UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549











Form
10-Q











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


THE
SECURITIES EXCHANGE ACT OF 1934





For
the Quarter Ended March 31, 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 company  T





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
March 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)March
      31,
            
            
            December
      31,2008
            
            
            2007Assets
            
            (unaudited)Cash
      and cash equivalents:Cash
      and due from banks
            
            $
            14,681
            
            
            $
            22,778Interest-earning
      demand deposits with banks
            
            
            19
            
            
            
            30Federal
      funds sold
            
            
            35,004
            
            
            
            35,869Cash
      and cash equivalents
            
            
            49,704
            
            
            
            58,677Interest-earning
      time deposits with banks
            
            
            99
            
            
            
            2,188Investment
      securities:Available
      for sale, at fair value
            
            
            90,565
            
            
            
            105,570Held
      to maturity, at cost (estimated fair value of$34,616
      and $36,206, respectively)
            
            
            34,545
            
            
            
            36,498Investment
      securities
            
            
            125,110
            
            
            
            142,068Federal
      Home Loan Bank stock, at cost
            
            
            467
            
            
            
            955Loans
      held for sale
            
            
            837
            
            
            
            3,959Loans,
      net of unearned income
            
            
            591,612
            
            
            
            575,256Less:
      allowance for loan losses
            
            
            6,174
            
            
            
            6,193Net
      loans
            
            
            585,438
            
            
            
            569,063Premises
      and equipment, net
            
            
            15,982
            
            
            
            16,240Goodwill
            
            
            2,062
            
            
            
            1,911Intangible
      assets, net
            
            
            2,305
            
            
            
            2,383Other
      real estate, net
            
            
            274
            
            
            
            373Accrued
      interest receivable
            
            
            4,439
            
            
            
            5,126Other
      assets
            
            
            3,201
            
            
            
            4,388Total
      Assets
            
            $
            789,918
            
            
            $
            807,331Liabilities
      and Stockholders' EquityDeposits:Noninterest-bearing
      demand
            
            $
            122,986
            
            
            $
            120,740Interest-bearing
      demand
            
            
            210,374
            
            
            
            223,142Savings
            
            
            44,948
            
            
            
            45,044Time
            
            
            326,415
            
            
            
            334,168Total
      deposits
            
            
            704,723
            
            
            
            723,094Short-term
      borrowings
            
            
            9,433
            
            
            
            10,401Accrued
      interest payable
            
            
            3,517
            
            
            
            2,956Long-term
      borrowings
            
            
            3,093
            
            
            
            3,093Other
      liabilities
            
            
            1,351
            
            
            
            1,254Total
      Liabilities
            
            
            722,117
            
            
            
            740,798Stockholders'
      EquityCommon
      stock:$1
      par value - authorized 100,000,000 shares; issued andoutstanding
      5,559,644 shares
            
            
            5,560
            
            
            
            5,560Surplus
            
            
            26,459
            
            
            
            26,459Retained
      earnings
            
            
            36,286
            
            
            
            34,849Accumulated
      other comprehensive loss
            
            
            (504
            )
            
            
            (335
            )Total
      Stockholders' Equity
            
            
            67,801
            
            
            
            66,533Total
      Liabilities and Stockholders' Equity
            
            $
            789,918
            
            
            $
            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
      MonthsEnded
      March 31,2008
            
            
            2007Interest
      Income:Loans
      (including fees)
            
            $
            10,858
            
            
            $
            10,501Loans
      held for sale
            
            
            21
            
            
            
            16Deposits
      with other banks
            
            
            9
            
            
            
            23Securities
      (including FHLB stock)
            
            
            1,519
            
            
            
            2,302Federal
      funds sold
            
            
            316
            
            
            
            119Total
      Interest Income
            
            
            12,723
            
            
            
            12,961Interest
      Expense:Demand
      deposits
            
            
            968
            
            
            
            1,659Savings
      deposits
            
            
            56
            
            
            
            50Time
      deposits
            
            
            3,582
            
            
            
            3,107Borrowings
            
            
            109
            
            
            
            274Total
      Interest Expense
            
            
            4,715
            
            
            
            5,090Net
      Interest Income
            
            
            8,008
            
            
            
            7,871Provision
      for loan losses
            
            
            202
            
            
            
            187Net
      Interest Income after Provision for Loan Losses
            
            
            7,806
            
            
            
            7,684Noninterest
      Income:Service
      charges, commissions and fees
            
            
            1,013
            
            
            
            882Net
      losses on sale of securities
            
            
            3
            
            
            
            (66
            )Net
      gains on sale of loans
            
            
            83
            
            
            
            38Other
            
            
            343
            
            
            
            289Total
      Noninterest Income
            
            
            1,442
            
            
            
            1,143Noninterest
      Expense:Salaries
      and employee benefits
            
            
            2,601
            
            
            
            2,280Occupancy
      and equipment expense
            
            
            699
            
            
            
            620Net
      cost from other real estate & repossessions
            
            
            42
            
            
            
            266Other
            
            
            2,330
            
            
            
            1,864Total
      Noninterest Expense
            
            
            5,672
            
            
            
            5,030Income
      Before Income Taxes
            
            
            3,576
            
            
            
            3,797Provision
      for income taxes
            
            
            1,250
            
            
            
            1,308Net
      Income
            
            $
            2,326
            
            
            $
            2,489Per
      Common Share:Earnings
            
            $
            0.42
            
            
            $
            0.45Cash
      dividends paid
            
            $
            0.16
            
            
            $
            0.15Average
      Common Shares Outstanding
            
            
            5,559,644
            
            
            
            5,559,644See
      Notes to Consolidated Financial Statements






- 3
-
  FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)(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
              
              
              -
              
              
              
              -
              
              
              
              2,489
              
              
              
              -
              
              
              
              2,489Change
      in unrealized losson
      available for sale securities,net
      of reclassification adjustments and taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              431
              
              
              
              431Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,920Cash
      dividends on common stock ($0.15 per share)
              
              
              -
              
              
              
              -
              
              
              
              (832
              )
              
              
              -
              
              
              
              (832
              )Balance
      March 31, 2007 (unaudited)
              
              $
              5,560
              
              
              $
              26,459
              
              
              $
              29,746
              
              
              $
              (474
              )
              
              $
              61,291Balance
      December 31, 2007
              
              $
              5,560
              
              
              $
              26,459
              
              
              $
              34,849
              
              
              $
              (335
              )
              
              $
              66,533Net
      income
              
              
              -
              
              
              
              -
              
              
              
              2,326
              
              
              
              -
              
              
              
              2,326Change
      in unrealized losson
      available for sale securities,net
      of reclassification adjustments and taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (169
              )
              
              
              (169
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,157Cash
      dividends on common stock ($0.16 per share)
              
              
              -
              
              
              
              -
              
              
              
              (889
              )
              
              
              -
              
              
              
              (889
              )Balance
      March 31, 2008 (unaudited)
              
              $
              5,560
              
              
              $
              26,459
              
              
              $
              36,286
              
              
              $
              (504
              )
              
              $
              67,801See
      Notes to Consolidated Financial Statements
  - 4
-
  FIRST
      GUARANTY BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH
      FLOWS(unaudited,
      in thousands)Three
      Months Ended March 31,2008
              
              
              2007Cash
      Flows From Operating ActivitiesNet
      income
              
              $
              2,326
              
              
              $
              2,489Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Provision
      for loan losses
              
              
              202
              
              
              
              187Depreciation
      and amortization
              
              
              365
              
              
              
              266Amortization
      of (discount) premium on investments
              
              
              (298
              )
              
              
              (260
              )(Gain)
      Loss on call / sale of securities
              
              
              (3
              )
              
              
              66Gain
      on sale of assets
              
              
              (83
              )
              
              
              (38
              )ORE
      writedowns and (gain) loss on disposition
              
              
              15
              
              
              
              61FHLB
      stock dividends
              
              
              (17
              )
              
              
              (34
              )Net
      decrease (increase) in loans held for sale
              
              
              3,122
              
              
              
              (438
              )Change
      in other assets and liabilities, net
              
              
              2,677
              
              
              
              972Net
      Cash Provided By Operating Activities
              
              
              8,306
              
              
              
              3,271Cash
      Flows From Investing ActivitiesProceeds
      from maturities and calls of HTM securities
              
              
              1,954
              
              
              
              140Proceeds
      from maturities, calls and sales of AFS securities
              
              
              244,909
              
              
              
              131,983Funds
      invested in AFS securities
              
              
              (229,861
              )
              
              
              (142,541
              )Proceeds
      from sale of Federal Home Loan Bank stock
              
              
              505
              
              
              
              938Proceeds
      from maturities of time deposits with banks
              
              
              2,089
              
              
              
              -Net
      (increase) decrease in loans
              
              
              (16,577
              )
              
              
              3,027Purchase
      of premises and equipment
              
              
              (97
              )
              
              
              (292
              )Proceeds
      from sales of other real estate owned
              
              
              84
              
              
              
              1,508Net
      Cash Provided By (Used In) Investing Activities
              
              
              3,006
              
              
              
              (5,237
              )Cash
      Flows From Financing ActivitiesNet
      (decrease) increase in deposits
              
              
              (18,428
              )
              
              
              18,003Net
      (decrease) increase in federal funds purchased and short-term
      borrowings
              
              
              (968
              )
              
              
              262Repayment
      of long-term borrowings
              
              
              -
              
              
              
              (7,531
              )Dividends
      paid
              
              
              (889
              )
              
              
              (832
              )Net
      Cash (Used In) Provided By Financing Activities
              
              
              (20,285
              )
              
              
              9,902Net
      (Decrease) Increase In Cash and Cash Equivalents
              
              
              (8,973
              )
              
              
              7,935Cash
      and Cash Equivalents at the Beginning of the Period
              
              
              58,677
              
              
              
              24,817Cash
      and Cash Equivalents at the End of the Period
              
              $
              49,704
              
              
              $
              32,752Noncash
      Activities:Loans
      transferred to foreclosed assets
              
              $
              -
              
              
              $
              313Cash
      Paid During The Period:Interest
      on deposits and borrowed funds
              
              $
              4,154
              
              
              $
              4,756Income
      taxes
              
              $
              -
              
              
              $
              200See
      Notes to Consolidated Financial Statements
  - 5
-





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Note
1. Basis of Presentation


The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 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. Any interim 2007 financial statement
information contained herein reflect those of First Guaranty Bank as the
predecessor entity.


In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair presentation of the
consolidated financial statements. Those adjustments are of a normal recurring
nature. The results of operations for the three-month periods ended March 31,
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 March 31, 2008, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair
value:





Fair Value Measurements atMarch 31, 2008, UsingQuotedPrices InActiveMarkets
            
            SignificantAssets/Liabilities
            
            For
            
            Other
            
            SignificantMeasured at Fair
            
            Identical
            
            Observable
            
            UnobservableValue
            
            Assets
            
            Inputs
            
            Inputs(Dollars in thousands)
            
            March 31, 2008
            
            (Level 1)
            
            (Level 2)
            
            (Level 3)Securities
      available for sale
            
            $
            90,565
            
            $
            10,874
            
            $
            79,691
            
            $
            -




- 6
-


Securities Available
for Sale. Securities classified as available for sale are reported at
fair value utilizing Level 2 inputs. For these securities, the Corporation
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.


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 $7.8 million at March 31, 2008.


Certain
non-financial assets and non-financial liabilities measured at fair value on a
non-recurring basis include non-financial assets and non-financial 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. Loans and Allowance for Loan Losses


Loans
at March 31, 2008 (unaudited) and December 31, 2007 were as
follows:





March
      31,
              
              
              December
      31,2008
              
              
              2007As
      % of
              
              
              
              
              
              As
      % ofBalance
              
              
              Category
              
              
              Balance
              
              
              Category(dollars
      in thousands)Real
      estateConstruction
      & land development
              
              $
              84,611
              
              
              
              14.3
              %
              
              $
              98,127
              
              
              
              17.0
              %Farmland
              
              
              19,662
              
              
              
              3.3
              %
              
              
              23,065
              
              
              
              4.0
              %1-4
      Family
              
              
              81,062
              
              
              
              13.7
              %
              
              
              84,640
              
              
              
              14.7
              %Multifamily
              
              
              19,534
              
              
              
              3.3
              %
              
              
              13,061
              
              
              
              2.3
              %Non-farm
      non-residential
              
              
              239,604
              
              
              
              40.5
              %
              
              
              236,474
              
              
              
              41.1
              %Total
      real estate
              
              
              444,473
              
              
              
              75.0
              %
              
              
              455,367
              
              
              
              79.1
              %Agricultural
              
              
              16,243
              
              
              
              2.7
              %
              
              
              16,816
              
              
              
              2.9
              %Commercial
      and industrial
              
              
              109,495
              
              
              
              18.5
              %
              
              
              81,073
              
              
              
              14.1
              %Consumer
      and other
              
              
              22,055
              
              
              
              3.7
              %
              
              
              22,517
              
              
              
              3.9
              %Total
      loans before unearned income
              
              
              592,266
              
              
              
              100.0
              %
              
              
              575,773
              
              
              
              100.0
              %Less:
      unearned income
              
              
              (654
              )
              
              
              
              
              
              
              (517
              )Total
      loans after unearned income
              
              $
              591,612
              
              
              
              
              
              
              $
              575,256





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


March
      31,
              
              
              December
      31,2008
              
              
              2007(in
      thousands)Balance
      beginning of period
              
              $
              6,193
              
              
              $
              6,675Additional
      provision from acquisition
              
              
              -
              
              
              
              325Provision
      charged to expense
              
              
              202
              
              
              
              1,918Loans
      charged off
              
              
              (284
              )
              
              
              (3,885
              )Recoveries
              
              
              63
              
              
              
              1,160Allowance
      for loan losses
              
              $
              6,174
              
              
              $
              6,193





The
loan charge-offs in 2008 consisted of $180,000 in commercial charge-offs,
$81,000 in consumer charge-offs, $2,000 in credit card charge-offs and $21,000
in demand deposit and savings charge-offs. Of the loan charge-offs in 2007,
approximately $3.0 million were loans secured by real estate of which $2.2
million were commercial real estate and approximately $800,000 were residential
properties.


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. 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.




- 7
-




Note 4. 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 March 31, 2008 was $2.1 million compared
to $1.9 million at December 31, 2007. No impairment charges were recognized
during 2008.


Mortgage
servicing rights totaled $24,000 at March 31, 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. The following table summarizes the Company’s purchased accounting
intangible assets subject to amortization.




As
      of March 31, 2008
              
              
              As
      of December 31, 2007Gross
      Carrying
              
              
              Accumulated
              
              
              Net
      Carrying
              
              
              Gross
      Carrying
              
              
              Accumulated
              
              
              Net
      CarryingAmount
              
              
              Amortization
              
              
              Amount
              
              
              Amount
              
              
              Amortization
              
              
              Amount(in
      thousands)Core
      deposit intangibles
              
              $
              7,997
              
              
              $
              5,716
              
              
              $
              2,281
              
              
              $
              7,997
              
              
              $
              5,638
              
              
              $
              2,359Mortgage
      Servicing Rights
              
              
              24
              
              
              
              -
              
              
              
              24
              
              
              
              24
              
              
              
              -
              
              
              
              24Total
              
              $
              8,021
              
              
              $
              5,716
              
              
              $
              2,305
              
              
              $
              8,021
              
              
              $
              5,638
              
              
              $
              2,383





Note
5. 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 March 31, 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 2003.





Note
6.  Recent Accounting Pronouncements 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 remeasure any ownership
interest retained at fair value on that date. This statement also requires
expanded disclosures that clearly identify and distinguish between the interests
of the parent and the interests of the non-controlling owners. SFAS 160 is
effective on a prospective basis for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008, except for the
presentation and disclosure requirements, which are required to be applied
retrospectively. We anticipate the adoption of SFAS No. 160 will not have a
significant impact to the Company’s financial condition or results of
operations


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




- 8
-


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 7. Subsequent
Events


The Agreement
and Plan of Merger with First Community Holding Company was amended on March 27,
2008 to provide until May 31, 2008 to complete the transaction.


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





The
following management discussion and analysis is intended to highlight the
significant factors affecting the Company's financial condition and results of
operations presented in the consolidated financial statements included in this
Form 10-Q. This discussion is designed to provide readers with a more
comprehensive view of the operating results and financial position than would be
obtained from reading the consolidated financial statements alone. Reference
should be made to those statements for an understanding of the following review
and analysis. The financial data for the three months ended March 31, 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.





First
Quarter Overview


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


·
            Net
      income for the first quarter of 2008 and 2007 was $2.3 million and $2.5
      million with earnings per common share of $0.42 and $0.45, respectively.
      The earnings for the first quarter 2008 decreased in spite of an
      improvement in net interest income due to 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 for the first quarter of 2008 and 2007 was $8.0 million
      and $7.9 million, respectively. The net interest margin was 4.3% for the
      first quarter 2008 and 4.7% for the first quarter
  2007.


·
            The
      provision for loan losses for the first quarter of 2008 was $202,000
      compared to $187,000 for the first quarter of
  2007.


·
            Noninterest
      income for the first quarter of 2008 was $1.4 million, up $299,000 when
      compared to the first quarter of 2007. Included are increases of $131,000
      in service charges, commissions and fees, $45,000 in net gains on sale of
      loans, $54,000 in other noninterest income and a $69,000 decrease in net
      losses on sale of securities.


·
            Noninterest
      expense for the first quarter of 2008 was $5.7 million, up $642,000 when
      compared to the first quarter of 2007. Included are increases of $321,000
      in salaries and employee benefits, $79,000 in occupancy and equipment
      expense, and $466,000 in other noninterest expense. These increases in
      noninterest expense were offset by the reduction in the net cost of other
      real estate and repossessions totaling
$224,000.


·
            Total
      assets as of March 31, 2008 were $789.9 million, a decrease of $17.4
      million or 2.2% when compared to $807.3 million at December 31, 2007. The
      decrease in assets resulted from decreases in cash and cash equivalents,
      interest-earning time deposits with banks and investment securities, and
      was offset by an increase in total
loans.


·
            The
      net loan portfolio at March 31, 2008 totaled $585.4 million, an increase
      of approximately $16.4 million or 2.9% from the December 31, 2007 level of
      $569.1 million. Net loans include the reduction for the allowance for loan
      losses which totaled $6.2 million for both March 31, 2008 and December 31,
      2007.


·
            Non-performing
      assets ended at $10.5 million at March 31, 2008, a decrease of $690,000
      when compared to $11.2 million as of December 31,
  2007.


·
            Total
      deposits decreased $18.4 million or 2.5% in the first quarter 2008
      compared to December 31, 2007.


·
            At
      March 31, 2008, short-term borrowings were $9.4 million and consisted
      solely of repurchase agreement accounts. Long-term borrowings remained
      unchanged for the first quarter 2008 and are comprised solely of trust
      preferred debt.


·
            Stockholders’
      equity ended at $67.8 million at March 31, 2008, an increase of $1.3
      million when compared to $66.5 million at December 31, 2007. The increase
      in equity resulted from net income of $2.3 million, which was offset by
      the change in accumulated other comprehensive income of $169,000 and by
      dividends paid to stockholders totaling
  $889,000.


·
            Return
      on average assets for the three month periods ended March 31, 2008 and
      2007 were 1.18% and 1.40%, respectively and return on average equity for
      the same periods were 13.74% and
16.58%.


·
            In
      March 2008, the Company’s Board of Directors declared a quarterly dividend
      of $0.16 per common share, a 6.7% increase compared to the same quarter of
      2007.





- 9
-


Financial
Condition





Changes
in Financial Condition from December 31, 2007 to March 31, 2008




General. Total assets as of
March 31, 2008 were $789.9 million, a decrease of $17.4 million or 2.2% when
compared to $807.3 million at December 31, 2007. The decrease in assets resulted
from decreases in cash and cash equivalents, interest-earning time deposits,
investment securities and other assets. Total loans increased by $16.4 million
during the first quarter 2008, an increase of 2.8% and ended at $591.6 million
at March 31, 2008.




Investment
Securities.Investment securities at March 31, 2008 totaled
$125.1 million compared to $142.1 million at December 31, 2007.  The
net change in securities purchased, sold and called was primarily a result of
the Company investing in loans which currently provide higher yields than
investment securities.




Mortgage Loans Held
forSale. Loans held for sale
decreased $3.1 million to $837,000 at March 31, 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. There are no significant
concentrations of credit to any borrower or industry. A significant portion of
our loan portfolio is secured primarily or secondarily by real
estate.


Our net loan portfolio at March 31,
2008 totaled $585.4 million, an increase of approximately $16.4 million from the
December 31, 2007 level of $569.1 million. Net loans include the reduction for
the allowance for loan losses which totaled $6.2 million at both March 31, 2008
and December 31, 2007. Fixed rate loans increased from $223.0 million or
38.77% of the total loan portfolio at December 31, 2007 to $243.0 million, or
41.08% of the total loan portfolio at March 31, 2008. Loan charge-offs totaled
$284,000 during the first three months of 2008, compared to $239,000 during the
same period of 2007.  Recoveries totaled $63,000 and $113,000
during the first three-month period 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 $10.5 million or 1.3% of total assets at March 31, 2008, compared
to $11.2 million, or 1.4% of total assets at December 31, 2007. Nonperforming
assets decreased primarily from reductions in non-accrual loans and loans 90
days greater delinquent and still accruing, offset by a slight increase in other
real estate.


- 10
-





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


March
      31,
              
              
              December
      31,2008
              
              
              2007(in
      thousands)Non-accrual
      loans:Real
      estate loans:Construction
      and land development
              
              $
              1,796
              
              
              $
              1,841Farmland
              
              
              314
              
              
              
              419One-
      to four- family residential
              
              
              1,889
              
              
              
              1,819Multifamily
              
              
              2
              
              
              
              2Non-farm
      non-residential
              
              
              5,158
              
              
              
              4,950Non-real
      estate loans:Agricultural
              
              
              -
              
              
              
              -Commercial
      and industrial
              
              
              463
              
              
              
              978Consumer
      and other
              
              
              244
              
              
              
              279Total
      non-accrual loans
              
              
              9,866
              
              
              
              10,288Loans
      90 days and greater delinquentand
      still accruing:Real
      estate loans:Construction
      and land development
              
              
              -
              
              
              
              -Farmland
              
              
              -
              
              
              
              -One-
      to four- family residential
              
              
              126
              
              
              
              544Multifamily
              
              
              -
              
              
              
              -Non-farm
      non-residential
              
              
              -
              
              
              
              -Non-real
      estate loans:Agricultural
              
              
              -
              
              
              
              -Commercial
      and industrial
              
              
              -
              
              
              
              -Consumer
      and other
              
              
              2
              
              
              
              3Total
      loans 90 days greaterdelinquent
      and still accruing
              
              
              128
              
              
              
              547Restructured
      loans
              
              
              -
              
              
              
              -Total
      non-performing loans
              
              
              9,994
              
              
              
              10,835Real
      estate owned:Real
      estate loans:Construction
      and land development
              
              
              84
              
              
              
              84Farmland
              
              
              -
              
              
              
              -One-
      to four- family residential
              
              
              81
              
              
              
              170Multifamily
              
              
              -
              
              
              
              -Non-farm
      non-residential
              
              
              359
              
              
              
              119Non-real
      estate loans:Agricultural
              
              
              -
              
              
              
              -Commercial
      and industrial
              
              
              -
              
              
              
              -Consumer
      and other
              
              
              -
              
              
              
              -Total
      real estate owned
              
              
              524
              
              
              
              373Total
      non-performing assets
              
              $
              10,518
              
              
              $
              11,208
  - 11
-
   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 the well
as recoveries of previously charged-off loans and is decreased by loan
charge-offs. The provision is the necessary charge to current expense to provide
for current loan losses and to maintain the allowance at an adequate level
commensurate with Management's evaluation of the risks inherent in the loan
portfolio. Various factors are taken into consideration when the Company
determines the amount of the provision and the adequacy of the allowance. These
factors include but are not limited to:




§  Past due
and nonperforming assets;


§  Specific
internal analysis of loans requiring special attention;


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


§  Changes
in underwriting standards or lending procedures and policies;


§  Charge-off
and recovery practices;


§  National
and local economic and business conditions;


§  Nature
and volume of loans;


§  Overall
portfolio quality;


§  Adequacy
of loan collateral;


§  Quality
of loan review system and degree of oversight by its Board of
Directors;


§  Competition
and legal and regulatory requirements on borrowers;


§  Examinations
and review by the Company's internal loan review department, independent
accountants and third-party independent loan review personnel; and


§  Examinations
of the loan portfolio by federal and state regulatory agencies.





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


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


Provisions made pursuant to these
processes totaled $202,000 in the first three months of 2008 as compared to
$187,000 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 three 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 $284,000 for first three
months of 2008 as compared to total charge-offs of $239,000 for the same period
in 2007. Recoveries were $63,000 for the first three months of 2008 as compared
to recoveries of $113,000 for the same period in 2007.


The allowance at March 31, 2008 was
$6.2 million or 1.04% of total loans and 58.7% 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.





March
      31,2008
              
              
              2007(in
      thousands)Loans:Average
      outstanding balance
              
              $
              581,108
              
              
              $
              502,845Balance
      at end of period
              
              $
              591,612
              
              
              $
              503,729Allowance
      for Loan Losses:Balance
      at beginning of year
              
              $
              6,193
              
              
              $
              6,675Provision
      charged to expense
              
              
              202
              
              
              
              187Loans
      charged off
              
              
              (284
              )
              
              
              (239
              )Recoveries
              
              
              63
              
              
              
              113Balance
      at end of period
              
              $
              6,174
              
              
              $
              6,736






- 12
-
 
  Deposits.Managing
the mix and pricing the maturities of deposit liabilities is an important factor
affecting 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 March 31, 2008, total
deposits decreased $18.4 million, or 2.5%, to $704.7 million at March 31, 2008
from $723.1 million at December 31, 2007. Non-interest-bearing demand deposits
increased by $2.2 million while interest-bearing deposits decreased by $20.6
million. The decrease in interest-bearing deposits are from a decrease of $5.4
million in business deposits, $27.0 million in consumer deposits and an increase
of $11.8 million in public fund deposits. As of March 31, 2008, the aggregate
amount of outstanding certificates of deposit in amounts greater than or equal
to $100,000 was approximately $174.5 million.


Average
noninterest-bearing deposits increased to $118.7 million for the three-month
period ended March 31, 2008 from $118.3 million for the three-month period ended
March 31, 2007. Average noninterest-bearing deposits represented 16.7% and 18.6%
of average total deposits for the three-month periods ended March 31, 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.


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




March
      31,
              
              
              December
      31,
              
              
              Increase/(Decrease)2008
              
              
              2007
              
              
              Amount
              
              
              Percent(dollars
      in thousands)Deposits:Non-interest
      bearing demand
              
              $
              122,986
              
              
              $
              120,740
              
              
              $
              2,246
              
              
              
              1.9
              %Interest
      bearing demand
              
              
              210,374
              
              
              
              223,142
              
              
              
              (12,768
              )
              
              
              -5.7
              %Savings
              
              
              44,948
              
              
              
              45,044
              
              
              
              (96
              )
              
              
              -0.2
              %Time
              
              
              326,415
              
              
              
              334,168
              
              
              
              (7,753
              )
              
              
              -2.3
              %Total
      deposits
              
              $
              704,723
              
              
              $
              723,094
              
              
              $
              (18,371
              )
              
              
              -2.5
              %




Borrowings.The Company maintains borrowing relationships with other financial
institutions as well as the Federal Home Loan Bank on a short- and long-term
basis to meet liquidity needs. At March 31, 2008, short term borrowings totaled
$9.4 million compared to $10.4 million at December 31, 2007. Long term
borrowings remained unchanged at $3.1 million at March 31, 2008 when
compared to December 31, 2007 and consisted solely of subordinated debt. The
average amount of total borrowings for the three months ended March 31, 2008 was
$10.9 million, compared to $20.6 million for the three months ended March 31,
2007. At March 31, 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 increased to $67.8 million as of March 31, 2008 from $66.5 million as of
December 31, 2007. The increase in equity primarily resulted from net income of
$2.3 million for the three months ended March 31, 2008 less $169,000 for
the decrease in unrealized loss on available for sale securities and
$889,000 in quarterly dividend payments. Cash dividends paid were $0.16 and
$0.15 per share for the three-month periods ending March 31, 2008 and 2007,
respectively.




Investment Securities
Portfolio.  The securities portfolio totaled $125.1 million at
March 31, 2008 and consisted principally of U.S. Government agency securities,
mortgage-backed obligations, asset-backed securities, corporate debt securities
and mutual funds or other equity securities. The 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 the balance
sheet.


At March
31, 2008, $39.1 million or 30.7% of securities (excluding 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 $38.3 million in discount notes that
are being used solely for pledging purposes. When excluding these securities,
only 2.2% of securities mature in less than one year. Securities with maturity
dates over 15 years totaled 11.1% of the total portfolio. The average maturity
of the securities portfolio was 2.29 years.


At March
31, 2008, securities totaling $90.6 million were classified as available for
sale and $34.5 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 March 31, 2008, it
is management’s opinion that we held no investment securities which bear a
greater than the normal amount of credit risk as compared to similar investments
and that no securities had an amortized cost greater than their recoverable
value.


Average
securities as a percentage of average interest-earning assets were 16.8% for the
three-month period ended March 31, 2008 and 24.6% for the same period in 2007.
Most securities held at March 31, 2008 qualified as securities pledgeable to
collateralize repurchase agreements and public funds.Securities
pledged at March 31, 2008 totaled $115.2 million.





- 13
-


Results
of Operations for the Three months ended March 31, 2008 and March 31,
2007





Net
income.Net income for
the three months ended March 31, 2008 was $2.3 million, a decrease of $163,000,
or 6.5% from $2.5 million for the three months ended March 31, 2007. Net income
for the first quarter 2008 decreased in spite of an improvement in net interest
income due to 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 this income to
provide the largest possible amount of income while balancing interest rate,
credit and liquidity risks.


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


Net interest
income for the three-month period ended March 31, 2008 totaled $8.0 million.
This reflects an increase of $137,000 when compared to the three-month
period ended March 31, 2007.


The net
interest income yield shown below in the average balance sheet is calculated by
dividing net interest income by average interest-earning assets and is a measure
of the efficiency of the earnings from balance sheet activities. It is affected
by changes in the difference between interest on interest-earning assets and
interest-bearing liabilities and the percentage of interest-earning assets
funded by interest-bearing liabilities (leverage). The leverage for the three
months ending March 31, 2008 was 80.6%, compared to 79.6% for the same period in
2007.


The following
table sets forth average balance sheets, average yields and costs, and certain
other information for the three months ended March 31, 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 set forth
below include the effect of deferred fees, discounts and premiums that are
amortized or accreted to interest income or expense.




- 14
-





Three
      Months Ended March 31,2008
              
              
              2007Average
              
              
              
              
              
              Yield/
              
              
              Average
              
              
              
              
              
              Yield/Balance
              
              
              Interest
              
              
              Rate
              
              
              Balance
              
              
              Interest
              
              
              Rate(dollars
      in thousands)AssetsInterest-earning
      assets:Interest-earning
      deposits with banks
              
              $
              880
              
              
              $
              9
              
              
              
              4.0
              %
              
              $
              2,300
              
              
              $
              23
              
              
              
              4.0
              %Securities
      (including FHLB stock)
              
              
              125,792
              
              
              
              1,519
              
              
              
              4.9
              %
              
              
              168,614
              
              
              
              2,302
              
              
              
              5.5
              %Federal
      funds sold
              
              
              39,080
              
              
              
              316
              
              
              
              3.3
              %
              
              
              9,191
              
              
              
              119
              
              
              
              5.3
              %Loans
      held for sale
              
              
              1,090
              
              
              
              21
              
              
              
              7.7
              %
              
              
              1,464
              
              
              
              16
              
              
              
              4.5
              %Loans,
      net of unearned income
              
              
              581,108
              
              
              
              10,858
              
              
              
              7.5
              %
              
              
              502,845
              
              
              
              10,501
              
              
              
              8.5
              %Total
      interest-earning assets
              
              
              747,950
              
              
              
              12,723
              
              
              
              6.8
              %
              
              
              684,414
              
              
              
              12,961
              
              
              
              7.7
              %Noninterest-earning
      assets:Cash
      and due from banks
              
              
              25,682
              
              
              
              
              
              
              
              
              
              
              
              20,097Premises
      and equipment, net
              
              
              16,150
              
              
              
              
              
              
              
              
              
              
              
              13,840Other
      assets
              
              
              4,973
              
              
              
              
              
              
              
              
              
              
              
              3,747Total
              
              $
              794,755
              
              
              
              
              
              
              
              
              
              
              $
              722,098Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Demand
      deposits
              
              $
              205,050
              
              
              
              968
              
              
              
              1.9
              %
              
              $
              198,785
              
              
              
              1,659
              
              
              
              3.4
              %Savings
      deposits
              
              
              45,929
              
              
              
              56
              
              
              
              0.5
              %
              
              
              40,882
              
              
              
              50
              
              
              
              0.5
              %Time
      deposits
              
              
              340,797
              
              
              
              3,582
              
              
              
              4.2
              %
              
              
              277,515
              
              
              
              3,107
              
              
              
              4.5
              %Borrowings
              
              
              10,907
              
              
              
              109
              
              
              
              4.0
              %
              
              
              20,563
              
              
              
              274
              
              
              
              5.4
              %Total
      interest-bearing liabilities
              
              
              602,683
              
              
              
              4,715
              
              
              
              3.1
              %
              
              
              537,745
              
              
              
              5,090
              
              
              
              3.8
              %Noninterest-bearing
      liabilities:Demand
      deposits
              
              
              118,713
              
              
              
              
              
              
              
              
              
              
              
              118,268Other
              
              
              5,281
              
              
              
              
              
              
              
              
              
              
              
              5,229Total
      liabilities
              
              
              726,677
              
              
              
              
              
              
              
              
              
              
              
              661,242Stockholders'
      equity
              
              
              68,078
              
              
              
              
              
              
              
              
              
              
              
              60,856Total
              
              $
              794,755
              
              
              
              
              
              
              
              
              
              
              $
              722,098Net
      interest income
              
              
              
              
              
              $
              8,008
              
              
              
              
              
              
              
              
              
              
              $
              7,871Net
      interest rate spread (1)
              
              
              
              
              
              
              
              
              
              
              3.7
              %
              
              
              
              
              
              
              
              
              
              
              3.9
              %Net
      interest-earning assets(2)
              
              $
              145,267
              
              
              
              
              
              
              
              
              
              
              $
              146,669Net
      interest spread (3)
              
              
              
              
              
              
              
              
              
              
              4.3
              %
              
              
              
              
              
              
              
              
              
              
              4.7
              %Average
      interest-earning assets tointerest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              124.1
              %
              
              
              
              
              
              
              
              
              
              
              127.3
              %


(1) Net
interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
 (2) Net
interest-earning assets represents total interest-earning assets less total
interest-bearing liabilities.
 (3) Net
interest margin represents net interest income divided by average total
interest-earning assets.
 
 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 $202,000 in the first three months of
2008 as compared to $187,000 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 three 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 $284,000 for the first three months of 2008 as compared to
$239,000 for the same period in 2007. Recoveries were $63,000 for the first
three months of 2008 as compared to $113,000 for the same period in
2007.





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 first three months of 2008 totaled $1.4 million, up $299,000 when
compared to the same period in 2007. This increase was due to increases in
service charge, commission and fee income totaling $131,000, increases of
$45,000 in net gains on sale of loans, increases of $54,000 in other noninterest
income and a $69,000 decrease in net losses on sale of securities.





- 15
-


Noninterest
Expense.  Noninterest expense totaled $5.7 million for the
three months ended March 31, 2008, compared to $5.0 million for the same period
in 2007, an increase of $642,000.


Salaries and
benefits increased $320,000 primarily due to an increase in support staff
and the acquisition of Homestead Bank which occurred on July 30, 2007. At March
31, 2008, 237 employees represented full-time equivalents of 222 staff members,
compared to 218 employees which represented full-time equivalents of 202.5
staff members during the same period of 2007. At the time of the Homestead Bank
acquisition, Homestead Bank employed 21 employees, all of whom became employees
of Company. Occupancy and equipment expense totaled $699,000 for the first three
months of 2008, an increase of $79,000 when compared to the same period in 2007.
Net cost of other real estate and repossessions decreased $224,000 when
comparing the three month periods ending 2008 and 2007. Other noninterest
expense reflects an increase of $466,000 when comparing the three-month periods
ended 2008 and 2007. The table below presents the components of other
noninterest expense as of the three months ended March 31, 2008 and
2007.





Three
      Months Ended March 31,2008
              
              
              2007(in
      thousands)Other
      noninterest expense:Legal
      and professional fees
              
              $
              436
              
              
              $
              239Operating
      supplies
              
              
              137
              
              
              
              150Regulatory
      assessment
              
              
              87
              
              
              
              38Insurance
              
              
              54
              
              
              
              31Marketing
      and public relations
              
              
              279
              
              
              
              273Data
      processing
              
              
              496
              
              
              
              415Travel
      and lodging
              
              
              110
              
              
              
              121Taxes
      - sales and capital
              
              
              172
              
              
              
              163Postage
              
              
              65
              
              
              
              65Software
              
              
              71
              
              
              
              65Telephone
              
              
              46
              
              
              
              47Amortization
      of core deposit intangibles
              
              
              78
              
              
              
              32Other
              
              
              299
              
              
              
              225Total
      other expense
              
              $
              2,330
              
              
              $
              1,864


Income
Taxes. The provision for income taxes for the three months ended
March 31, 2008 decreased $58,000 when compared to the same period in 2007. The
decrease in the provision for income taxes reflected lower income during the
three-month period in 2008. In each of the three months ended March 31, 2008 and
2007, the income tax provision approximated the normal statutory
rate.  The effective rates were 35.0% and 34.4%,
respectively.




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




- 16
-


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


We monitor
interest rate risk using an interest sensitivity analysis set forth on the
following table. This analysis, which we prepare monthly, reflects the maturity
and repricing characteristics of assets and liabilities over various time
periods. The gap indicates whether more assets or liabilities are subject to
repricing over a given time period. The interest sensitivity analysis at March
31, 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)
              
              $
              369,237
              
              
              $
              62,522
              
              
              $
              431,759
              
              
              $
              160,690
              
              
              $
              592,449Securities
      (including FHLB stock)
              
              
              38,943
              
              
              
              645
              
              
              
              39,588
              
              
              
              85,989
              
              
              
              125,577Federal
      funds sold
              
              
              35,004
              
              
              
              -
              
              
              
              35,004
              
              
              
              -
              
              
              
              35,004Other
      earning assets
              
              
              19
              
              
              
              99
              
              
              
              118
              
              
              
              -
              
              
              
              118Total
      earning assets
              
              
              443,203
              
              
              
              63,266
              
              
              
              506,469
              
              
              
              246,679
              
              
              $
              753,148Source
      of Funds:Interest-bearing
      Accounts:Demand
      deposits
              
              
              140,221
              
              
              
              -
              
              
              
              140,221
              
              
              
              70,153
              
              
              
              210,374Savings
              
              
              11,237
              
              
              
              -
              
              
              
              11,237
              
              
              
              33,711
              
              
              
              44,948Time
      deposits
              
              
              152,686
              
              
              
              111,011
              
              
              
              263,697
              
              
              
              62,718
              
              
              
              326,415Short-term
      borrowings
              
              
              9,433
              
              
              
              -
              
              
              
              9,433
              
              
              
              -
              
              
              
              9,433Long-term
      borrowings
              
              
              -
              
              
              
              3,093
              
              
              
              3,093
              
              
              
              -
              
              
              
              3,093Noninterest-bearing,
      net
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              158,885
              
              
              
              158,885Total
      source of funds
              
              
              313,577
              
              
              
              114,104
              
              
              
              427,681
              
              
              
              325,467
              
              
              $
              753,148Period
      gap
              
              
              129,626
              
              
              
              (50,838
              )
              
              
              78,788
              
              
              
              (78,788
              )Cumulative
      gap
              
              $
              129,626
              
              
              $
              78,788
              
              
              $
              78,788
              
              
              $
              -Cumulative
      gap as apercent
      of earning assets
              
              
              17.21
              %
              
              
              10.46
              %
              
              
              10.46
              %





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-bearing demand deposits with banks, federal funds sold and available
for sale investment securities. Including securities pledged to collateralize
public fund deposits, these assets represent 17.7% and 20.6% of the total
liquidity base at March 31, 2008 and December 31, 2007, respectively. In
addition, the Company maintained borrowing availability with the Federal Home
Loan Bank approximating $9.1 million and $54.7 million at March 31, 2008
and December 31, 2007, respectively.  We also maintain federal funds
lines of credit at three other correspondent banks totaling $59.7 million
at March 31, 2008 and December 31, 2007. As of March 31, 2008 and December
31, 2007, the Company did not have outstanding debt against 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 $67.8 million at March 31, 2008, an increase of $1.3 million
when compared to $66.5 million at December 31, 2007. The increase in equity
resulted from net income of $2.3 million, which was partially offset by the
change in accumulated other comprehensive income of $169,000 and by dividends
paid to stockholders totaling $889,000.




- 17
-


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


At March 31,
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 annual report are effective. There were no changes in the
Company’s internal control over financial reporting during the last fiscal
quarter in the period covered by this quarterly report that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.





- 18
-
  
  Item 1. Legal
Proceedings
 The Company
is subject to various other legal proceedings in the normal course of business
and otherwise. It is management's belief that the ultimate resolution of such
other claims will not have a material adverse effect on the Company's financial
position or results of operations.
   Item 1A. Risk
Factors
 There have
been no material changes in the risk factors disclosed by the Company in its
Annual Report 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
nonapplicable and is therefore not included.
   Item 3. Defaults Upon Senior
Securities
 Item 3 is
nonapplicable and is therefore not included.
   Item 4. Submission of Matters to a
Vote of Security Holders
 Item 4 is
nonapplicable and is therefore not included.
   Item 5. Other Information
 Item 5 is
non-applicable and is therefore not included.
   Item 6. Exhibits and Reports on Form
8-K
 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
              
              Exhibit11
              
              Statement
      regarding computation of earnings per common shareThe
      information required by this item is incorporated by reference to the
      Company's Form 10-K for the period ended December 31, 2007,  filed
      with the SEC on 03/31/2008 .12
              
              Statement
      regarding computation of ratiosThe
      information required by this item is incorporated by reference to the
      Company's Form 10-K for the period ended December 31, 2007, filed with the
      SEC on 03/31/2008 .31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
              
              Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.32.2
              
              Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.
  
 - 19
-


SIGNATURES
   Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
   FIRST
      GUARANTY BANCSHARES, INC.Date:
      May 15, 2008
              
              By:
      /s/ Michael R.
  SharpMichael
      R. SharpPresident
      andChief
      Executive OfficerDate: May
      15, 2008
              
              By:
      /s/ Michele E.
    LoBiancoMichele
      E. LoBiancoChief
      Financial OfficerSecretary
      and Treasurer