $28.4 million in assignments purchased on non-real estate
commercial and industrial loans and $1.7 million in loans made in-house, net of
paydowns. The loan assignments purchased meet the same underwriting criteria
used when making in-house loans. Net loans include the reduction for the
allowance for loan losses which totaled $6.5 million at September 30, 2008 and
$6.2 at December 31, 2007. Fixed rate loans increased from $223.0 million or
38.8% of the total loan portfolio at December 31, 2007 to $259.0 million, or
42.8% of the total loan portfolio at September 30, 2008. Loan charge-offs
totaled $1.0 million during the first nine months of 2008, compared to $1.9
during the same period of 2007.  Recoveries totaled $0.2
million and $1.1 million during the first nine months of 2008 and 2007,
respectively.





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.


Nonperforming
assets totaled $11.2 million or 1.3% of total assets at September 30, 2008, a
decrease of $34,000 from December 31, 2007.  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.




- 13 -




The table below sets forth the
amounts and categories of our non-performing assets at September 30, 2008
(unaudited) and December 31, 2007.




September
      30,
                                
                                
                                December
      31,2008
                                
                                
                                2007(in
      thousands)Non-accrual
      loans:Real
      estate loans:Construction
      and land development
                                
                                $
                                2,253
                                
                                
                                $
                                1,841Farmland
                                
                                
                                182
                                
                                
                                
                                419One-
      to four- family residential
                                
                                
                                1,621
                                
                                
                                
                                1,819Multifamily
                                
                                
                                -
                                
                                
                                
                                2Non-farm
      non-residential
                                
                                
                                5,669
                                
                                
                                
                                4,950Non-real
      estate loans:Commercial
      and industrial
                                
                                
                                453
                                
                                
                                
                                978Consumer
      and other
                                
                                
                                280
                                
                                
                                
                                279Total
      non-accrual loans
                                
                                
                                10,458
                                
                                
                                
                                10,288Loans
      90 days and greater delinquentand
      still accruing:Real
      estate loans:One-
      to four- family residential
                                
                                
                                49
                                
                                
                                
                                544Non-real
      estate loans:Consumer
      and other
                                
                                
                                3
                                
                                
                                
                                3Total
      loans 90 days greaterdelinquent
      and still accruing
                                
                                
                                52
                                
                                
                                
                                547Restructured
      loans
                                
                                
                                -
                                
                                
                                
                                -Total
      non-performing loans
                                
                                
                                10,510
                                
                                
                                
                                10,835Real
      estate owned:Real
      estate loans:Construction
      and land development
                                
                                
                                188
                                
                                
                                
                                84One-
      to four- family residential
                                
                                
                                105
                                
                                
                                
                                170Non-farm
      non-residential
                                
                                
                                371
                                
                                
                                
                                119Total
      real estate owned
                                
                                
                                664
                                
                                
                                
                                373Total
      non-performing assets
                                
                                $
                                11,174
                                
                                
                                $
                                11,208





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.





- 14 -


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. In the third quarter
of 2008, the Company began using new risk categories in the calculation of the
allowance for loan losses. The calculation has continued to include historical
trends and current economic factors.


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


Provisions made pursuant to these
processes totaled $1.1 million in the first nine months of 2008 as compared to
$0.7 million for the same period in 2007. Provisions are necessary to maintain
the allowance at an adequate level based on loan risk factors and the levels of
net loan charge-offs. The provisions made in the first nine months of 2008
were taken to provide for current loan losses and to maintain the allowance at
an adequate level commensurate with Management’s evaluation of the risks
inherent in the loan portfolio. Total charge-offs were $1.0 million for first
nine months of 2008 as compared to total charge-offs of $1.9 million for the
same period in 2007. Recoveries were $0.2 million for the first nine months of
2008 as compared to recoveries of $1.1 million for the same period in
2007.


The allowance at September 30, 2008 was
$6.5 million or 1.1% of total loans and 58.0% of nonperforming assets.
Management believes that the current level of the allowance is adequate to cover
losses in the loan portfolio given the current economic conditions, expected net
charge-offs and nonperforming asset levels.


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


September
      30,2008
                              
                              
                              2007(in
      thousands, unaudited)Loans:Average
      outstanding balance
                              
                              $
                              600,256
                              
                              
                              $
                              535,181Balance
      at end of period
                              
                              $
                              605,399
                              
                              
                              
                              587,478Allowance
      for Loan Losses:Balance
      at beginning of year
                              
                              $
                              6,193
                              
                              
                              $
                              6,675Provision
      charged to expense
                              
                              
                              1,099
                              
                              
                              
                              679Provision
      from acquisition
                              
                              
                              -
                              
                              
                              
                              325Loans
      charged off
                              
                              
                              (991
                              )
                              
                              
                              (1,893
                              )Recoveries
                              
                              
                              177
                              
                              
                              
                              1,092Balance
      at end of period
                              
                              $
                              6,478
                              
                              
                              $
                              6,878





Deposits.Managing
the mix and pricing the maturities of deposit liabilities is an important factor
that affects our ability to maximize the 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, 2007 to September 30, 2008, total
deposits decreased $7.6 million, or 1.1%, to $715.5 million at September 30,
2008 from $723.1 million at December 31, 2007. Noninterest-bearing demand
deposits decreased by $4.1 million and interest-bearing deposits decreased by
$3.5 million. The decrease in interest-bearing deposits are from a decrease of
$2.3 million in business deposits, $3.5 million in consumer deposits and an
increase of $2.2 million in public fund deposits. As of September 30, 2008,
the aggregate amount of outstanding certificates of deposit in amounts greater
than or equal to $100,000 was approximately $187.3 million.


Average
noninterest-bearing deposits decreased to $119.4 million for the nine-month
period ended September 30, 2008 from $122.3 million for the nine-month period
ended September 30, 2007. Average noninterest-bearing deposits represented 17.1%
and 18.7% of average total deposits for the nine-month periods ended September
30, 2008 and 2007, 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.  At September 30, 2008,
our core deposits totaled $505.7 million or 70.7% of total
deposits.




- 15 -


The
following table sets forth the composition of the Company’s deposits at
September 30, 2008 (unaudited) and December 31, 2007.




September
      30,
                                    
                                    
                                    December
      31,
                                    
                                    
                                    Increase/(Decrease)2008
                                    
                                    
                                    2007
                                    
                                    
                                    Amount
                                    
                                    
                                    Percent(dollars
      in thousands)Deposits:Noninterest-bearing
      demand
                                    
                                    $
                                    116,641
                                    
                                    
                                    $
                                    120,740
                                    
                                    
                                    $
                                    (4,099
                                    )
                                    
                                    
                                    -3.4
                                    %Interest-bearing
      demand
                                    
                                    
                                    204,247
                                    
                                    
                                    
                                    223,142
                                    
                                    
                                    
                                    (18,895
                                    )
                                    
                                    
                                    -8.5
                                    %Savings
                                    
                                    
                                    41,633
                                    
                                    
                                    
                                    45,044
                                    
                                    
                                    
                                    (3,411
                                    )
                                    
                                    
                                    -7.6
                                    %Time
                                    
                                    
                                    352,943
                                    
                                    
                                    
                                    334,168
                                    
                                    
                                    
                                    18,775
                                    
                                    
                                    
                                    5.6
                                    %Total
      deposits
                                    
                                    $
                                    715,464
                                    
                                    
                                    $
                                    723,094
                                    
                                    
                                    $
                                    (7,630
                                    )
                                    
                                    
                                    -1.1
                                    %





Borrowings.The Company maintains borrowing relationships with other financial
institutions as well as the Federal Home Loan Bank on a short- and long-term
basis to meet liquidity needs. At September 30, 2008, short term borrowings
totaled $41.3 million compared to $10.4 million at December 31, 2007. Long term
borrowings increased in 2008 to $10.0 million from $3.1 million at December
31, 2007. The change in long-term borrowings in 2008 resulted from a new $10.0
million FHLB advance offset by the redemption of $3.1 million in trust preferred
debt.


The
average amount of total borrowings for the nine months ended September 30, 2008
was $12.8 million, compared to $28.8 million for the nine months ended September
30, 2007. At September 30, 2008, the Company had $135.0 million in Federal
Home Loan Bank letters of credit outstanding obtained solely for collateralizing
public deposits.




Equity.Total equity decreased to $64.3 million as of September 30, 2008 from
$66.5 million as of December 31, 2007. The change in equity primarily resulted
from net income of $3.6 million for the nine months ended September 30, 2008
less $3.2 million for the decrease in unrealized loss on available for sale
securities and $2.7 million in quarterly dividend payments on common stock. Cash
dividends paid were $0.48 and $0.47 per share for the nine-month periods ending
September 30, 2008 and 2007, respectively.







Results
of Operations for the Nine Months and Three Months Ended September 30, 2008 and
September 30, 2007




Netincome.For the quarter ending
September 30, 2008, First Guaranty Bancshares, Inc. had a consolidated net loss
of $0.8 million, a $3.7 million decrease from the $2.8 million of net income
reported for the third quarter of 2007. Net income for the nine
months ended September 30, 2008 was $3.6 million, a decrease of $4.4 million
from $8.0 million for the nine months ended September 30, 2007. The largest
decrease in net income resulted from a $4.6 million, $3.0 million net of tax,
other than temporary impairment charge recorded on the securities
portfolio.  Net interest income also decreased due to market pressure
placed on our net interest margin with the decline in market interest rates. In
addition, noninterest expense increased due to additional costs related to
strengthening and enhancing the internal audit and control process, costs
associated with education and training of existing and new personnel, and the
addition of staff to position ourselves to take advantage of opportunities in
our respective markets.





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 our net interest income to provide the largest possible
amount of income while balancing interest rate, credit and liquidity
risks.


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


Net interest income for the
quarter ended September 30, 2008 was $8.2 million, a decrease of $0.9 million
when compared to $9.1 million for the third quarter in 2007. Net interest income
for the nine month period ended September 30, 2008 totaled $24.1 million
reflecting a decrease of $1.4 million when compared to the nine month period
ended September 30, 2007.  The decrease in net interest income for
both the three month and nine month periods reflected a decrease in net interest
spread and net interest margin as the yield on our interest-earning assets
decreased more than the cost of our interest-bearing liabilities.


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). Leverage for the nine months ending
September 30, 2008 was 79.5%, compared to 79.6% for the same period in
2007.




- 16 -




The following table sets forth
average balance sheets, average yields and costs, and certain other information
for the nine months ended September 30, 2008 and 2007, 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 earned and rates paid set forth
below include the effect of deferred fees, discounts and premiums that are
amortized or accreted to interest income or expense.




Nine
      Months Ended September 30,2008
                                                                                                    
                                                                                                    
                                                                                                    2007Average
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    Yield/
                                                                                                    
                                                                                                    
                                                                                                    Average
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    Yield/Balance
                                                                                                    
                                                                                                    
                                                                                                    Interest
                                                                                                    
                                                                                                    
                                                                                                    Rate
                                                                                                    
                                                                                                    
                                                                                                    Balance
                                                                                                    
                                                                                                    
                                                                                                    Interest
                                                                                                    
                                                                                                    
                                                                                                    Rate(dollars
      in thousands)AssetsInterest-earning
      assets:Interest-earning
      deposits with banks
                                                                                                    
                                                                                                    $
                                                                                                    1,547
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    22
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1.9
                                                                                                    %
                                                                                                    
                                                                                                    $
                                                                                                    1,763
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    62
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    4.7
                                                                                                    %Securities
      (including FHLB stock)
                                                                                                    
                                                                                                    
                                                                                                    124,538
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    4,635
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5.0
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    163,807
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    6,565
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5.4
                                                                                                    %Federal
      funds sold
                                                                                                    
                                                                                                    
                                                                                                    17,249
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    378
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2.9
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    6,953
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    273
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5.2
                                                                                                    %Loans
      held for sale
                                                                                                    
                                                                                                    
                                                                                                    784
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    37
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    6.3
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    5,544
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    267
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    6.4
                                                                                                    %Loans,
      net of unearned income
                                                                                                    
                                                                                                    
                                                                                                    600,256
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    31,104
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    6.9
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    535,181
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    34,115
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    8.5
                                                                                                    %Total
      interest-earning assets
                                                                                                    
                                                                                                    
                                                                                                    744,374
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    36,176
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    6.5
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    713,248
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    41,282
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    7.7
                                                                                                    %Noninterest-earning
      assets:Cash
      and due from banks
                                                                                                    
                                                                                                    
                                                                                                    21,696
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    19,317Premises
      and equipment, net
                                                                                                    
                                                                                                    
                                                                                                    16,147
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    14,551Other
      assets
                                                                                                    
                                                                                                    
                                                                                                    5,923
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,877Total
                                                                                                    
                                                                                                    $
                                                                                                    788,140
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    750,993Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Demand
      deposits
                                                                                                    
                                                                                                    $
                                                                                                    202,871
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2,305
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1.5
                                                                                                    %
                                                                                                    
                                                                                                    $
                                                                                                    198,330
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    4,865
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3.3
                                                                                                    %Savings
      deposits
                                                                                                    
                                                                                                    
                                                                                                    44,260
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    150
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.5
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    42,418
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    171
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.5
                                                                                                    %Time
      deposits
                                                                                                    
                                                                                                    
                                                                                                    331,837
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    9,249
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3.7
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    291,699
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    9,758
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    4.5
                                                                                                    %Borrowings
                                                                                                    
                                                                                                    
                                                                                                    12,794
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    345
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3.6
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    28,828
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    970
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    4.5
                                                                                                    %Total
      interest-bearing liabilities
                                                                                                    
                                                                                                    
                                                                                                    591,762
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    12,049
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2.7
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    561,275
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    15,764
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3.8
                                                                                                    %Noninterest-bearing
      liabilities:Demand
      deposits
                                                                                                    
                                                                                                    
                                                                                                    119,371
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    122,307Other
                                                                                                    
                                                                                                    
                                                                                                    8,270
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5,475Total
      liabilities
                                                                                                    
                                                                                                    
                                                                                                    719,403
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    689,057Stockholders'
      equity
                                                                                                    
                                                                                                    
                                                                                                    68,737
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    61,936Total
                                                                                                    
                                                                                                    $
                                                                                                    788,140
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    750,993Net
      interest income
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    24,127
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    25,518Net
      interest rate spread (1)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3.8
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3.9
                                                                                                    %Net
      interest-earning assets(2)
                                                                                                    
                                                                                                    $
                                                                                                    152,612
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    151,973Net
      interest margin (3)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    4.3
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    4.8
                                                                                                    %Average
      interest-earning assets tointerest-bearing
      liabilities
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    125.8
                                                                                                    %
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    127.1
                                                                                                    %





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


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


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





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


Provisions made pursuant to these
processes totaled $407,000 for the quarter ended September 30, 2008, an increase
of $336,000 when compared to the same quarter in 2007. Year-to-date provisions
made totaled $1.1 million for the first nine months of 2008 as compared to
$679,000 for the same period in 2007. Provisions are necessary to maintain the
allowance at an adequate level based on loan risk factors and the levels of net
loan charge-offs. The provisions made in the first nine months of 2008 and
2007 were taken to provide for current loan losses and to maintain the allowance
at an adequate level commensurate with Management’s evaluation of the risks
inherent in the loan portfolio. Total charge-offs were $1.0 million for the
first nine months of 2008 as compared to $1.9 million for the same period in
2007. Recoveries were $0.2 million for the first nine months of 2008 as compared
to $1.1 million for the same period in 2007.





- 17 -




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 third quarter 2008 reflected a loss of $3.2 million, down $4.2 million
when compared to the same period in 2007. This decrease in noninterest income
resulted primarily from a $4.6 million other than temporary impairment charge
taken on securities in the third quarter 2008 (see Note 3). Noninterest income
excluding the impairment charge would have ended at $1.4 million, an increase of
$0.4 million when compared to the same quarter in 2007.


Year-to-date
noninterest income for 2008 ended with a loss of $0.2 million, down $3.5
million when compared to the same period in 2007. Excluding the impairment
charge on securities, year-to-date noninterest income would have ended at $4.4
million as of September 30, 2008 reflecting an increase of $1.1 million from the
same period in 2007. Service charge, commission and fee income increased $0.2
million, net gains on sale of securities increased $0.4 million, net gains on
sale of loans increased $0.1 million and other noninterest income increased $0.4
million when comparing year-to-date noninterest income 2008 to year-to-date
noninterest income 2007.





Noninterest Expense.  Noninterest
expense includes salaries and employee benefits, occupancy and equipment
expense, net cost from other real estate and repossessions and other types of
expenses. Noninterest expense for the third quarter in 2008 totaled $5.9
million, an increase of $0.2 million from the same period in 2007. The largest
increases in noninterest expense were reflected in salaries and employee
benefits and in occupancy and equipment expense. The increase in salaries and
employee benefits resulted from an increase in the employee stock ownership plan
when comparing third quarter 2008 to 2007. The increase in occupancy expense
resulted from an increase in the cost of utilities and an increase in
depreciation.


Noninterest expense totaled $17.3
million for the nine months ended September 30, 2008, compared to $15.8 million
for the same period in 2007, an increase of $1.5 million. Salaries and
benefits increased $0.8 million. At September 30, 2008, our full time equivalent
employees were 225, compared to 234 full time equivalent employees during the
same period of 2007. Occupancy and equipment expense totaled $2.2 million for
the first nine months of 2008, an increase of $0.3 million when compared to the
same period in 2007. Net cost of other real estate and repossessions decreased
$0.4 million when comparing the nine month periods ending 2008 and 2007. Other
noninterest expense reflects an increase of $0.8 million when comparing the nine
month periods ended 2008 and 2007. During 2009, our noninterest expense is
expected to significantly increase as a result of higher FDIC deposit
insurance.


The table below presents the
components of other noninterest expense as of the three months and nine months
ended September 30, 2008 and 2007.




Three
      Months Ended September 30,
                                
                                
                                Nine
      Months Ended September 30,2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007(in
      thousands)
                                
                                
                                (in
      thousands)Other
      noninterest expense:Legal
      and professional fees
                                
                                $
                                412
                                
                                
                                $
                                530
                                
                                
                                $
                                1,242
                                
                                
                                $
                                1,087Operating
      supplies
                                
                                
                                154
                                
                                
                                
                                167
                                
                                
                                
                                425
                                
                                
                                
                                457Regulatory
      assessment
                                
                                
                                161
                                
                                
                                
                                47
                                
                                
                                
                                412
                                
                                
                                
                                123Insurance
                                
                                
                                55
                                
                                
                                
                                53
                                
                                
                                
                                166
                                
                                
                                
                                133Marketing
      and public relations
                                
                                
                                326
                                
                                
                                
                                197
                                
                                
                                
                                883
                                
                                
                                
                                674Data
      processing
                                
                                
                                449
                                
                                
                                
                                453
                                
                                
                                
                                1,355
                                
                                
                                
                                1,290Travel
      and lodging
                                
                                
                                95
                                
                                
                                
                                113
                                
                                
                                
                                307
                                
                                
                                
                                341Taxes
      - sales and capital
                                
                                
                                213
                                
                                
                                
                                147
                                
                                
                                
                                559
                                
                                
                                
                                473Postage
                                
                                
                                58
                                
                                
                                
                                55
                                
                                
                                
                                181
                                
                                
                                
                                183Software
                                
                                
                                72
                                
                                
                                
                                83
                                
                                
                                
                                215
                                
                                
                                
                                220Telephone
                                
                                
                                39
                                
                                
                                
                                56
                                
                                
                                
                                138
                                
                                
                                
                                155Amortization
      of core deposit intangibles
                                
                                
                                78
                                
                                
                                
                                92
                                
                                
                                
                                233
                                
                                
                                
                                155Other
                                
                                
                                239
                                
                                
                                
                                376
                                
                                
                                
                                906
                                
                                
                                
                                910Total
      other expense
                                
                                $
                                2,351
                                
                                
                                $
                                2,369
                                
                                
                                $
                                7,022
                                
                                
                                $
                                6,201





Other noninterest expense during
the third quarter 2008 includes approximately $114,000 in expenses from our
terminated transaction to acquire First Community Holding Company.





Income Taxes. The
provision for income taxes totaled -$0.5 million and $1.6 million for the
quarters ended September 30, 2008 and 2007, respectively. The provision for
income taxes for the nine months ended September 30, 2008 decreased $2.4 million
when compared to the same period in 2007. The decrease in the provision for
income taxes reflected lower income during both the three month and nine month
periods in 2008. In each of the nine months ended September 30, 2008 and 2007,
the income tax provision approximated the normal statutory rate.  The
effective rates were 34.8% and 35.0%, respectively.





- 18 -




Item
3. Quantitative and Qualitative Disclosures about Market
Risk





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


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


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


We monitor interest rate risk
using an interest sensitivity analysis set forth on the following table. This
analysis, which we prepare monthly, reflects the maturity and re-pricing
characteristics of assets and liabilities over various time periods. The gap
indicates whether more assets or liabilities are subject to re-pricing over a
given time period. The interest sensitivity analysis at September 30, 2008
reflects an asset-sensitive position with a positive cumulative gap on a
one-year basis.




Interest
      Sensitivity Within3
      Months
                                                                                  
                                                                                  
                                                                                  Over
      3 Months
                                                                                  
                                                                                  
                                                                                  Total
                                                                                  
                                                                                  
                                                                                  OverOr
      Less
                                                                                  
                                                                                  
                                                                                  thru
      12 Months
                                                                                  
                                                                                  
                                                                                  One
      Year
                                                                                  
                                                                                  
                                                                                  One
      Year
                                                                                  
                                                                                  
                                                                                  Total(dollars
      in thousands)Earning
      Assets:Loans
      (including loans held for sale)
                                                                                  
                                                                                  $
                                                                                  369,619
                                                                                  
                                                                                  
                                                                                  $
                                                                                  77,352
                                                                                  
                                                                                  
                                                                                  $
                                                                                  446,971
                                                                                  
                                                                                  
                                                                                  $
                                                                                  158,808
                                                                                  
                                                                                  
                                                                                  $
                                                                                  605,779Securities
      (including FHLB stock)
                                                                                  
                                                                                  
                                                                                  32,574
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,803
                                                                                  
                                                                                  
                                                                                  
                                                                                  35,377
                                                                                  
                                                                                  
                                                                                  
                                                                                  102,302
                                                                                  
                                                                                  
                                                                                  
                                                                                  137,679Federal
      funds sold
                                                                                  
                                                                                  
                                                                                  584
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  584
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  584Other
      earning assets
                                                                                  
                                                                                  
                                                                                  48,441
                                                                                  
                                                                                  
                                                                                  
                                                                                  99
                                                                                  
                                                                                  
                                                                                  
                                                                                  48,540
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  48,540Total
      earning assets
                                                                                  
                                                                                  
                                                                                  451,218
                                                                                  
                                                                                  
                                                                                  
                                                                                  80,254
                                                                                  
                                                                                  
                                                                                  
                                                                                  531,472
                                                                                  
                                                                                  
                                                                                  
                                                                                  261,110
                                                                                  
                                                                                  
                                                                                  $
                                                                                  792,582Source
      of Funds:Interest-bearing
      accounts:Demand
      deposits
                                                                                  
                                                                                  
                                                                                  147,324
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  147,324
                                                                                  
                                                                                  
                                                                                  
                                                                                  56,923
                                                                                  
                                                                                  
                                                                                  
                                                                                  204,247Savings
                                                                                  
                                                                                  
                                                                                  10,408
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,408
                                                                                  
                                                                                  
                                                                                  
                                                                                  31,225
                                                                                  
                                                                                  
                                                                                  
                                                                                  41,633Time
      deposits
                                                                                  
                                                                                  
                                                                                  141,220
                                                                                  
                                                                                  
                                                                                  
                                                                                  107,509
                                                                                  
                                                                                  
                                                                                  
                                                                                  248,729
                                                                                  
                                                                                  
                                                                                  
                                                                                  104,214
                                                                                  
                                                                                  
                                                                                  
                                                                                  352,943Short-term
      borrowings
                                                                                  
                                                                                  
                                                                                  39,821
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,500
                                                                                  
                                                                                  
                                                                                  
                                                                                  41,321
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  41,321Long-term
      borrowings
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,000Noninterest-bearing,
      net
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  142,438
                                                                                  
                                                                                  
                                                                                  
                                                                                  142,438Total
      source of funds
                                                                                  
                                                                                  
                                                                                  338,773
                                                                                  
                                                                                  
                                                                                  
                                                                                  119,009
                                                                                  
                                                                                  
                                                                                  
                                                                                  457,782
                                                                                  
                                                                                  
                                                                                  
                                                                                  334,800
                                                                                  
                                                                                  
                                                                                  $
                                                                                  792,582Period
      gap
                                                                                  
                                                                                  
                                                                                  112,445
                                                                                  
                                                                                  
                                                                                  
                                                                                  (38,755
                                                                                  )
                                                                                  
                                                                                  
                                                                                  73,690
                                                                                  
                                                                                  
                                                                                  
                                                                                  (73,690
                                                                                  )Cumulative
      gap
                                                                                  
                                                                                  $
                                                                                  112,445
                                                                                  
                                                                                  
                                                                                  $
                                                                                  73,690
                                                                                  
                                                                                  
                                                                                  $
                                                                                  73,690
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Cumulative
      gap as apercent
      of earning assets
                                                                                  
                                                                                  
                                                                                  14.19
                                                                                  %
                                                                                  
                                                                                  
                                                                                  9.30
                                                                                  %
                                                                                  
                                                                                  
                                                                                  9.30
                                                                                  %





- 19 -




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 20.3% and 20.6% of the total
liquidity base at September 30, 2008 and December 31, 2007, respectively. In
addition, the Company maintained borrowing availability with the Federal Home
Loan Bank totaling $253.8 million and $159.7 million at September 30,
2008 and December 31, 2007, respectively.  As of September 30, 2008,
the net availability at the Federal Home Loan Bank was $108.8 million, compared
to $54.7 million at December 31, 2007 with the increase primarily due to an
additional $94.1 million in availability offset by an additional $30.0 million
in letters of credit used solely to pledge to public fund deposits and $35.0
million in overnight borrowings. The increase in the availability with Federal
Home Loan Bank resulted from the Housing and Economic Recovery Act of 2008 which
redefined Community Financial Institutions. Under this new act, Community
Financial Institutions are defined as institutions with average assets over the
three-year period preceding measurement of less than $1 billion (up from the
previous statutory amount of $500 million). Also, loans for community
development activities were added to loans for small business, small farm, and
small agricultural business as permissible purposes for long-term advances to
Community Financial Institutions. We also maintain federal funds lines of
credit at three other correspondent banks with borrowing capacity of $78.2
million at September 30, 2008 and $74.7 million at December 31, 2007. As of
September 30, 2008, the Company had $1.5 million outstanding on these lines of
credit. At December 31, 2007, 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.


Stockholders’ equity ended at
$64.3 million at September 30, 2008, a decrease of $2.2 million when compared to
December 31, 2007. The decrease in equity resulted from 2008 net income of $3.6
million, which was offset by the change in accumulated other comprehensive
income of $3.2 million and dividends paid on common stock totaling $2.7
million.




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


At September 30, 2008, 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




As defined by the Securities and
Exchange Commission in Exchange Act Rules 13a-14(c) and 15d-14(c), a company’s
“disclosure controls and procedures” means controls and other procedures of an
issuer that are designed to ensure that information required to be disclosed by
the issuer in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within time periods specified in
the Commission’s rules and forms. The Company maintains such controls designed
to ensure this material information is communicated to Management, including the
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as
appropriate, to allow timely decision regarding required
disclosure.


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





- 20 -




PART
II.  OTHER INFORMATION


Item
1.  Legal Proceedings


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





Item
1A.  Risk Factors




Our
Noninterest Expense Will Increase As A Result Of Increases In FDIC Insurance
Premiums.





The Federal Deposit Insurance
Corporation (“FDIC”) imposes an assessment against institutions for deposit
insurance.  This assessment is based on the risk category of the
institution and currently ranges from 5 to 43 basis points of the institution’s
deposits.  Federal law requires that the designated reserve ratio for
the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of
estimated insured deposits.  If this reserve ratio drops below 1.15%
or the FDIC expects that it to do so within six months, the FDIC must, within 90
days, establish and implement a plan to restore the designated reserve ratio to
1.15% of estimated insured deposits within five years (absent extraordinary
circumstances).


Recent bank failures coupled with
deteriorating economic conditions have significantly reduced the deposit
insurance fund’s reserve ratio.  As of June 30, 2008, the designated
reserve ratio was 1.01% of estimated insured deposits at March 31,
2008.  As a result of this reduced reserve ratio, on October 16, 2008,
the FDIC published a proposed rule that would restore the reserve ratios to its
required level.  The proposed rule would raise the current deposit
insurance assessment rates uniformly for all institutions by 7 basis points (to
a range from 12 to 50 basis points) for the first quarter of
2009.  The proposed rule would also alter the way the FDIC calculates
federal deposit insurance assessment rates beginning in the second quarter of
2009 and thereafter.


Under the proposed rule, the FDIC would
first establish an institution’s initial base assessment rate.  This
initial base assessment rate would range, depending on the risk category of the
institution, from 10 to 45 basis points.  The FDIC would then adjust
the initial base assessment (higher or lower) to obtain the total base
assessment rate.  The adjustments to the initial base assessment rate
would be based upon an institution’s levels of unsecured debt, secured
liabilities, and brokered deposits.  The total base assessment rate
would range from 8 to 77.5 basis points of the institution’s deposits. There can
be no assurance that the proposed rule will be implemented by the FDIC or
implemented in its proposed form.


In addition, the Emergency Economic
Stabilization Act of 2008 (EESA) temporarily increased the limit on FDIC
insurance coverage for deposits to $250,000 through December 31, 2009, and the
FDIC took action to provide coverage for newly-issued senior unsecured debt and
non-interest bearing transaction accounts in excess of the $250,000 limit, for
which institutions will be assessed additional premiums.


These actions will significantly
increase our non-interest expense in 2009 and in future years as long as the
increased premiums are in place.





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





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


Item 2 is non-applicable and is
therefore not included.





Item
3.  Defaults Upon Senior Securities


Item 3 is non-applicable and is
therefore not included.





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


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





Item
5.  Other Information


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





- 21 -




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


31.1                     Certification
of Chief Executive 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.











- 22 -




SIGNATURES














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








FIRST
GUARANTY BANCSHARES, INC.











Date:                      November
14,
2008                                         By:/s/Michael
R. Sharp


Michael R. Sharp


President and


Chief Executive
Officer








Date:                      November
14,
2008                                         By:
/s/Michele
E. LoBianco


Michele E.
LoBianco


Chief Financial
Officer


Secretary and
Treasurer


- 23 -