Attached files

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EX-24 - POWER OF ATTORNEY - First Guaranty Bancshares, Inc.ex24.htm
EX-12 - COMPUTATION OF RATIOS - First Guaranty Bancshares, Inc.ex12.htm
EX-11 - COMPUTATION OF EPCS - First Guaranty Bancshares, Inc.ex-11.htm
EX-31.1 - CEO 302 CERTIFICATION - First Guaranty Bancshares, Inc.ex31-1.htm
EX-31.2 - CFO 302 CERTIFICATION - First Guaranty Bancshares, Inc.ex31-2.htm
EX-32.2 - CFO 906 CERTIFICATION - First Guaranty Bancshares, Inc.ex32-2.htm
EX-14.4 - CODE OF CONDUCT FOR SENIOR FINANCIAL OFFICERS - First Guaranty Bancshares, Inc.ex14-4.htm
EX-99.2 - CFO TARP CERTIFICATION - First Guaranty Bancshares, Inc.ex99-2.htm
EX-14.3 - CODE OF CONDUCT FOR EMPLOYEES, OFFICERS AND DIRECTORS - First Guaranty Bancshares, Inc.ex14-3.htm
EX-32.1 - CEO 906 CERTIFICATION - First Guaranty Bancshares, Inc.ex32-1.htm
EX-99.1 - CEO TARP CERTIFICATION - First Guaranty Bancshares, Inc.ex99-1.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
x ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010.
or
        o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.

Commission file number: 000-52748

 
       
 
       FIRST GUARANTY BANCSHARES, INC.
        (Exact name of registrant as specified in its charter)

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

 
 
 

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

 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES o         NO x
 
 
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 o
 
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.  
YESo         NO o
 
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.T
YESo         NOx
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer Accelerated filer  Non-accelerated filer  Smaller reporting company  x
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   
YESo        NO x

 
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2010 was $53,658,241 based upon the price from the last trade of $18.62.  The common stock is not quoted or traded on an exchange and there is no established or liquid market for the common stock.
 
As of March 10, 2011, there were issued and outstanding 5,559,644 shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE:
(1)  Proxy Statement for the 2010 Annual Meeting of Stockholders of the Registrant (Part III).
 
 
- 2 -
 
 

 
 
 

 
 
TABLE OF CONTENTS

 

 

 
   
Page
Part I.
   
Item 1
Business
4
Item 1A
Risk Factors
15
Item 1B
Unresolved Staff Comments
21
Item 2
Properties
22
Item 3
Legal Proceedings
23
Item 4
Reserved
23
     
Part II.
   
Item 5
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
 
 
  Purchases of Equity Securities
23
Item 6
Selected Financial Data
25
Item 7
Management's Discussion and Analysis of Financial Condition and Results
 
 
  of Operations
27
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
50
Item 8
Financial Statements and Supplementary Data
52
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial
 
 
  Disclosures
85
Item 9a(T)
Controls and Procedures
85
Item 9b
Other Information
85
     
Part III.
   
Item 10
Directors, Executive Officers and Corporate Governance
86
Item 11
Executive Compensation
86
Item 12
Security Ownership of Certain Beneficial Owners, Management and Related Stockholder
86
 
  Matters
 
Item 13
Certain Relationships and Related Transactions and Director Independence
86
Item 14
Principal Accountant Fees and Services
86
     
Part IV.
   
Item 15
Exhibits and Financial Statement Schedules
87
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 3 -
 
 
 

 

 
 PART 1

Item 1 – Business
Background
    First Guaranty Bancshares, Inc. (the “Company”) is a bank holding company headquartered in Hammond, Louisiana with one wholly owned subsidiary, First Guaranty Bank (the “Bank”). At December 31, 2010, the Company had consolidated assets of $1.133 billion with $97.9 million in consolidated stockholders’ equity. The Company’s executive office is located at 400 East Thomas Street, Hammond, Louisiana 70401. The telephone number is (985) 345-7685. The Company is subject to extensive regulation by the Board of Governors of the Federal Reserve System (“FRB”).
    First Guaranty Bank is a Louisiana state chartered commercial bank with 16 full-service banking facilities and one drive-up only facility located in southeast, southwest and north Louisiana. The Bank was organized under Louisiana law in 1934 and changed its name to First Guaranty Bank in 1971. Deposits are insured up to the maximum legal limits by the FDIC. The Bank is not a member of the Federal Reserve System. As of December 31, 2010, the Bank was the sixth largest Louisiana-based bank and the fourth largest Louisiana bank not headquartered in New Orleans, as measured by total assets. On October 22, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Greensburg Bancshares, Inc. (“Greensburg Bancshares”) and its wholly-owned subsidiary, Bank of Greensburg (“Greensburg”).  For further information see "Entry into Material Definitive Agreement."
Business Objective
    The Company’s business objective is to provide value to customers by delivering products and services matched to customer needs. We emphasize personal relationships and localized decision making. The Board of Directors and senior Management have extensive experience and contacts in our marketplace and are an important source of new business opportunities.
    The Company’s business plan emphasizes both growth and profitability.  From December 31, 2006 to December 31, 2010, assets have grown from $715.2 million to $1.133 billion.

Market Areas
    Our focus is on the bedroom communities of metropolitan markets, small cities and rural areas in southeast, southwest and north Louisiana. In southeast Louisiana, seven branches are located in Tangipahoa Parish in the towns of Amite, Hammond (2), Independence, Kentwood and Ponchatoula (2). Two branches are located in Livingston Parish, one branch in Denham Springs and the other in Walker. In southwest Louisiana, we have branches in Abbeville and Jennings which are located in Vermillion Parish and Jefferson Davis Parish, respectively. The remaining six branches are located in north Louisiana, in Haynesville and Homer, which are both in Claiborne Parish; in Oil City and Vivian, both in Caddo Parish; in Dubach in Lincoln Parish and Benton, in Bossier Parish. Our core market remains in the home parish of Tangipahoa where approximately 33.0% of deposits and 39.8% of net loans were based in 2010.
    Our southeast Louisiana market is strategically located near the intersection of Interstates 12 and 55, which places it at a crossroads of commercial activity for the southeastern United States. In addition, this market area is largely populated by the work force of several nearby petrochemical refineries and other industrial plants and is a bedroom community for the urban centers of New Orleans and Baton Rouge, which are approximately 45 miles and 60 miles, respectively, from Hammond, where the main office is located. Hammond is home to one of the largest medical centers in the state of Louisiana and the third largest state university in Louisiana.
    Our southwest Louisiana market benefits from a profitable casino gaming industry and substantial tourism revenue derived from the Louisiana Acadian culture. It also has a concentration of oilfield and oilfield services activity and is a thriving agricultural center for rice, sugarcane and crawfish.
    Timber cultivation and its related industries, including milling and logging, are key commercial activities in the north Louisiana market. It is also an agrarian center in which corn, cotton and soybeans are the primary crops. The poultry industry, including independent poultry grower farms that contract with national poultry processing companies, are also very important to the local economy.

Banking Products and Services
    The Company offers personalized commercial banking services to businesses, professionals and individuals. We offer a variety of deposit products including personal and business checking and savings accounts, time deposits, money market accounts and NOW accounts. Other services provided include personal and commercial credit cards, remote deposit capture, safe deposit boxes, official checks, traveler's checks, internet banking, online bill pay, mobile banking and lockbox services. Also offered is 24-hour banking through internet banking, voice response and 26 automated teller machines. Although full trust powers have been granted, we do not actively operate or have any present intention to activate a trust department.

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

 
 
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Competition
    The banking business in Louisiana is extremely competitive. We compete for deposits and loans with existing Louisiana and out-of-state financial institutions that have longer operating histories, larger capital reserves and more established customer bases. The competition includes large financial services companies and other entities in addition to traditional banking institutions such as savings and loan associations, savings banks, commercial banks and credit unions.
    Many of our larger competitors have a greater ability to finance wide-ranging advertising campaigns through their greater capital resources. Marketing efforts depend heavily upon referrals from officers, directors and shareholders, selective advertising in local media and direct mail solicitations. We compete for business principally on the basis of personal service to customers, customer access to officers and directors and competitive interest rates and fees.
    In the financial services industry, intense market demands, technological and regulatory changes and economic pressures have eroded industry classifications in recent years that were once clearly defined. Financial institutions have been forced to diversify their services, increase rates paid on deposits and become more cost effective, as a result of competition with one another and with new types of financial services companies, including non-banking competitors. Some of the results of these market dynamics in the financial services industry have been a number of new bank and non-bank competitors, increased merger activity, and increased customer awareness of product and service differences among competitors. These factors could affect business prospects.

Employees
   At December 31, 2010, the Company employeed 246 full-time equivalent employees.  None of our employees are represented by a collective bargaining group. The Company has a good relationship with its employees.

Data Processing
    Since November 2001, customer information has been housed on equipment owned by Financial Institution Service Corporation (FISC). FISC is a cooperative jointly owned by a number of Louisiana and Mississippi state banks that are currently serviced by FISC. The 2010 annual cost of this service was $0.8 million. The current arrangements are adequate and are expected to be able to accommodate our needs for the foreseeable future.

Information Technology Infrastructure
    Our wide area network links more than 25 remote sites.  All of the Company's network devices communicate via secure network.  We have a redundant back-up site located in Homer, Louisiana.

Subsidiaries
    The Company is a one-bank holding company with First Guaranty Bank as its subsidiary.
 
Bank Regulatory Compliance
    First Guaranty Bank is a Federal Deposit Insurance Corporation (“FDIC”) insured, non-member Louisiana state bank. Regulation of financial institutions is intended primarily to protect depositors, the deposit insurance funds of the FDIC and the banking system as a whole, and generally is not intended to protect stockholders or other investors.
    The Bank is subject to regulation and supervision by both the Louisiana Office of Financial Institutions and the FDIC. In addition, the Bank is subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that are made and the interest that is charged on those loans, and limitations on the types of investments that are made and the types of services that are offered. Various consumer laws and regulations also affect operations. See “Bank Regulation and Supervision.”

Bank Regulation and Supervision
    Banking is a complex, highly regulated industry. Consequently, the growth and earnings performance of First Guaranty Bancshares, Inc. and its subsidiary bank can be affected not only by Management decisions and general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. These authorities include, but are not limited to, the FRB, the FDIC, the Louisiana Office of Financial Institutions (“OFI”), the U.S. Internal Revenue Service and state taxing authorities. The effect of these statutes, regulations and policies and any changes to any of them can be significant and cannot be predicted.
    The primary goals of the regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress has created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the banking industry. The system of supervision and regulation applicable to First Guaranty Bancshares, Inc. establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds, depositors and the public, rather than the shareholders and creditors. The following is an attempt to summarize some of the relevant laws, rules and regulations governing banks and bank holding companies, but does not purport to be a complete summary of all such applicable laws, rules and regulations. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed.
 
 
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The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”).  
    The Dodd-Frank Act made extensive changes in the regulation of depository institutions.  For example, the Dodd-Frank Act creates a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board.  The Consumer Financial Protection Bureau will assume responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations, a function currently assigned to prudential regulators, and will have authority to impose new requirements.  Institutions of less than $10 billion in assets, such as First Guaranty Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the primary enforcement authority of, their federal prudential regulator rather than the Consumer Financial Protection Bureau.
    In addition to creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, directs changes in the way that institutions are assessed for deposit insurance, requires more stringent consolidated capital requirements for bank holding companies, requires originators of securitized loans to retain a percentage of the risk for the transferred loans, establishes regulatory rate-setting for certain debit card interchange fees, repeals restrictions on the payment of interest on commercial demand deposits, contains a number of reforms related to mortgage originations and requires public companies to give stockholders a non-binding vote on executive compensation and golden parachutes.  Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates and/or require the issuance of implementing regulations.  Their impact on operations can not yet be fully assessed.  However, there is significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden, compliance costs and interest expense for First Guaranty Bank.
 
  First Guaranty Bancshares, Inc.
    General.  First Guaranty Bancshares, Inc. is a bank holding company registered with, and subject to regulation by, the FRB under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). The Bank Holding Company Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.
    In accordance with FRB policy, a bank holding company, such as First Guaranty Bancshares, Inc., is expected to act as a source of financial strength to its subsidiary banks and commit resources to support its banks. This support may be required under circumstances when we might not be inclined to do so absent this FRB policy.
 
    Dividends. The Federal Reserve Bank has stated that generally, a bank holding company, should not maintain a rate of distributions to shareholders unless its available net income has been sufficient to fully fund the distributions, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition. As a Louisiana corporation, the Company is restricted under the Louisiana corporate law from paying dividends under certain conditions. The Company is currently required to obtain prior written approval from the FRB before declaring or paying any corporate dividend.
    The Company is also restricted under the terms of the agreement related to the issuance of the Treasury Capital Purchase Program preferred stock from raising its dividend level or engaging in other capital transactions.  See "Troubled Assets Relief Program."
    First Guaranty Bank may not pay dividends or distribute capital assets if it is in default on any assessment due to the FDIC.  First Guaranty Bank is also subject to regulations that impose minimum regulatory capital and minimum state law earnings requirements that affect the amount of cash available for distribution. In addition, under the Louisiana Banking Law, dividends may not be paid if it would reduce the unimpaired surplus below 50% of outstanding capital stock in any year.
    The Bank is restricted under applicable laws in the payment of dividends to an amount equal to current year earnings plus undistributed earnings for the immediately preceding year, unless prior permission is received from the Commissioner of Financial Institutions for the State of Louisiana. 
  
    Certain Acquisitions. Federal law requires every bank holding company to obtain the prior approval of the FRB before (i) acquiring more than five percent of the voting stock of any bank or other bank holding company, (ii) acquiring all or substantially all of the assets of any bank or bank holding company or (iii) merging or consolidating with any other bank holding company.
    Additionally, federal law provides that the FRB may not approve any of these transactions if it would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The FRB is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. Further, the FRB is required to consider the record of a bank holding company and its subsidiary            bank(s) in combating money laundering activities in its evaluation of bank holding company merger or acquisition transactions.
    Under the Bank Holding Company Act, if adequately capitalized and adequately managed, any bank holding company located in Louisiana may purchase a bank located outside of Louisiana. However, as discussed below, restrictions currently exist on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits.

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

    - 6 -

Permitted Activities. Generally, bank holding companies are prohibited by federal law from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in any activity other than (i) banking or managing or controlling banks or (ii) an activity that the FRB determines to be so closely related to banking as to be a proper incident to the business of banking.
    Activities that the FRB has found to be so closely related to banking as to be a proper incident to the business of banking include, but are not limited to:
  •  factoring accounts receivable;
  •  making, acquiring, brokering or servicing loans and usual related activities;
  •  leasing personal or real property;
  •  operating a non-bank depository institution, such as a savings association;
  •  trust company functions;
  •  financial and investment advisory activities;
  •  conducting discount securities brokerage activities;
  •  underwriting and dealing in government obligations and money market instruments;
  •  providing specified Management consulting and counseling activities;
  •  performing selected data processing services and support services;
  •  acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
  •  performing selected insurance underwriting activities.
     Despite prior approval, the FRB has the authority to require a bank holding company to terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. A bank holding company that qualifies and elects to become a financial holding company is permitted to engage in additional activities that are financial in nature or incidental or complementary to financial activity. The Bank Holding Company Act expressly lists the following activities as financial in nature:
  • lending, exchanging, transferring, investing for others, or safeguarding money or securities;
  • insuring, guaranteeing or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent or broker for these purposes, in any state;
  • providing financial, investment or advisory services;
  • issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;
  • underwriting, dealing in or making a market in securities;
  • other activities that the FRB may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling banks;
  • foreign activities permitted outside of the United States if the FRB has determined them to be usual in connection with banking operations abroad;
  • merchant banking through securities or insurance affiliates; and
  • insurance company portfolio investments.
    To qualify to become a financial holding company, First Guaranty Bancshares, Inc. and its subsidiary bank must be well-capitalized and well managed and must have a Community Reinvestment Act rating of at least satisfactory. Additionally, First Guaranty Bancshares, Inc. would be required to file an election with the FRB to become a financial holding company and to provide the FRB with 30 days’ written notice prior to engaging in a permitted financial activity. A bank holding company that falls out of compliance with these requirements may be required to cease engaging in some of its activities. First Guaranty Bancshares, Inc. currently has no plans to make a financial holding company election.

   Anti-tying Restrictions. Bank holding companies and affiliates are prohibited from tying the provision of services, such as extensions of credit, to other services offered by a holding company or its affiliates.
 
 
 
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  Insurance of Deposit Accounts.
    First Guaranty Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in First Guaranty Bank are insured by the FDIC, previously up to a maximum of $100,000 for each separately insured depositor and $250,000 for self-directed retirement accounts. However, in view of the recent economic crisis, the FDIC temporarily increased the deposit insurance available on all deposit accounts to $250,000.  The Dodd-Frank Act made that level of coverage permanent. In addition, the Dodd-Frank Act requires that certain non-interest-bearing transaction accounts maintained with depository institutions be fully insured, regardless of the dollar amount, until December 31, 2012.
    The FDIC imposes an assessment for deposit insurance against all depository institutions. That assessment is based on the risk category of each institution, which is derived from examination and supervisory information.  The FDIC first establishes an institution's initial base assessment rate based upon the risk category, with less risky institution paying lower rates.  That initial base assessment rate ranges, from 12 to 45 basis points, depending upon the risk category of the institution.  The initial base assessment is then adjusted (higher or lower) to obtain the total base assessment rate. The adjustments to the initial base assessment rate are generally based upon an institution's levels of unsecured debt, secured liabilities and brokered deposits.  The total base assessment rate, as adjusted, ranges from 7 to 77.5 basis points of the institution's assessable deposits.  The FDIC may adjust the scale uniformly, except when no adjustment may deviate more than three basis points from the base scale without notice and comment.
    On May 22, 2009, the FDIC issued a final rule that imposed a special five basis point assessment on each FDIC-insured depository institution's assets minus its Tier 1 capital, on June 30, 2009, which was collected on September 30, 2009. The special assessment was capped at 10 basis points of an institution's domestic deposits.
    Subsequently the FDIC adopted a rule pursuant to which all insured depository institutions were required to prepay their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. That pre-payment, which was due on December 30, 2009, amounted to approximately $4.5 million for the Bank. The amount of prepayment was determined based on certain assumptions, including an annual 5% growth rate in the assessment base through the end of 2012.  The pre-payment was been recorded as a prepaid expense asset at December 31. 2009 and will be amortized to expense over three years.
    Most recently, the Dodd-Frank Act required the FDIC to revise its risk-based assessment schedule and procedures to base the assessment on each institution’s average total assets less tangible capital, rather than deposits.  The FDIC has issued a final rule that will implement that directive effective April 1, 2011.
    The Federal Deposit Insurance Corporation has authority to increase insurance assessments.  A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of First Guaranty Bank.  Management cannot predict what insurance assessment rates will be in the future.
 
  - 8 -

        Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
         In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds  issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2010, the annualized FICO assessment was 1.04 basis points of assessable deposits maintained at an institution.
  
  Other Regulations. Interest and other charges collected or contracted is subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to federal laws applicable to credit transactions, such as:
  • the federal "Truth -In-Lending Act," governing disclosures of credit terms to consumer borrowers;
  • the "Home Mortgage Disclosure Act of 1975," requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obigation to help meet the housing needs of the community it serves;
  • the "Equal Credit Opportunity Act," prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
  • the "Fair Credit Reporting Act of 1978," governing the use and provision of information to credit reporting agencies;
  • the "Real Estate Settlement Procedures Act";
  • the "Fair Debt Collection Act," governing the manner in which consumer debts may be collected by collection agencies; and
  • The rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.
    The deposit operations are subject to:
  • the "Right to Financial Privacy Act," which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
  • the "Electronic Funds Transfer Act," and Regulation E issued by the FRB to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services;
  • the "Truth in Savings Act"; and
  • the "Expedited Funds Availability Act".
    Dividends. The Company is a legal entity separate and distinct from its subsidiary, First Guaranty Bank. The majority of the Company’s revenue is from dividends paid to the Company by the Bank. First Guaranty Bank may not pay dividends or distribute capital assets if it is in default on any assessment due to the FDIC. The FRB has indicated generally that it may be an unsafe or unsound practice for a bank holding company to pay dividends unless the bank holding company’s net income over the preceding year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition.
    First Guaranty Bank is also subject to regulations that impose minimum regulatory capital and minimum state law earnings requirements that affect the amount of cash available for distribution. In addition, under the Louisiana Banking Law, dividends may not be paid if it would reduce the unimpaired surplus below 50% of outstanding capital stock in any year. If the Company does not comply with these laws, regulations or policies it may materially affect the ability of the Bank to pay dividends.
 
    Capital Adequacy. The FRB monitors the capital adequacy of bank holding companies, such as First Guaranty Bancshares, Inc., and the OFI and FDIC monitor the capital adequacy of First Guaranty Bank. The federal bank regulators use a combination of risk-based guidelines and leverage ratios to evaluate capital adequacy and consider these capital levels when taking action on various types of applications and when conducting supervisory activities related to safety and soundness. The risk-based guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $500 million or more and, generally, on a bank-only basis for bank holding companies with less than $500 million in consolidated assets. Each insured depository subsidiary of a bank holding company with less than $500 million in consolidated assets is expected to be “well-capitalized.”
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    The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and their holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
    The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, preferred stock (other than that which is included in Tier I Capital), and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital.
    In addition, the FRB has established minimum leverage ratio guidelines for bank holding companies with assets of $500 million or more. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the FRB’s risk-based capital measure for market risk. All other bank holding companies with assets of $500 million or more generally are required to maintain a leverage ratio of at least 4%. The guidelines also provide that bank holding companies of such size experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The FRB considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities. The FRB and the FDIC have adopted amendments to their risk-based capital regulations to provide for the consideration of interest rate risk in the agencies’ determination of a banking institution’s capital adequacy.

The Dodd-Frank Act requires the Federal Reserve Board to issue consolidated regulatory capital requirements for bank holding companies that are at least as stringent as those applicable to insured depository institutions.  Such regulations, when issued, will eliminate the use of certain instruments, such as cumulative preferred stock and trust preferred securities, from Tier 1 holding company capital.  Instruments issued by May 19, 2010 by bank holding companies with consolidated assets of less than $15 billion (as of December 31, 2009) are grandfathered.

Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of federal deposit insurance, a prohibition on accepting brokered deposits and other restrictions on its business.
 
    Concentrated Commercial Real Estate Lending Regulations. The FRB and FDIC have recently promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a company has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and non-farm residential properties and loans for construction, land development, and other land represent 300% or more of total capital and the outstanding balance of such loans has increased 50% or more during the prior 36 months. If a concentration is present, Management must employ heightened risk Management practices including board and Management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and increasing capital requirements. The Company is subject to these regulations.
 
    Prompt Corrective Action Regulations. Under the prompt corrective action regulations, bank regulators are required and authorized to take supervisory actions against undercapitalized banks. For this purpose, a bank is placed in one of the following five categories based on its capital:
  • well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);
  • adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);
  • undercapitalized (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3% leverage capital);
  • significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); and
  • critically undercapitalized (less than 2% tangible capital).
 
    Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, banking regulators must appoint a receiver or conservator for an institution that is “critically undercapitalized.” The federal banking agencies have specified by regulation the relevant capital level for each category. An institution that is categorized as “undercapitalized”, “significantly undercapitalized” or “critically undercapitalized” is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an “undercapitalized” subsidiary’s assets at the time it became “undercapitalized” or the amount required to meet regulatory capital requirements. An “undercapitalized” institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with regulatory approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.
 
 
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    Restrictions on Transactions with Affiliates and Loans to Insiders.  First Guaranty Bank is subject to the provisions of Section 23A of the FRB Act and its implementing regulations. These provisions place limits on the amount of:
  • First Guaranty Bank’s loans or extensions of credit to affiliates;
  • First Guaranty Bank’s  investment in affiliates;
  • assets that First Guaranty Bank may purchase from affiliates, except for real and personal property exempted by the FRB;
  • the amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and
  • First Guaranty Bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
 
    The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of First Guaranty Bank’s capital and surplus and, as to all affiliates combined, to 20% of its capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements.
    First Guaranty Bank is also subject to the provisions of Section 23B of the FRB Act and its implementing regulations, which, among other things, prohibit First Guaranty Bank from engaging in any transaction with an affiliate, such as First Guaranty Bancshares, Inc., unless the transaction is on terms substantially the same, or at least as favorable to First Guaranty Bank as those prevailing at the time for comparable transactions with nonaffiliated companies.
    First Guaranty Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These types of extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and must not involve more than the normal risk of repayment or present other unfavorable features.
 
    Anti-terrorism Legislation. Financial institutions are required to establish anti-money laundering programs. In 2001, the USA PATRIOT Act was enacted.  The USA PATRIOT Act significantly enhanced the powers of the federal government and law enforcement organizations to combat terrorism, organized crime and money laundering. While the USA PATRIOT Act imposed additional anti-money laundering requirements, these additional requirements are not material to our operations.
    Aside from the above, the USA PATRIOT Act also requires the federal banking regulators to assess the effectiveness of an institution’s anti-money laundering program in connection with merger and acquisition transactions.  Failure to maintain an effective anti-money laundering program is grounds for the denial of merger or acquisition transactions.

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

Brokered Deposits and Pass-Through Insurance
    An FDIC-insured depository institution cannot accept, rollover or renew brokered deposits unless it is well capitalized or adequately capitalized and receives a waiver from the FDIC. A depository institution that cannot receive brokered deposits also cannot offer “pass-through” insurance on certain employee benefit accounts. Whether or not it has obtained such a waiver, an adequately capitalized depository institution may not pay an interest rate on any deposits in excess of 0.75% over certain prevailing market rates specified by regulation. As of December 31, 2010, the Bank had $12.9 million in brokered deposits through the Certificate of Deposit Account Registry Service (CDARS).

Interstate Branching
    Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits state and national banks with different home states to operate branches across state lines with approval of the appropriate federal banking agency, unless the home state of a participating bank passed legislation “opting out” of interstate banking.  The Dodd-Frank Act amended federal law to allow banks to branch de novo into another state if that state allows banks chartered by it to establish branches within its borders.  First Guaranty Bank currently has no branches outside of Louisiana.

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

Privacy Provisions
    Under the Gramm-Leach-Bliley Act, federal banking regulators have adopted new rules requiring disclosure of privacy policies and information sharing practices to consumers. These rules prohibit depository institutions from sharing customer information with nonaffiliated parties without the customer’s consent, except in limited situations, and require disclosure of privacy policies to consumers and, in some circumstances, enable consumers to prevent disclosure of personal information to nonaffiliated third parties. In addition, the Fair and Accurate Credit Transactions Act of 2003 requires banks to notify their customers if they report negative information about them to a credit bureau or if they grant credit to them on terms less favorable than those generally available.
    The Company has instituted risk Management systems to comply with all required privacy provisions and believes that the new disclosure requirements and implementation of the privacy laws will not materially increase operating expenses.
 
Check 21
    The Check 21 Act facilitates check truncation and electronic check exchange by authorizing a new negotiable instrument called a “substitute check”. The Act provides that a properly prepared substitute check is the legal equivalent of the original check for all purposes. This law supercedes contradictory state laws (i.e., state laws that allow customers to demand the return of original checks).
    Although the Check 21 Act does not require any bank to create substitute checks or to accept checks electronically, it does require banks to accept a legally equivalent substitute check in place of an original check after the Check 21 Act’s effective date of October 28, 2004.

Sarbanes-Oxley Act
    The Company is also subject to the Sarbanes-Oxley Act of 2002, which has imposed corporate governance and accounting oversight restrictions and responsibilities on the board of directors, executive officers and independent auditors. The law has increased the time spent discharging responsibilities and costs for audit services. Beginning in 2007, Management was required to report on the effectiveness of internal controls and procedures. The Company is a smaller reporting company and is not required to get an attestation report from our external auditor on the effectiveness of our internal controls over financial reporting until our public float exceeds $75 million.

Effect of Governmental Policies
    The difference between the interest rate paid on deposits and other borrowings and the interest rate received on loans and securities comprise most of a bank’s earnings.  In order to mitigate the interest rate risk inherent in the industry, the banking business is becoming increasingly dependent on the generation of fee and service charge revenue.
    The earnings and growth of a bank will be affected by both general economic conditions and the monetary and fiscal policy of the United States Government and its agencies, particularly the Federal Reserve. The Federal Reserve sets national monetary policy such as seeking to curb inflation and combat recession.  This is accomplished by its open-market operations in United States government securities, adjustments to the discount rates on borrowings and target rates for federal funds transactions.  The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates on loans and deposits.  The nature and timing of any future changes in monetary policies and their potential impact on the Company cannot be predicted.
    Our noninterest income and expenses can be affected by increasing rates of inflation; however, unlike most industrial companies, the assets and liabilities of financial institutions such as the Banks are primarily monetary in nature.  Interest rates, therefore, have a more significant impact on the Bank’s performance than the effect of general levels of inflation on the price of goods and services.

 
 
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Entry into Material Definitive Agreement
 
    On October 22, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Greensburg Bancshares, Inc. (“Greensburg Bancshares”) and its wholly-owned subsidiary, Bank of Greensburg (“Greensburg”).
    The Merger Agreement provides for the acquisition of Greensburg Bancshares in a merger (the “Merger”).  At the effective time of the Merger, each share of common stock of Greensburg Bancshares (other than shares owned by Greensburg Bancshares and First Guaranty Bancshares), at the election of the holder thereof, will be converted into the right to receive either 13.26 shares of common stock of First Guaranty Bancshares, $247 in cash, or a combination of cash and common stock of First Guaranty Bancshares (the “Merger Consideration”).  The final structure of the Merger will depend upon the election by Greensburg Bancshares of the form of the Merger Consideration.  The total consideration is valued at approximately $5.3 million.
    At December 31, 2010, Greensburg Bancshares had total assets of approximately $89.3 million, including loans of $67.5 million.  Total deposits were $79.8 million.
    The Merger is subject to the approval by the stockholders of Greensburg Bancshares by such vote as is required under its articles of incorporation and Louisiana Business Corporation Law, and other customary closing conditions.  The Merger Agreement contains customary representations, warranties and covenants of First Guaranty Bancshares, First Guaranty Bank, Merger Subsidiary, Greensburg Bancshares and Greensburg.
    It is expected that the Merger will be completed during the second quarter of 2011 following receipt of all regulatory and shareholder approvals.
 
 Troubled Assets Relief Program. Under the TARP, the United States Department of the Treasury authorized a voluntary capital purchase program (the “CPP”) to purchase up to $250 billion of senior preferred shares of qualifying financial institutions that elected to participate. Participating companies must adopt certain standards for executive compensation, including (a) prohibiting “golden parachute” payments as defined in the EESA to senior Executive Officers; (b) requiring recovery of any compensation paid to senior Executive Officers based on criteria that is later proven to be materially inaccurate; and (c) prohibiting incentive compensation that encourages unnecessary and excessive risks that threaten the value of the financial institution. The terms of the CPP also limit certain uses of capital by the issuer, including repurchases of company stock and increases in dividends.
 
     On August 28, 2009, the Company entered into a Letter Agreement, which includes a Securities Purchase Agreement and a Side Letter Agreement (together, the “Purchase Agreement”), with the United States Department of the Treasury (“Treasury Department”) pursuant to which the Company has issued and sold to the Treasury Department 2,069.9 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1,000 per share for a total purchase price of $20.7 million. In addition to the issuance of the Series A Stock, as a part of the transaction, the Company issued to the Treasury Department a warrant to purchase 114.44444 shares of the Company’s Fixed Rate Cumulative Preferred Stock, Series B, and immediately following the issuance of the Series A stock, the Treasury Department exercised its rights and acquired 103 of the Series B shares through a cashless exercise. The newly issued Series A Stock, generally non-voting stock, pays cumulative dividends of 5% for five years, and a rate of 9% dividends, per annum, thereafter. The newly issued Series B Stock, generally non-voting, pays cumulative dividends at a rate of 9% per annum. Both the Series A Stock and the Series B Stock were issued in a private placement.
 
 
 
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    FDIC Temporary Liquidity Guarantee Program. First Guaranty Bancshares, Inc. and First Guaranty Bank have chosen to participate in the FDIC’s Temporary Liquidity Guarantee Program (the “TLGP”), which applies to, among other, all U.S. depository institutions insured by the FDIC and all United States bank holding companies, unless they have opted out. Under the TLPG, the FDIC guarantees certain senior unsecured debt of the holding company and bank, as well as non-interest bearing transaction account deposits at First Guaranty Bank. Under the debt guarantee component of the TLGP, the FDIC will pay the unpaid principal and interest on an FDIC-guaranteed debt instrument upon the uncured failure of the participating entity to make a timely payment of principal or interest.  Neither First Guaranty Bancshares, Inc. nor First Guaranty Bank issued debt under the TLGP.
     Under the transaction account guarantee component of the TLGP, all non-interest bearing transaction accounts maintained at First Guaranty Bank are insured in full by the FDIC until June 30, 2010, later extended to December 31, 2010, regardless of the standard maximum deposit insurance amounts. An annualized 10 basis point assessment on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 was assessed on a quarterly basis to insured depository institutions participating in this component of the TLGP.  The Company chose to participate in this component of the TLGP.  The Dodd-Frank Act extended unlimited coverage for certain non-interest bearing transaction accounts through December 31, 2012.  The cost associated with that coverage will be part of the usual FDIC assessment.
 
    American Recovery and Reinvestment Act of 2009.  On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “ARRA”) was enacted. The ARRA is intended to provide a stimulus to the U.S. economy in the wake of the economic downturn brought about by the subprime mortgage crisis and the resulting credit crunch. The bill includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, healthcare, and infrastructure, including the energy structure. The new law also includes numerous non-economic recovery related items, including a limitation on executive compensation in federally aided banks.
    Under the ARRA, an institution will be subject to the following restrictions and standards through out the period in which any obligation arising from financial assistance provided under the TARP remains outstanding:
  • Limits on compensation incentives for risk taking for senior executive officers.
  • Requirement of recovery of any compensation paid based on inaccurate financial information.
  • Prohibition on "Golden Parachute Payments".
  • Prohibition on compensation plans that would encourage manipulation of reported earnings to enhance the compensation of employees.
  • Publicly registered TARP recipients must establish a board compensation committee comprised entirely of independent directors, for the purpose of reviewing employee compensation plans.
  •  Prohibition on bonus, retention award, or incentive compensation, except for payments of long term restricted stock.
  • Limitation on luxury expenditures.
  • TARP recipients are required to permit a separate shareholder vote to approve the compensation of executives, as disclosed pursuant  to the SEC's compensation disclosure rules.
    The foregoing is a summary of requirements to be included in standards to be established by the Secretary of the Treasury.

    The chief executive officer and chief financial officer of each TARP recipient will be required to provide a written certification of compliance with these standards to the SEC. The foregoing is a summary of requirements to be included in standards to be established by the Secretary of the Treasury.
 

 
 
 
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Item 1A. – Risk Factors
(references to “our,” “we” or similar terms under this subheading refer to First Guaranty Bancshares, Inc.)
    Various factors, such as general economic conditions in the U.S. and Louisiana, regulatory and legislative initiatives and increasing competition could impact our business. The risks and uncertainties described below are not the only risks that may have a material adverse effect on us.  Additional risks and uncertainties also could adversely affect our business and results of operations.  If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or part of your investment.  Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

Risks Associated with our Business

We may be vulnerable to certain sectors of the economy.
          A portion of our loan portfolio is secured by real estate. If the economy deteriorated and depressed real estate values beyond a certain point, that collateral value of the portfolio and the revenue stream from those loans could come under stress and possibly require additional provision to the allowance for loan losses. Our ability to dispose of foreclosed real estate at prices above the respective carrying values could also be impinged, causing additional losses.
 
Difficult market conditions have adversely affected the industry in which we operate.
          The capital and credit markets have been experiencing volatility and disruption for more than twenty-four months. The volatility and disruption has reached unprecedented levels. Dramatic declines in the housing market over the past two years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. We do not expect that the difficult conditions in the financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institution industry. In particular, we may face the following risks in connection with these events:
  • We expect to face increased regulation of our industry, including as a result of the Emergency Economic Stabilization Act of 2008 (EESA).
  • Compliance with such regulation may increase our costs and limit our ability to pursue business oppotunities.
  •  Market developments and the resulting economic pressure on consumers may affect consumer confidence levels and may cause increases in delinquencies and default rates, which, among other effects, could affect our charge-offs and provision for laon losses.  Competition in the industry could intensify as a result of the increasing consolidation of financial services companies in connection with the current market conditions.    
  • The current market disruptions make valuation even more difficult and subjective, and our ability to measure the fair value of our assets could be adversely affected.  If we determine that a significant portion of our assets have values significantly below their recorded carrying value, we could recognize a material charge to earnings in the quarter in which such determination was made, our capital ratios would be adversely affected and a rating agency might downgrade our credit rating or put us on credit watch.

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Certain changes in interest rates, inflation, deflation, or the financial markets could affect demand for our products and our ability to deliver products efficiently.
          Loan originations, and potentially loan revenues, could be adversely impacted by sharply rising interest rates. Conversely, sharply falling rates could increase prepayments within our securities portfolio lowering interest earnings from those investments. An underperforming stock market could reduce brokerage transactions, therefore reducing investment brokerage revenues; in addition, wealth management fees associated with managed securities portfolios could also be adversely affected. An unanticipated increase in inflation could cause our operating costs related to salaries and benefits, technology, and supplies to increase at a faster pace than revenues.
          The fair market value of our securities portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations.
 
Changes in the policies of monetary authorities and other government action could adversely affect our profitability.
          The results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve Board. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in U.S. government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, particularly in light of the continuing threat of terrorist attacks and the current military operations in the Middle East, we cannot predict possible future changes in interest rates, deposit levels, loan demand or our business and earnings. Furthermore, the actions of the United States government and other governments in responding to such terrorist attacks or the military operations in the Middle East may result in currency fluctuations, exchange controls, market disruption and other adverse effects.

We engage in acquisitions of other businesses from time to time.
          On occasion, we will engage in acquisitions of other businesses. Inability to successfully integrate acquired businesses can pose varied risks to us, including customer and employee turnover, thus increasing the cost of operating the new businesses. The acquired companies may also have legal contingencies, beyond those that we are aware of, that could result in unexpected costs. Moreover, there can be no assurance that acquired businesses will achieve prior or planned results of operations.

We may not be able to successfully maintain and manage our growth.
    Since December 31, 2006, assets have grown 58.4%, loan balances have grown 11.9% and deposits have grown 60.8%.  Continued growth depends, in part, upon the ability to expand market presence, to successfully attract core deposits, and to identify attractive commercial lending opportunities.
    Management cannot be certain as to its ability to manage increased levels of assets and liabilities. We may be required to make additional investments in equipment and personnel to manage higher asset levels and loans balances, which may adversely impact our efficiency ratio, earnings and shareholder returns.
    In addition, franchise growth may increase through acquisitions and de novo branching. The ability to successfully integrate such acquisitions into our consolidated operations will have a direct impact on our financial condition and results of operations.

Our loan portfolio consists of a high percentage of loans secured by non-farm non-residential real estate. These loans are riskier than loans secured by one- to four-family properties.
    At December 31, 2010, $292.8 million, or 50.9% of the loan portfolio consisted of non-farm non-residential real estate loans (primarily loans secured by commercial real estate such as office buildings, hotels and gaming facilities). These loans generally expose a lender to greater risk of nonpayment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation and income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential loans. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.
 
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Emphasis on the origination of short-term loans could expose us to increased lending risks.
    At December 31, 2010, $495.1 million, or 86.0% of our loan portfolio consisted of loans that mature within five years. These loans typically provide for payments based on a ten to twenty-year amortization schedule. This results in our borrowers having significantly higher final payments due at maturity, known as a “balloon payment”. In the event our borrowers are unable to make their balloon payments when they are due, we may incur significant losses in our loan portfolio. Moreover, while the shorter maturities of our loan portfolio help us to manage our interest rate risk, they also increase the reinvestment risk associated with new loan originations. To mitigate this risk, we generally will originate loans to existing customers. There can be no assurance that during an economic slow-down we might not incur significant losses as our loan portfolio matures.

Hurricane Activity in Louisiana can have an adverse impact on our market area.
    Our market area in Southeast Louisiana is close to New Orleans and the Gulf of Mexico, an area which is susceptible to hurricanes and tropical storms.
    Hurricane Katrina hit the greater New Orleans area in August 2005. The hurricane caused widespread property damage, required the relocation of an unprecedented number of residents and business operations, and severely disrupted normal economic activity in the impacted areas. The hurricane affected our loan originations and impacted our deposit base. While Hurricane Katrina did not affect our operations as adversely as other areas of Southeast Louisiana, future hurricane activity may have a severe and adverse affect on our operations. More generally, our ability to compete effectively with financial institutions whose operations are not concentrated in areas affected by hurricanes or whose resources are greater than ours, will depend primarily on our ability to continue normal business operations following a hurricane. The severity and duration of the effects of hurricanes will depend on a variety of factors that are beyond our control, including the amount and timing of government, private and philanthropic investments including deposits in the region, the pace of rebuilding and economic recovery in the region and the extent to which a hurricane’s property damage is covered by insurance.
    None of the effects described above can be accurately predicted or quantified at this time. As a result, significant uncertainty remains regarding the impact a hurricane may have on our business, financial condition and results of operations.
 

The oil leak in the Gulf of Mexico and legislative and regulatory responses thereto could have a negative impact on the Company’s customers and, indirectly, result in a negative impact on our earnings.

In late April 2010, the explosion and collapse of a drilling rig in the Gulf of Mexico off the Louisiana coast caused a major oil spill that has now been contained. In response to the oil spill, the U.S. Government imposed a moratorium on deepwater drilling operations and issued new regulations intended to improve the safety of these operations. A moratorium on new wells was ultimately rescinded in October 2010, and the industry is in the process of working to comply with these new requirements. The U.S. Congress currently is considering legislation that could impact offshore drillers’ operations. The Company has identified and communicated with customers that may be affected by the oil spill and its effects. The Company currently believes that its exposure to this event remains extremely limited. As of December 31, 2010, no credit relationship had been adversely classified as a result of the oil spill. However, new legislation or regulations that affect offshore exploration and production activities or substantially increase the cost of these activities could negatively impact customers in this industry and the general economy in our market area.

If the allowance for loan losses is not sufficient to cover actual loan losses, earnings could decrease.
    Loan customers may not repay their loans according to the terms of their loans, and the collateral securing the payment of their loans may be insufficient to assure repayment. We may experience significant credit losses, which could have a material adverse effect on our operating results. Various assumptions and judgments about the collectability of the loan portfolio are made, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of many loans. In determining the amount of the allowance for loan losses, Management reviews the loans and the loss and delinquency experience and evaluates economic conditions. If assumptions prove to be incorrect, the allowance for loan losses may not cover inherent losses in the loan portfolio at the date of the financial statements. Material additions to the allowance would materially decrease net income. At December 31, 2010, our allowance for loan losses totaled $8.3 million, representing 1.44% of loans, net of unearned income.
    Management believes it has underwriting standards to manage normal lending risks, and at December 31, 2010, nonperforming loans consisted of $30.4 million, or 5.28% of loans, net of unearned income. We can give no assurance that the nonperforming loans will not increase or that nonperforming or delinquent loans will not adversely affect future performance.
    In addition, federal and state regulators periodically review the allowance for loan losses and may require an increase in the allowance for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a material adverse effect on the results of operations and financial condition.
 
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Adverse events in Louisiana, where our business is concentrated, could adversely affect our results and future growth.
    Our business, the location of our branches and the real estate used as collateral on our real estate loans are primarily concentrated in Louisiana. As a result, we are exposed to geographic risks. The occurrence of an economic downturn in Louisiana, or adverse changes in laws or regulations in Louisiana could impact the credit quality of our assets, the business of our customers and our ability to expand our business.
    Our success significantly depends upon the growth in population, income levels, deposits and housing in our market area.  If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may be negatively affected.  In addition, the economies of the communities in which we operate are substantially dependent on the growth of the economy in the state of Louisiana.  To the extent that economic conditions in Louisiana are unfavorable or do not continue to grow as projected, the economy in our market area would be adversely affected.  Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our market area if they do occur.
    In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions. As of December 31, 2010, approximately 79.8% of our total loans were secured by real estate.  Adverse developments affecting commerce or real estate values in the local economies in our primary market areas could increase the credit risk associated with our loan portfolio. In addition, substantially all of our loans are to individuals and businesses in Louisiana.  Our business customers may not have customer bases that are as diverse as businesses serving regional or national markets. Consequently, any decline in the economy of our market area could have an adverse impact on our revenues and financial condition.  In particular, we may experience increased loan delinquencies, which could result in a higher provision for loan losses and increased charge-offs. Any sustained period of increased non-payment, delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues, results of operations and financial condition.

Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed and could result in dilution of shareholders’ ownership.
    We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations.  We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future. We may, at some point, need to raise additional capital to support continued growth, both internally and for potential acquisitions. Such issuance of our securities will dilute the ownership interest of our shareholders.
    Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control. Accordingly, we cannot assure you of our ability to raise additional capital if needed or that the terms acceptable to us will be available. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and potential acquisitions could be materially impaired.

We rely on our Management team for the successful implementation of our business strategy.
    Our success of First Guaranty Bancshares, Inc. and First Guaranty Bank has been largely due to the efforts of our Executive Management team consisting of Alton B. Lewis, Chief Executive Officer, Michael R. Sharp, President, Larry A. Stark, Executive Vice President and Eric J. Dosch, Chief Financial Officer. In addition, we substantially rely upon Marshall T. Reynolds, our Chairman of the Board of Directors.  The loss of services of one or more of these individuals may have a material adverse effect on our ability to implement our business plan.

There is no assurance that we will be able to successfully compete with others for business.
    The area in which we operate is considered attractive from an economic and demographic viewpoint, and is a highly competitive banking market. We compete for loans and deposits with numerous regional and national banks and other community banking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers and private lenders. Many competitors have substantially greater resources than we do and operate under less stringent regulatory environments. The differences in resources and regulations may make it harder for us to compete profitably, reduce the rates that we can earn on loans and investments, increase the rates we must offer on deposits and other funds, and adversely affect our overall financial condition and earnings.

 
- 18 -
 
 
 
 

 
 
We depend primarily on net interest income for our earnings rather than noninterest income.
    Net interest income is the most significant component of our operating income. We do not rely on nontraditional sources of fee income utilized by some community banks, such as fees from sales of insurance, securities or investment advisory products or services. For the years ended December 31, 2010, 2009, and 2008 our net interest income was $38.2 million, $32.3 million, and $31.8 million respectively.  The amount of our net interest income is influenced by the overall interest rate environment, competition, and the amount of interest-earning assets relative to the amount of interest-bearing liabilities. In the event that one or more of these factors were to result in a decrease in our net interest income, we do not have significant sources of fee income to make up for decreases in net interest income.

Fluctuations in interest rates could reduce our profitability.
    We realize income primarily from the difference between the interest we earn on loans and investments and the interest we pay on deposits and borrowings. Unexpected movement in interest rates markedly changing the slope of the current yield curve could cause our net interest margins to decrease, subsequently decreasing net interest income.  In addition, such changes could adversely affect the valuation of our assets and liabilities.  The interest rates on our assets and liabilities respond differently to changes in market interest rates, which means our interest-bearing liabilities may be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates change, this “gap” between the amount of interest-earning assets and interest-bearing liabilities that reprice in response to these interest rate changes may work against us, and our earnings may be negatively affected.
    We are unable to predict fluctuations in market interest rates, which are affected by, among other factors, changes in the following:
  •    inflation rates;
  •    business activity levels;
  •    money supply; and
  •    domestic and foreign financial markets.
 
    The value of our investment portfolio and the composition of our deposit base are influenced by prevailing market conditions and interest rates. Our asset-liability Management strategy, which is designed to mitigate the risk to us from changes in market interest rates, may not prevent changes in interest rates or securities market downturns from reducing deposit outflow or from having a material adverse effect on our results of operations, our financial condition or the value of our investments.

We expect to incur additional expenses in connection with our compliance with Sarbanes-Oxley.
    Under Section 404 of the Sarbanes-Oxley Act of 2002, we were required to conduct a comprehensive review and assessment of the adequacy of our existing financial systems and controls beginning with the year ended December 31, 2007.  Future reviews of our financial systems and controls may uncover deficiencies in existing systems and controls. If that is the case, we would have to take the necessary steps to correct any deficiencies, which may be costly and may strain our Management resources and negatively impact earnings.  We also would be required to disclose any such deficiencies, which could adversely affect the market price of our common stock.

  
- 19 -
 
 
 

 
 
 
 
Future legislative or regulatory actions responding to perceived financial and market problems could impair the Company’s rights against borrowers.
    There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting the Company’s rights as a creditor, to be implemented, the Company could experience increased credit losses or increased expense in pursuing its remedies as a creditor.

Continued or further declines in the value of certain investment securities could require write-downs, which would reduce the Company’s earnings.
   At December 31, 2010, gross unrealized losses in the Company’s investment portfolio equaled approximately $10.0 million relating to securities with an aggregate fair value of $310.1 million. The gross unrealized losses were partially offset by gross unrealized gains of $5.1 million on other securities. There can be no assurance that future factors or combinations of factors will not cause the Company to conclude in one or more future reporting periods that an unrealized loss that exists with respect to any of its securities constitutes an impairment that is other than temporary.

We operate in a highly regulated environment and may be adversely affected by changes in federal, state and local laws and regulations.
    We are subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change in applicable regulations or federal, state or local legislation could have a substantial impact on us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on our results of operations and financial condition.
    Like other bank holding companies and financial institutions, we must comply with significant anti-money laundering and anti-terrorism laws.  Under these laws, we are required, among other things, to enforce a customer identification program and file currency transaction and suspicious activity reports with the federal government. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws or make required reports.

We hold certain intangible assets that could be classified as impaired in the future.  If these assets are considered to be either partially or fully impaired in the future, our earnings and the book values of these assets would decrease.
     The Company is required to test goodwill and core deposit intangible assets for impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similarly situated insured depository institutions. The Company conducted its goodwill impairment testing as of October 1, 2010.  The results of the testing indicated that no goodwill impairment existing. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our common shares or our regulatory capital levels.
 
If we were unable to borrow funds through access to capital markets, we may not be able to meet the cash flow requirements of our depositors and borrowers or the operating cash needs to fund corporate expansion and other corporate activities.
    Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of our Company is used to make loans and leases to repay deposit liabilities as they become due or are demanded by customers.  Liquidity policies and limits are established by the board of directors. Management and the Investment Committee regularly monitor the overall liquidity position of the Company to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. Management and the Investment Committee also establish policies and monitor guidelines to diversify the bank's funding sources. Funding sources include Federal funds purchased, securities sold under repurchase agreements, non-core deposits, and short- and long-term debt. We are also members of the Federal Home Loan Bank (“FHLB”) System, which provides funding through advances to members that are collateralized with certain loans.
 
 
- 20 -
 
 
 
 

 
 
 
    We maintain a portfolio of securities that can be used as a secondary source of liquidity. There are other sources of liquidity available to us should they be needed. These sources include sales of loans, additional collateralized borrowings such as FHLB advances, unsecured borrowing lines with other financial institutions, the issuance and sale of debt securities, and the issuance and sale of preferred or common securities. We can also borrow from the Federal Reserve’s discount window.
    Amounts available under our existing credit facilities as of December 31, 2010, consist of $52.2 million available at the Federal Home Loan Bank and $48.4 million in the form of federal funds and/or other lines of credit.
    If we were unable to access any of these funding sources when needed, we might be unable to meet customers’ needs, which could adversely impact our financial condition, results of operations, cash flows, and level of regulatory-qualifying capital.
 
Risk Associated with an Investment in our Common Stock

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

Our Management controls a substantial percentage of our common stock and therefore has the ability to exercise substantial control over our affairs.
    As of March 14, 2011, our directors and executive officers (and their affiliates) beneficially owned 2,948,152 shares or approximately 53.0% of our common stock. Because of the large percentage of common stock held by our directors and executive officers, such persons could significantly influence the outcome of any matter submitted to a vote of our shareholders even if other shareholders were in favor of a different result.
 
Our participation in the U.S. Treasury’s Capital Purchase Program imposes restrictions on us that limit our ability to perform certain equity transactions, including the payment of dividends and common stock purchases.
    On August 28, 2009, we issued and sold $20.7 million in Fixed Rate Cumulative Perpetual Preferred Stock, Series A and a warrant to purchase shares of the Company’s Fixed Rate Cumulative Preferred Stock, Series B to the Treasury Department as part of the Capital Purchase Program. The Series A preferred shares will pay a cumulative dividend rate of five percent (5.0%) per annum for the first five years and will reset to a rate of nine percent (9.0%) per annum after year five. Immediately following the issuance of the Series A Preferred Stock and the Warrant, the Treasury Department exercised its rights under the Warrant to acquire shares of the Series B Preferred Stock through a cashless exercise. The Series B Preferred Stock pays cumulative dividends at a rate of nine percent (9.0%) per annum.  The Series B Preferred Stock generally has the same rights and privileges as the Series A Preferred Stock. The dividends and potential increase in dividends if we do not redeem the preferred stock may significantly impact our operating results, liquidity, and capital position.
    Pursuant to the Purchase Agreement, prior to August 28, 2012, unless the Company has redeemed the Series A Preferred Stock and the Series B Preferred Stock or the Treasury Department has transferred the Series A Preferred Stock and the Series B Preferred Stock to a third party, the ability of the Company to declare or pay any dividend or make any distribution on its capital stock or other equity securities of any kind of the Company will be subject to restriction, including a restriction against (1) increasing the quarterly cash dividend per share to an amount larger than the last quarterly cash dividend paid on the common stock prior to November 17, 2008, $0.16 per share, or (2) redeeming, purchasing or acquiring any shares of its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain circumstances specified in the Purchase Agreement.  In addition, prior to August 28, 2012, the Company may not redeem any of the Series A Preferred Stock or Series B Preferred Stock except with the proceeds of a qualified equity offering.
    Following August 28, 2012 and until August 28, 2019 (unless the Series A Preferred Stock and Series B Preferred Stock has been redeemed or transferred to a third party), the Company may not, without the consent of the Treasury Department, pay any dividends on its capital stock that are in the aggregate greater than 103% of any dividends in the prior fiscal quarter.  In addition, prior to August 28, 2019 (unless the Series A Preferred Stock and Series B Preferred Stock has been redeemed or transferred to a third party) the Company may not repurchase or acquire any equity security of the Company without the consent of the Treasury Department other than in certain circumstances specified in the Purchase Agreement.  Following August 28, 2019, the Company may not pay any dividend or repurchase any equity securities without the consent of the Treasury Department unless the Series A Preferred Stock and the Series B Preferred Stock have been redeemed or the United States Treasury has transferred the securities.  In addition, no shares of the Series B Preferred Stock may be redeemed unless all the shares of Series A Preferred Stock have been redeemed.
    In addition, under the Articles of Amendment for the Series A Preferred Stock and the Series B Preferred Stock, the Company’s ability to declare or pay dividends or repurchase its common stock or other equity or capital securities will be subject to restrictions in the event that it fails to declare and pay or set aside for payment full dividends on the Series A Preferred Stock and the Series B Preferred Stock, respectively.
 
Item 1B – Unresolved Staff Comments
    None.

 
- 21 -
 
 
 

 
 
Item 2 - Properties
    The Company does not directly own any real estate, but it does own real estate indirectly through its subsidiary. The Bank operates 17 retail-banking centers and one drive-up facility. The following table sets forth certain information relating to each office. The net book value of our properties at December 31, 2010 was $9.0 million.
 
Location
 
 
Use of Facilities
 
 
Year Facility Opened or Acquired
 
 
 
Owned/
Leased
First Guaranty Square
400 East Thomas Street
Hammond, LA  70401
 
Bank’s Main Office
 
1975
 
Owned
2111 West Thomas Street
Hammond, LA  70401
 
Guaranty West Banking Center
 
1974
 
Owned
100 East Oak Street
Amite, LA  70422
 
Amite Banking Center
 
1970
 
Owned
455 Railroad Avenue
Independence, LA  70443
 
Independence Banking Center
 
1979
 
Owned
301 Avenue F
Kentwood, LA  70444
 
Kentwood Banking Center
 
1975
 
Owned
170 West Hickory
Ponchatoula, LA  70454
 
Ponchatoula Banking Center
 
1960
 
Owned
189 Burt Blvd
Benton, LA  71006
 
Benton Banking Center
 
2010
 
Owned
126 South Hwy. 1
Oil City, LA  71061
 
Oil City Banking Center
 
1999
 
Owned
401 North 2nd Street
Homer, LA  71040
 
Homer Main Banking Center
 
1999
 
Owned
10065 Hwy 79
Haynesville, LA  71038
 
Haynesville Banking Center
 
1999
 
Owned
117 East Hico Street
Dubach, LA 71235
 
Dubach Banking Center
 
1999
 
Owned
102 East Louisiana Avenue
Vivian, LA  71082
 
Vivian Banking Center
 
1999
 
Owned
500 North Cary
Jennings, LA  70546
 
Jennings Banking Center
 
1999
 
Owned
799 West Summers Drive
Abbeville, LA  70510
 
Abbeville Banking Center
 
1999
 
Owned
105 Berryland
Ponchatoula, LA  70454
 
Berryland Banking Center
 
2004
 
Leased
2231 S. Range Avenue
Denham Springs, LA 70726
 
Denham Springs Banking Center
 
2005
 
Owned
North 6th Street
Ponchatoula, LA  70454
 
Ponchatoula Banking Center 1
 
2007
 
Owned
29815 Walker Rd S
Walker, LA 70785
 
Walker Banking Center
 
2007
 
Owned
1 This banking facility was closed on March 14, 2008 and consolidated with the Ponchatoula Banking Center.
   The Bank also owns four additional properties which are currently not being used as banking facilities. One of the properties is a banking center location previously owned and operated by Homestead Bank in Amite, Louisiana but was closed at the time of the merger. This facility is currently being used for storage.  The Bank also acquired, in the Homestead Bank merger, a banking facility located in Ponchatoula, Louisiana. This facility was closed in March 2008 and currently is leased. Management’s intentions are to sell these two properties.

 - 22 -
 
 
 

 
Item 3 - Legal Proceedings
    The Company is subject to various legal proceedings in the normal course of its business. It is Management’s belief that the ultimate resolution of such claims will not have a material adverse effect on the financial position or results of operations. At December 31, 2010, we were not involved in any material legal proceedings.

Item 4 - Removed and Reserved

 
PART II

Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    There is no liquid or active market for our common stock. The Company’s shares of common stock are not traded on a stock exchange or in any established over-the-counter market. Trades occur primarily between individuals at a price mutually agreed upon by the buyer and seller. Trading in the Company’s common stock has been infrequent and such trades cannot be characterized as constituting an active trading market.
    The following table sets forth the high and low bid quotations for First Guaranty Bancshares, Inc.’s common stock for the periods indicated. These quotations represent trades of which we are aware and do not include retail markups, markdowns, or commissions and do not necessarily reflect actual transactions. As of December 31, 2010, there were 5,559,644 shares of First Guaranty Bancshares, Inc. common stock issued and outstanding with a total of 1,361 shareholders of record.


   
2010
   
2009
 
Quarter Ended:
 
High
   
Low
   
Dividend
   
High
   
Low
   
Dividend
 
March
 
$
17.00
   
$
17.00
   
$
0.16
   
$
25.00
   
$
17.00
   
$
0.16
 
June
   
18.62
     
17.00
     
0.16
     
17.00
     
17.00
     
0.16
 
September
   
18.62
     
17.50
     
0.16
     
17.00
     
15.00
     
0.16
 
December
   
18.62
     
18.62
     
0.16
     
17.00
     
12.00
     
0.16
 
 
    
    Our stockholders are entitled to receive dividends when, and if declared by the Board of Directors, out of funds legally available for dividends. We have paid consecutive quarterly cash dividends on our common stock for each of the last ten years and the Board of Directors intends to continue to pay regular quarterly cash dividends. The ability to pay dividends in the future will depend on earnings and financial condition, liquidity and capital requirements, regulatory restrictions, the general economic and regulatory climate and ability to service any equity or debt obligations senior to common stock.
    There are legal restrictions on the ability of First Guaranty Bank to pay cash dividends to First Guaranty Bancshares, Inc.  Under federal and state law, we are required to maintain certain surplus and capital levels and may not distribute dividends in cash or in kind, if after such distribution we would fall below such levels.  Specifically, an insured depository institution is prohibited from making any capital distribution to its shareholders, including by way of dividend, if after making such distribution, the depository institution fails to meet the required minimum level for any relevant capital measure including the risk-based capital adequacy and leverage standards.
  
    Additionally, under the Louisiana Business Corporation Act, First Guaranty Bancshares, Inc. is prohibited from paying any cash dividends to shareholders if, after the payment of such dividend, its total assets would be less than its total liabilities or where net assets are less than the liquidation value of shares that have a preferential right to participate in First Guaranty Bancshares, Inc.’s assets in the event First Guaranty Bancshares, Inc. were to be liquidated.
    
    First Guaranty Bancshares, Inc. must seek prior approval from the Federal Reserve Bank before paying dividends to its shareholders.
    
    We have not repurchased any shares of our outstanding common stock during the past year.
 
- 23 -

 
 
 

 
 
 
 
Stock Performance Graph
    The line graph below compares the cumulative total return for the Company’s common stock with the cumulative total return of both the NASDAQ Stock Market Index for U.S. companies and the NASDAQ Index for bank stocks for the period December 31, 2006 through December 31, 2010. The total return assumes the reinvestment of all dividends and is based on a $100 investment on December 31, 1998. It also reflects the stock price on December 31st of each year shown, although this price reflects only a small number of transactions involving a small number of directors of the Company or affiliates or associates and cannot be taken as an accurate indicator of the market value of the Company’s common stock.

 
 
 
            

    We have no equity based benefit plans.
 
- 24 -
 
 
 

 

Item 6 - Selected Financial Data
    The following selected financial data should be read in conjunction with the financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this Form 10-K. Except for the data under “Performance Ratios,” “Capital Ratios” and “Asset Quality Ratios,” the income statement data and share and per share data for the years ended December 31, 2010, 2009 and 2008 and the balance sheet data as of December 31, 2010 and 2009 are derived from the audited financial statements and related notes which are included elsewhere in this Form 10-K, and the income statement data and share and per share data for the years ended December 31, 2007 and 2006 and the balance sheet data as of December 31, 2008, 2007and 2006 are derived from the audited financial statements and related notes that are not included in this Form 10-K.
 

   
At or For the Years Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
                               
                               
Year End Balance Sheet Data:
                             
(in thousands)
                             
 Securities
 
$
481,961
   
$
261,829
   
$
139,162
   
$
142,068
   
$
158,352
 
 Federal funds sold
   
9,129
     
13,279
     
838
     
35,869
     
6,793
 
 Loans, net of unearned income
   
575,640
     
589,902
     
606,369
     
575,256
     
507,195
 
 Allowance for loan losses
   
8,317
     
7,919
     
6,482
     
6,193
     
6,675
 
 Total assets(1)
   
1,132,792
     
930,847
     
871,233
     
807,994
     
715,216
 
 Total deposits
   
1,007,383
     
799,746
     
780,372
     
723,094
     
626,293
 
 Borrowings
   
12,589
     
31,929
     
18,122
     
13,494
     
24,568
 
 Stockholders' equity(1)
   
97,938
     
94,935
     
65,487
     
66,355
     
59,471
 
 Common Stockholders' equity(1)
   
76,963
     
74,165
     
65,487
     
66,355
     
59,471
 
                                         
Average Balance Sheet Data:
                                       
(dollars in thousands)
                                       
 Securities
 
$
342,589
   
$
245,952
   
$
127,586
   
$
152,990
   
$
178,419
 
 Federal funds sold
   
11,007
     
24,662
     
17,247
     
8,083
     
3,115
 
 Loans, net of unearned income
   
593,429
     
599,609
     
600,854
     
543,946
     
505,623
 
 Total earning assets
   
964,039
     
906,158
     
752,093
     
712,212
     
690,057
 
 Total assets
   
1,015,681
     
948,556
     
797,024
     
751,237
     
726,593
 
 Total deposits
   
883,440
     
842,274
     
707,114
     
658,456
     
622,869
 
 Borrowings
   
27,324
     
22,907
     
16,287
     
23,450
     
42,435
 
 Stockholders' equity
   
99,575
     
77,135
     
67,769
     
63,564
     
56,640
 
 Stockholders' common equity
   
79,245
     
70,055
     
67,769
     
63,564
     
56,640
 
                                         
Performance Ratios:
                                       
 Return on average assets
   
0.99
%
   
0.80
%
   
0.69
%
   
1.30
%
   
1.16
%
 Return on average common equity
   
12.65
%
   
10.84
%
   
8.13
%
   
15.37
%
   
14.88
%
 Return on average tangible assets(2)
   
0.99
%
   
0.80
%
   
0.69
%
   
1.30
%
   
1.16
%
 Return on average tangible common equity(3)
   
12.95
%
   
11.14
%
   
8.77
%
   
16.47
%
   
15.73
%
 Net interest margin
   
3.96
%
   
3.57
%
   
4.25
%
   
4.79
%
   
4.60
%
 Average loans to average deposits
   
67.17
%
   
71.19
%
   
84.97
%
   
82.61
%
   
81.18
%
 Efficiency ratio (1)
   
56.20
%
   
60.80
%
   
70.73
%
   
55.80
%
   
51.80
%
Efficiency ratio (excluding amortization of
                         
   intangibles and securities transactions) (1)
   
59.25
%
   
61.99
%
   
61.20
%
   
54.59
%
   
49.90
%
 Full time equivalent employees (year end)
   
246
     
230
     
225
     
222
     
196
 
 
         (1)   For the years ended 2006, 2007 and 2008 amounts were restated in 2009 to reflect prior period adjustments. 
         (2)   Average tangible assets represent average assets less average core deposit intangibles.
         (3)   Average tangible equity represents average equity less average core deposit intangibles.
       
 
- 25 -
 
 
 

 
 

 
   
At or For the Years Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
                               
                               
Capital Ratios:
                             
 Average stockholders' equity to average assets
   
9.80
%
   
8.13
%
   
8.50
%
   
8.46
%
   
7.80
%
 Average tangible equity to average tangible assets(1),(2)
   
9.64
%
   
7.95
%
   
8.25
%
   
8.31
%
   
7.71
%
 Common stockholders' equity to total assets(3)
   
6.79
%
   
7.97
%
   
7.52
%
   
8.21
%
   
8.32
%
 Tier 1 leverage capital(3)
   
8.69
%
   
9.58
%
   
7.88
%
   
7.38
%
   
8.11
%
 Tier 1 capital(3)
   
11.98
%
   
11.90
%
   
9.19
%
   
10.13
%
   
9.85
%
 Total risk-based capital(3)
   
13.03
%
   
12.97
%
   
10.11
%
   
11.09
%
   
10.96
%
                                         
Income Data:
                                       
(dollars in thousands)
                                       
Interest income
 
$
51,390
   
$
47,191
   
$
47,661
   
$
55,480
   
$
50,937
 
Interest expense(3)
   
13,223
     
14,844
     
15,881
     
21,934
     
19,769
 
Net interest income(3)
   
38,167
     
32,347
     
31,780
     
33,546
     
31,168
 
Provision for loan losses
   
5,654
     
4,155
     
1,634
     
1,918
     
4,419
 
Noninterest income (excluding securities transactions)
   
6,741
     
5,909
     
5,689
     
5,176
     
4,601
 
Securities (losses) gains
   
2,824
     
2,056
 
   
(1
)
   
(478
)
   
(234
Loss on securities impairment
   
-
 
   
(829
)
   
(4,611
)    
-
     
-
 
Noninterest expense(3)
   
26,827
     
24,007
     
23,241
     
21,341
     
18,373
 
Earnings before income taxes(3)
   
15,251
     
11,321
     
7,982
     
14,985
     
12,744
 
Net income(3)
   
10,025
     
7,595
     
5,512
     
9,772
     
8,431
 
Net income available to common shareholders(3)
   
8,692
     
7,001
     
5,512
     
9,772
     
8,431
 
                                         
Per Common Share Data:
                                       
 Net earnings(3)
 
$
1.56
   
$
1.26
   
$
0.99
   
$
1.76
   
$
1.52
 
 Cash dividends paid
   
0.64
     
0.64
     
0.64
     
0.63
     
0.60
 
 Book value(3)
   
13.84
     
13.34
     
11.78
     
11.94
     
10.70
 
 Dividend payout ratio(3)
   
40.94
%
   
50.82
%
   
64.53
%
   
35.85
%
   
39.56
%
 Weighted average number of shares outstanding
   
5,559,644
     
5,559,644
     
5,559,644
     
5,559,644
     
5,559,644
 
 Number of shares outstanding (year end)
   
5,559,644
     
5,559,644
     
5,559,644
     
5,559,644
     
5,559,644
 
 Market data:
                                       
   High
 
$
18.62
   
$
25.00
   
$
25.00
   
$
24.30
   
$
23.42
 
   Low
 
$
17.00
   
$
12.00
   
$
24.30
   
$
23.42
   
$
18.57
 
   Trading Volume
   
181,353
     
165,386
     
368,454
     
924,692
     
535,264
 
   Stockholders of record
   
1,361
     
1,356
     
1,343
     
1,293
     
1,181
 
                                         
Asset Quality Ratios:
                                       
 Nonperforming assets to total assets
   
2.73
%
   
1.68
%
   
1.14
%
   
1.39
%
   
1.85
%
 Nonperforming assets to loans
   
5.38
%
   
2.65
%
   
1.63
%
   
1.95
%
   
2.61
%
 Loan loss reserve to nonperforming assets
   
26.9
%
   
50.68
%
   
65.46
%
   
55.26
%
   
50.43
%
 Net charge-offs to average loans
   
0.89
%
   
0.45
%
   
0.22
%
   
0.50
%
   
1.06
%
 Provision for loan loss to average loans
   
0.95
%
   
0.69
%
   
0.27
%
   
0.35
%
   
0.87
%
 Allowance for loan loss to total loans
   
1.44
%
   
1.34
%
   
1.07
%
   
1.08
%
   
1.32
%
     
            (1)   Average tangible assets represents average assets less average core deposit intangibles.
            (2)   Average tangible equity represents average equity less average core deposit intangibles.
            (3)   For the years ended 2006, 2007 and 2008 amounts were restated in 2009 to reflect prior period adjustments.
               
 
- 26 - 
 
 
 

 
 
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
    First Guaranty Bancshares, Inc. became the holding company for First Guaranty Bank on July 27, 2007 in a corporate reorganization. Prior to becoming the holding company of First Guaranty Bank, First Guaranty Bancshares, Inc. had no assets, liabilities or operations.
    This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. Reference should be made to those financial statements of this Form 10-K and the selected financial data (above) presented in this report in order to obtain a better understanding of the commentary which follows.
 
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’s expectations. This discussion and analysis contains forward-looking statements and reflects Management’s current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of factors and uncertainties, which could cause our actual results and experience to differ from the anticipated results and expectations, expressed in such forward-looking statements.

Application of Critical Accounting Policies
    The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America and to predominant accounting practices within the banking industry. Certain critical accounting policies require judgment and estimates which are used in the preparation of the financial statements.
    Other-Than-Temporary Impairment of Investment Securities. Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. The term “other-than-temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Management reviews criteria such as the magnitude and duration of the decline, the reasons for the decline, and the performance and valuation of the underlying collateral, when applicable, to predict whether the loss in value is other-than-temporary. Once a decline in value is determined to be other-than-temporary, the carrying value of the security is reduced to its fair value and a corresponding charge to earnings is recognized.
    Allowance for Loan Losses. The Company’s most critical accounting policy relates to its allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when Management believes that the collectability of the principal is unlikely. The allowance, which is based on the evaluation of the collectability of loans and prior loan loss experience, is an amount Management believes will be adequate to reflect the risks inherent in the existing loan portfolio and that exist at the reporting date. The evaluations take into consideration a number of subjective factors including changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect a borrower’s ability to pay, adequacy of loan collateral and other relevant factors.
    Changes in such estimates may have a significant impact on the financial statements. For further discussion of the allowance for loan losses, see the “Allowance for Loan Losses” section of this analysis and Note 1 and Note 5 to the Consolidated Financial Statements.
    Valuation of Goodwill, Intangible Assets and Other Purchase Accounting Adjustments. The Company's goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. The Company’s goodwill is tested for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. A goodwill impairment test includes two steps. Step one, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit’s goodwill, an impairment loss is recognized in an amount equal to that excess. Based on Management’s goodwill impairment tests, there was no impairment of goodwill at December 31, 2010.  For additional information on goodwill and intangible assets, see Note 7 to the Consolidated Financial Statements.
 
 
 
- 27 -
 
 
 

2010 Financial Overview
 
Financial highlights for 2010 and 2009 are as follows:
·  
Net income for 2010 and 2009 was $10.0 million and $7.6 million respectively.  Net income to common shareholders after preferred stock dividends was $8.7 million and $7.0 million for 2010 and 2009, with earnings per common share of $1.56 and $1.26 respectively.  The increase in net income was primarily the result of an increase in net interest income due to a larger investment portfolio and higher loan pricing.  The Company also recognized gains from sales of securities of $2.8 million compared to $2.1 million for 2009.
·  
Net interest income for 2010 and 2009 was $38.2 million and $32.3 million, respectively.  The net interest margin for the Company was 4.0% at December 31, 2010 and 3.6% at December 31, 2009.
·  
The provision for loan losses for 2010 was $5.7 million compared to $4.2 million for 2009. 
·  
Total assets at December 31, 2010 were $1.133 billion, an increase of $201.9 million or 21.7% when compared to $930.8 million at December 31, 2009. The increase in assets primarily resulted from excess cash received from deposit growth which was primarily invested in the securities portfolio.
·  
Investment securities totaled $482.0 million at December 31, 2010, an increase of $220.1 million when compared to $261.8 million at December 31, 2009. At December 31, 2010, available for sale securities, at fair value, totaled $322.1 million, an increase of $72.6 million when compared to December 31, 2009. The Company had $159.8 million in the held to maturity category as of December 31, 2010.  Our securities in the held to maturity category totaled $12.3 million at December 31, 2009.
·  
The net loan portfolio at December 31, 2010 totaled $567.3 million, a decrease of $14.7 million from the December 31, 2009 level of $582.0 million.  Net loans are reduced by the allowance for loan losses which totaled $8.3 million for December 31, 2010 and $7.9 million for December 31, 2009.
·  
Non-performing assets at December 31, 2010 were $31.0 million, an increase of $15.3 million compared to December 31, 2009.
·  
Total deposits increased $207.6 million or 26.0% in 2010 compared to the year ended December 31, 2009.
·  
Return on average assets for the twelve months ending December 31, 2010 and December 31, 2009 was 1.0% and 0.8% respectively.  Return on average common shareholders’ equity for  2010 and 2009 were 12.7% and 10.8% respectively.  Return on average assets is calculated by dividing  net income before preferred dividends by average assets.  Return on common shareholders’ equity is calculated by dividing net earnings applicable to common shareholders by average common shareholders’ equity.
·  
The Company’s Board of Directors declared cash dividends of $0.64 per common share in 2010 and 2009.

 
Financial Condition
    Assets. Total assets at December 31, 2010 were $1.133 billion, an increase of $201.9 million, or 21.7%, from $930.8 million at December 31, 2009. Federal funds sold decreased $4.2 million from December 31, 2009 to December 31, 2010 and total loans for the same period decreased $14.3 million. Cash and due from banks increased $2.3 million from 2009 to 2010.  Additionally, total investment securities increased $220.1 million to $482.0 million from December 31, 2009 to December 31, 2010. Total deposits increased by $207.6 million or 26.0% from 2009 to 2010. At December 31, 2010, the Company had no long-term borrowings compared to long-term borrowings of $20.0 million at December 31, 2009.
 
Investment Securities. The securities portfolio consisted principally of U.S. Government agency securities, corporate debt securities and mutual funds or other equity securities. The securities portfolio provides us with a relatively stable source of income and provides a balance to interest rate and credit risks as compared to other categories of assets.
    The securities portfolio totaled $482.0 million at December 31, 2010, representing an increase of $220.1  million from December 31, 2009. The primary changes in the portfolio consisted of $1.0 billion in purchases, sales totaling $44.3 million, and calls and maturities of $768.1 million. 
    At December 31, 2010, approximately 2.4% of the securities portfolio (excluding Federal Home Loan Bank stock) matures in less than one year while securities with maturity dates over 10 years totaled 26.9% of the portfolio. At December 31, 2010, the average maturity of the securities portfolio was 6.5 years, compared to the average maturity at December 31, 2009 of 6.3 years.
    During the fourth quarter of 2009, three agency securities with a par value of $10.0 million were transferred from available for sale to held to maturity.  These three securities had a fair market value totaling $9.8 million and an average maturity of aproximately 14 years.  The unrealized loss of $0.2 million was recorded as a component of other comprehensive loss and will be amortized over the life of the securities or until the security is called.
At December 31, 2010, securities totaling $322.1 million were classified as available for sale and $159.8 million were classified as held to maturity as compared to $249.5 million and $12.3 million, respectively at December 31, 2009.
    Securities classified as available for sale are measured at fair market value. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, market yield curves, prepayment speeds, credit information and the instrument’s contractual terms and conditions, among other things. Securities classified as held to maturity are measured at book value. See Note 3 to the Consolidated Financial Statements for additional information.
    The book yields on securities available for sale ranged from 0.8% to 10.9% at December 31, 2010, exclusive of the effect of changes in fair value reflected as a component of stockholders’ equity. The book yields on held to maturity securities ranged from 2.1% to 4.0%.
- 28 -
 
 
 

         Securities classified as available for sale had gross unrealized losses totaling $5.5 million at December 31, 2010.  These losses include $4.0 million in unrealized losses on U.S. Government agency securities, which have been in a loss position for less than 12 months. The Company believes that it will collect all amounts contractually due and has the intent and the ability to hold these securities until the fair value is at least equal to the carrying value. At December 31, 2009, securities classified as available for sale had gross unrealized losses totaling $2.8 million. See Note 3 to the Consolidated Financial Statements for additional information.
    Average securities as a percentage of average interest-earning assets were 35.5% and 27.1% at December 31, 2010 and 2009, respectively. This increase reflected, in part, Management’s decision to deploy a certain amount of funds into investment securities, rather than loans, to manage our interest rate risk, in a low interest rate environment in 2010.  At December 31, 2010 and 2009, $271.5 million and $154.5 million in securities were pledged, respectively.
    In the second quarter of 2010, the Company sold the $12.1 million that remained in the held to maturity category.  This represented approximately 4.0% of the total investment portfolio and 1.0% of assets.  Several of the securities sold included mortgage backed securities and agency bullet securities which were no longer part of Management's investment portfolio strategy. During the third quarter of 2010, the Company experienced significant deposit growth but decreased loan demand.  Deposits grew approximately $123.0 million or 14.0% from June 30, 2010 to December 31, 2010.  Net loans declined $38.0 million or 6.0% during the same period.  Investment securities increased $142.0 million or 42% from June 30, 2010 to December 31, 2010.  Market conditions continued to be historically volatile and interest rates declined to levels not seen in decades.
    Given the changes in the Company’s balance sheet observed  during the third quarter and following the completion of a five year strategic plan, securities purchased pursuant to this plan were classified as held to maturity.  The Company determined the unprecedented market conditions and volatility coupled with a revised five year strategic plan that a waiting period of one quarter was appropriate based on the materiality conditions and the type of securities in the held to maturity portfolio sold during the second quarter of 2010.
     The held to maturity portfolio is comprised of government sponsored enterprise securities such as FHLB, FNMA, FHLMC, and FFCB.  The securities have maturities of 15 years or less and the securities are used to collateralize public funds.  The Company has maintained public funds in excess of $175.0 million since December 2007.  Management believes that public funds will continue to be a significant part of the Company's deposit base and will need to be collateralized by securities in the investment portfolio. 
   
 Loans. The origination of loans is the primary use of our financial resources and represents the largest component of earning assets. At December 31, 2010, the loan portfolio (loans, net of unearned income) totaled $575.6 million, a decrease of approximately $14.3 million, or 2.4%, from the December 31, 2009 level of $589.9 million. The decrease in net loans primarily includes a reduction of $13.1 million in real estate construction and land development loans, a reduction of $5.8 million in commercial and industrial loans, a reduction of $7.9 million in non-farm non-residential loans secured by real estate, partially offset by an increase of $5.6 million in multifamily loans.
      Loans represented 57.1% of deposits at December 31, 2010, compared to 73.8% of deposits at December 31, 2009. Loans secured by real estate decreased $17.7 million to $459.4 million at December 31, 2010. Commercial and industrial loans decreased $5.8 million to $76.6 million at December 31, 2010. Real estate and related loans comprised 79.8% of the portfolio in 2010 as compared to 80.9% in 2009. Commercial and industrial loans comprised 13.3% of the portfolio in 2010 as compared to 14.0% in 2009.
    Loan charge-offs taken during 2010 totaled $5.6 million, compared to charge-offs of $2.9 million in 2009. Of the loan charge-offs in 2010, approximately $1.8 million were loans secured by real estate, $3.4 million were commercial and industrial loans and $0.4 million were consumer and other loans. In 2010, recoveries of $0.4 million were recognized on loans previously charged off as compared to $0.2 million in 2009.
 
 Nonperforming Assets. Nonperforming assets were $31.0 million, or 2.7% of total assets at December 31, 2010, compared to $15.6 million, or 1.7% of total assets at December 31, 2009. The increase resulted from a $14.5 million increase in non-accrual loans, and an increase of $0.9 million in 90 days past due loans.  The increase in nonaccrual loans was primarily in construction and land development, multifamily, and non-farm non-residential loans.  The increase in nonperforming assets was concentrated in less than ten customer relationships.
 
    Deposits. Total deposits increased by $207.6 million or 26.0%, to $1.01 billion at December 31, 2010 from $799.7 million at December 31, 2009.  In 2010, noninterest-bearing demand deposits decreased $0.9 million, interest-bearing demand deposits increased $3.9 million and savings deposits increased $6.4 million. Time deposits increased $198.3 million, or 45.1%.   The increase in deposits was principally due to an increase of $88.7 million in public funds deposits and a deposit promotion program that increased deposits by over $100.0 million. The increase in public fund deposits was the primary result of three municipalities maintaining higher deposit balances.
    Public fund deposits totaled $356.2 million or 35.4% of total deposits at December 31, 2010.  Six public entities comprised $277.6 million or 77.9% of the total public funds as of December 31, 2010.  At December 31, 2009, public fund deposits represented 33.6% of total deposits with a balance of $268.5 million.
 
    Borrowings. Short-term borrowings increased $0.7 million in 2010 to $12.6 million at December 31, 2010 from $11.9 million at December 31, 2009. Short-term borrowings are used to manage liquidity on a daily or otherwise short-term basis. The short-term borrowings at December 31, 2010 and 2009, respectively was solely comprised of repurchase agreements. Overnight repurchase agreement balances are monitored daily for sufficient collateralization.
    There were no long-term borrowings at December 31, 2010, compared to $20.0 million at December 31, 2009.
 
    Stockholders’ Equity. Total stockholders’ equity increased $3.0 million or 3.2% to $97.9 million at December 31, 2010 from $94.9 million at December 31, 2009. The increase in stockholders’ equity is attributable to the $10.0 million in consolidated earnings for 2010 which was partially offset by $3.6 million in dividends on common stock, $1.1 million in dividends on preferred stock, and a $2.3 million decrease in the unrealized gain on available for sale securities.  Included in stockholders' equity are two classes of preferred stock Series A at $19.9 million and Series B at $1.1 million. Series A and Series B were  issued in August 2009 to the Treasury Department. See Note 11 to the Consolidated Financial Statements for additional information.
- 29 -
 
 
 

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


   
December 31,
   
2010
 
2009
 
2008
         
As % of
       
As % of
       
As % of
   
Balance
   
Category
 
Balance
   
Category
 
Balance
   
Category
   
(in thousands)
Real estate
                                   
   Construction & land development
 
$
65,570
     
11.4
%
 
$
78,686
     
13.3
%
 
$
92,029
     
15.2
%
   Farmland
    13,337      
2.3
%
   
11,352
     
1.9
%
   
16,403
     
2.7
%
   1-4 Family
   
73,158
     
12.7
%
   
77,470
     
13.1
%
   
79,285
     
13.1
%
   Multifamily
   
14,544
     
2.5
%
   
8,927
     
1.5
%
   
15,707
     
2.6
%
   Non-farm non-residential
   
292,809
     
50.8
%
   
300,673
     
51.0
%
   
261,744
     
43.0
%
      Total real estate
   
459,418
     
79.7
%
   
477,108
     
80.8
%
   
465,168
     
76.6
%
                                                 
Agricultural
   
17,361
     
3.0
%
   
14,017
     
2.4
%
   
18,536
     
3.0
%
Commercial and industrial
   
76,590
     
13.3
%
   
82,348
     
13.9
%
   
105,555
     
17.4
%
Consumer and other
   
22,970
     
4.0
%
   
17,226
     
2.9
%
   
17,926
     
3.0
%
Total loans before unearned income
   
576,339
     
100.0
%
   
590,699
     
100.0
%
   
607,185
     
100.0
%
Less: unearned income
   
(699
)
           
(797
)
           
(816
)
       
Total loans net of unearned income
 
$
575,640
           
$
589,902
           
$
606,369
         
                                                 
                                                 
   
December 31,
               
   
2007
 
2006
               
           
As % of
         
As % of
               
   
Balance
   
Category
 
Balance
   
Category
               
   
(in thousands)
               
Real estate
                                               
   Construction & land development
 
$
98,127
     
17.0
%
 
$
49,837
     
9.9
%
               
   Farmland
   
23,065
     
4.0
%
   
25,582
     
5.0
%
               
   1-4 Family
   
84,640
     
14.7
%
   
67,022
     
13.2
%
               
   Multifamily
   
13,061
     
2.3
%
   
14,702
     
2.9
%
               
   Non-farm non-residential
   
236,474
     
41.1
%
   
256,176
     
50.5
%
               
      Total real estate
   
455,367
     
79.1
%
   
413,319
     
81.5
%
               
                                                 
Agricultural
   
16,816
     
2.9
%
   
16,359
     
3.2
%
               
Commercial and industrial
   
81,073
     
14.1
%
   
59,072
     
11.6
%
               
Consumer and other
   
22,517
     
3.9
%
   
18,880
     
3.7
%
               
Total loans before unearned income
   
575,773
     
100.0
%
   
507,630
     
100.0
%
               
Less: unearned income
   
(517
)
           
(435
)
                       
Total loans net of unearned income
 
$
575,256
           
$
507,195
                         
                                                 
 
- 30 -
 
 
 

 
    
The four most significant categories of our loan portfolio are construction and land development real estate loans, 1-4 family residential loans, non-farm non-residential real estate loans and commercial and industrial loans.
    The Company’s credit policy dictates specific loan-to-value and debt service coverage requirements. The Company generally requires a maximum loan-to-value of 85.0% and a debt service coverage ratio of 1.25x to 1.0x for non-farm non-residential real estate loans. In addition, personal guarantees of borrowers are required as well as applicable hazard, title and flood insurance. Loans may have a maximum maturity of five years and a maximum amortization of 25 years. The Company may require additional real estate or non-real estate collateral when deemed appropriate to secure the loan.
    The Company generally requires all one- to four- family residential loans to be underwritten based on the Fannie Mae guidelines provided through Desktop Underwriter. These guidelines include the evaluation of risk and eligibility, verification and approval of conditions, credit and liabilities, employment and income, assets, property and appraisal information. It is required that all borrowers have proper hazard, flood and title insurance prior to a loan closing. Appraisals and Desktop Underwriter approvals are good for six months. The Company has an in-house underwriter review the final package for compliance to these guidelines.
    The Company generally requires a maximum loan-to value of 75.0% and a debt service coverage ratio of 1.25x to 1.0x for construction land development loans. In addition, detailed construction cost breakdowns, personal guarantees of borrowers and applicable hazard, title and flood insurance are required. Loans may have a maximum maturity of 12 months for the construction phase and a maximum maturity of 24 months for the sell-out phase. The Company may require additional real estate or non-real estate collateral when deemed appropriate to secure the loan.
    The Company has specific guidelines for the underwriting of commercial and industrial loans that is specific for the collateral type and the business type.  Commercial and industrial loans are secured by non-real estate collateral such as equipment, inventory or accounts receivable.  Each of these collateral types has maximum loan to value ratios.  Commercial and industrial loans have the same debt service coverage ratio requirements as other loans, which is 1.25x to 1.0x.
    The Company will allow exceptions to each of the above policies with appropriate mitigating circumstances and approvals. The Company has a defined credit underwriting process for all loan requests. The Company actively monitors loan concentrations by industry type and will make adjustments to underwriting standards as deemed necessary. The Company has a loan review department that monitors the performance and credit quality of loans. The Company has a special assets department that manages loans that have become delinquent or have serious credit issues associated with them.
    For new loan originations, appraisals and evaluations on all properties shall be valid for a period not to exceed two calendar years from the effective appraisal date for non-residential properties and one calendar year from the effective appraisal date for residential properties.  However, an appraisal may be valid longer if there has been no material decline in the property condition or market condition that would negatively affect the bank’s collateral position.  This must be supported with a Validity Check Memorandum”.
    For renewals with or without new money, any commercial appraisal greater than two years or greater than one year for residential appraisals must be updated with a Validity Check Memorandum.  Any renewal loan request, in which new money will be disbursed, whether commercial or residential, and the appraisal is older than five years a new appraisal must be obtained.
    The Company does not require new appraisals between renewals unless the loan becomes impaired and is considered collateral dependent. At this time, an appraisal may be ordered in accordance with the Company’s Allowance for Loan Losses policy.
    The Company does not mitigate risk using products such as credit default agreements and/or credit derivatives.  These, accordingly, have no impact on our financial statements.
    The Company does not offer loan products with established loan-funded interest reserves.
 
    Loan Maturities by Type. The following table summarizes the scheduled repayments of our loan portfolio including non-accruals at December 31, 2010. Loans having no stated repayment schedule or maturity and overdraft loans are reported as being due in one year or less. Maturities are based on the final contractual payment date and do not reflect the effect of prepayments and scheduled principal amortization.

     December 31, 2010  
   
One Year
   
One Through
   
After
       
   
or Less
   
Five Years
   
Five Years
   
Total
 
   
(in thousands)
 
Real estate:
                       
   Construction and land development
 
$
50,377    
$
11,979    
$
3,214    
$
65,570  
   Farmland
   
6,647
      3,863       2,827       13,337  
   1-4 Family
    19,745      
24,098
      29,315       73,158  
   Multifamily
    7,815       5,426       1,303       14,544  
   Non-farm non-residential
    114,034       172,283       6,492       292,809  
      Total real estate
    198,618       217,649       43,151       459,418  
                                 
Agricultural
    7,080       3,414       6,867       17,361  
Commercial and industrial
    46,185       23,869       6,536       76,590  
Consumer and other
    7,767       15,054       149       22,970  
Total loans before unearned income
 
$
259,650    
$
259,986    
$
56,703    
$
576,339  
Less: unearned income
                            (699
)
Total loans net of unearned income
                   
$
575,640  
                                 

- 31 -
 

 

The following table sets forth the scheduled contractual maturities at December 31, 2010 of fixed- and floating-rate loans excluding non-accrual loans.

   
December 31, 2010
 
   
Fixed
   
Floating
   
Total
 
   
(in thousands)
 
                   
One year or less
 
$
67,944
   
$
167,399
   
$
235,343
 
One to five years
   
127,401
     
132,345
     
259,746
 
Five to 15 years
   
2,456
     
30,953
     
33,409
 
Over 15 years
   
9,735
     
9,388
     
19,123
 
  Subtotal
   
207,536
     
340,085
     
547,621
 
Nonaccrual loans
                   
28,718
 
  Total loans
                 
$
576,339
 
  Unearned Income                     (699 )
  Total loans net of unearned income
 
 
     
 
     
$
575,640
 
 
 
    At December 31, 2010, fixed rate loans totaled $207.5 million or 37.9% of total loans excluding non-accrual loans and variable rate loans totaled $340.1 or 62.1% of total loans excluding non-accrual loans.  Throughout 2010, Management added floors to floating rate loans, primarily tied to the prime rate.  As of December 31, 2010, the portfolio consisted of $340.1 million in variable rate loans with $292.0 million or 85.8% at the floor rate. 
 
- 32 -
 
 
 

 

    Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

   
At December 31,
   
2010
      2009    
2008
   
2007
   
2006
 
   
(in thousands)
Non-accrual loans:
                               
 Real estate loans:
                               
  Construction and land development
 
$
3,383
    2,841     
$
1,644
   
$
1,841
   
$
2,676
 
  Farmland
   
-
      54       
182
     
419
     
33
 
  1 - 4 family residential
   
1,480
      2,814       
1,445
     
1,819
     
3,202
 
  Multifamily
   
1,357
           
-
     
2
     
-
 
  Non-farm non-residential
   
21,944
      7,439       
5,263
     
4,950
     
3,882
 
 Non-real estate loans:
                                       
  Agricultural
   
446
           
-
     
-
     
-
 
  Commercial and industrial
   
76
      830       
275
     
978
     
267
 
  Consumer and other
   
32
      205       
320
     
279
     
302
 
   Total non-accrual loans
   
28,718
      14,183       
9,129
     
10,288
     
10,362
 
                                         
Loans 90 days and greater delinquent
                                 
and still accruing:
                                       
 Real estate loans:
                                       
  Construction and land development
   
-
           
-
     
-
     
-
 
  Farmland
   
-
           
-
     
-
     
-
 
  1 - 4 family residential
   
1,663
      757       
185
     
544
     
334
 
  Multifamily
   
-
           
-
     
-
     
-
 
  Non-farm non-residential
   
-
           
-
     
-
     
-
 
 Non-real estate loans:
                                       
  Agricultural
   
-
           
-
     
-
     
-
 
  Commercial and industrial
   
-
           
17
     
-
     
-
 
  Consumer and other
   
10
      28       
3
     
3
     
-
 
   Total loans 90 days greater
                                       
    delinquent and still accruing
   
1,673
      785       
205
     
547
     
334
 
                                         
Total non-performing loans
   
30,391
      14,968       
9,334
     
10,835
     
10,696
 
                                         
Real estate owned:
                                       
 Construction and land development
   
231
           
89
     
84
     
2,217
 
 Farmland
   
-
           
-
     
-
     
-
 
 1 - 4 family residential
   
232
      292       
223
     
170
     
78
 
 Multifamily
   
-
           
-
     
-
     
-
 
 Non-farm non-residential
   
114
      366       
256
     
119
     
245
 
Non-real estate loans:
                                       
 Agricultural
   
-
           
-
     
-
     
-
 
 Commercial and industrial
   
-
           
-
     
-
     
-
 
 Consumer and other
   
-
           
-
     
-
     
-
 
  Total real estate owned
   
577
      658       
568
     
373
     
2,540
 
                                         
Total non-performing assets
 
$
30,968
    15,626     
$
9,902
   
$
11,208
   
$
13,236
 
                                         
Restructured Loans     9,535                               51  
                                         
Ratios:
                                       
 Non-performing assets to total loans
   
5.38
%
    2.65     
1.63
%
   
1.95
%
   
2.61
%
 Non-performing assets to total assets
   
2.73
%
    1.68     
1.14
%
   
1.39
%
   
1.85
%

 
- 33 -
 
 

 
    For the years ended December 31, 2010 and 2009, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $1.7 million and $0.4 million, respectively. Interest income recognized on such loans for 2010 was $3.7 million.
    Nonperforming assets totaled $31.0 million or 2.73% of total assets at December 31, 2010, an increase of $15.3 million from December 31, 2009.  Management has not identified additional information on any loans not already included in impaired loans or the nonperforming asset total that indicates possible credit problems that could cause doubt as to the ability of borrowers to comply with the loan repayment terms in the future.
    Nonaccrual loans increased $14.5 million from December 31, 2009 to December 31, 2010. There were increases in construction and land development nonaccrual loans, nonfarm nonresidential nonaccrual loans and multi-family non-accrual loans.
    During 2010, there was a $0.5 million increase in construction and land development nonaccrual loans.  This increase in nonaccrual construction and land development was due mainly to three loans.  Two of these loans were made to the same borrower to purchase land for future development for a total outstanding balance of $0.6 million.  The third loan was a vacant land purchase for future development in the amount of $1.3 million. There was also a total of $1.4 million in nonaccrual loans were moved to OREO property and subsequently sold.
    Non-farm non-residential nonaccrual loans increased $14.5 million from December 31, 2009 to December 31, 2010.  This increase is reflective of five loans, two of which were for the construction of a climate controlled storage facility.  These two loans totaled $8.0 million to the same borrower.  A third loan, in the amount of $3.8 million, is to a hotel which has seen a drop in revenue due to the recession's impact on the hotel industry.  The remaining loans consist of a church loan in the amount of $2.6 million and $1.1 million loan to a non-owner occupied real estate loan.  The $1.1 million loan is secured by a warehouse and has been added to nonaccrual due to lack of occupancy of the building.
    Multi-family non-accrual loans increased $1.4 million during 2010.  This was due to one loan in the amount of $1.3 million secured by an apartment complex.  This project has experienced slow sales of units, due to the recession, and has implemented a change in management to help correct the problem.  The borrower has since decided to lease the remaining units. 
   At December 31, 2010, there were decreases of  $54,000 in farmland, $1.3 million in 1-4 family residential, $0.8 million in commercial and industrial and $0.2 million in consumer and other non-accrual loans. See preceding table for further information.
 
    Allowance for Loan Losses. The allowance for loan losses is maintained at a level considered sufficient to absorb potential losses embedded in the loan portfolio. The allowance is increased by the provision for anticipated loan losses as well as recoveries of previously charged off loans and is decreased by loan charge-offs. The provision is the necessary charge to current expense to provide for current loan losses and to maintain the allowance at an adequate level commensurate with Management’s evaluation of the risks inherent in the loan portfolio. Various factors are taken into consideration when determining the amount of the provision and the adequacy of the allowance. These factors include but are not limited to:
 
  • past due and nonperforming assets;
  • specific internal analysis of loans requiring special attention;
  • the current level of regulatory classified and criticized assets and the associated risk factors with each;
  • changes in underwriting standards or lending procedures and policies;
  • charge-off and recovery practices;
  • national and local economic and business conditions;
  • nature and volume of loans;
  • overall portfolio quality;
  • adequacy of loan collateral;
  • quality of loan review system and degree of oversight by its Board of Directors;
  • competition and legal and regulatory requirements on borrowers;
  • examinations of the loan portfolio by federal and state regulatory agencies and examinations;
  • and review by our internal loan review department and independent accountants.
 
 
 
 
 
 
 
- 34 -
 
 
 
 

 
 
    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.
 
    Allocation of Allowance for Loan Losses. In prior years, the Company used an internal method to calculate the allowance for loan losses which categorized loans by risk rather than by type. We do not have the ability to accurately and efficiently provide the allocation of the allowance for loan losses by loan type for a five-year historical period.
    Beginning in 2008, the Company modified the allowance calculation to segregate loans by category and allocate the allowance for loan losses accordingly.
    The allowance for loan losses calculation considers both qualitative and quantitative risk factors. The quantitative risk factors include, but are not limited to, past due and nonperforming assets, adequacy of collateral, changes in underwriting standings or lending procedures and policies, specific internal analysis of loans requiring special attention and the nature and volume of loans. Qualitative risk factors include, but are not limited to, local and regional business conditions and other economic factors.

 
The following table shows the allocation of the allowance for loan losses by loan type as of December 31, 2010, 2009, and 2008.
   
At December 31,
 
   
2010
   
2009
      2008  
         Percent of    
Percent of
         Percent of    
Percent of
         Percent of        Percent of  
   
Allowance
  Allowance to    
loans in each
   
Allowance
   Allowance to