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First Guaranty Bancshares, Inc. - Quarter Report: 2009 March (Form 10-Q)

form10-q.htm



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



Form 10-Q



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended March 31, 2009
Commission File Number 000-52748




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



Louisiana
26-0513559
(State or other jurisdiction
(I.R.S. Employer
incorporation or organization)
Identification Number)
   
400 East Thomas Street
 
Hammond, Louisiana
70401
(Address of principal executive office)
(Zip Code)

(985) 345-7685
(Telephone number, including area code)





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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]   No [X]

As of March 31, 2009, the registrant had 5,559,644 shares of $1 par value common stock which were issued and outstanding.


 
- 1 -

 

PART I.                       FINANCIAL INFORMATION
Item 1.                      Consolidated Financial Statements


FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS
 
(dollars in thousands, except share data)
 
             
   
March 31,
   
December 31,
 
   
2009
   
2008
 
Assets
 
(unaudited)
       
Cash and cash equivalents:
           
  Cash and due from banks
  $ 18,040     $ 77,159  
  Interest-earning demand deposits with banks
    45,230       20  
  Federal funds sold
    50,533       838  
    Cash and cash equivalents
    113,803       78,017  
                 
Interest-earning time deposits with banks
    18,766       21,481  
                 
Investment securities:
               
 Available for sale, at fair value
    235,816       114,406  
 Held to maturity, at cost (estimated fair value of
               
   $20,272 and $24,936, respectively)
    20,159       24,756  
  Investment securities
    255,975       139,162  
                 
Federal Home Loan Bank stock, at cost
    946       944  
Loans held for sale
    56       -  
                 
Loans, net of unearned income
    591,473       606,369  
Less: allowance for loan losses
    6,444       6,482  
  Net loans
    585,029       599,887  
                 
Premises and equipment, net
    16,077       16,141  
Goodwill
    1,980       1,980  
Intangible assets, net
    2,007       2,078  
Other real estate, net
    720       568  
Accrued interest receivable
    5,390       4,611  
Other assets
    8,089       6,563  
  Total Assets
  $ 1,008,838     $ 871,432  
                 
Liabilities and Stockholders' Equity
               
Deposits:
               
  Noninterest-bearing demand
  $ 118,008     $ 118,255  
  Interest-bearing demand
    247,042       180,230  
  Savings
    42,873       41,357  
  Time
    503,899       440,530  
    Total deposits
    911,822       780,372  
                 
Short-term borrowings
    18,482       9,767  
Accrued interest payable
    4,226       3,033  
Long-term borrowings
    5,871       8,355  
Other liabilities
    3,732       3,275  
  Total Liabilities
    944,133       804,802  
                 
Stockholders' Equity
               
Common stock:
               
  $1 par value - authorized 100,600,000 shares; issued and
               
    outstanding 5,559,644 shares
    5,560       5,560  
Surplus
    26,459       26,459  
Retained earnings
    37,989       37,769  
Accumulated other comprehensive loss
    (5,303 )     (3,158 )
  Total Stockholders' Equity
    64,705       66,630  
    Total Liabilities and Stockholders' Equity
  $ 1,008,838     $ 871,432  
                 
See Notes to Consolidated Financial Statements.
               

 
- 2 -

 


FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
 
(dollars in thousands, except per share data)
 
             
   
Three Months
 
   
Ended March 31,
 
   
2009
   
2008
 
Interest Income:
           
  Loans (including fees)
  $ 8,657     $ 10,858  
  Loans held for sale
    1       21  
  Deposits with other banks
    225       9  
  Securities (including FHLB stock)
    2,074       1,519  
  Federal funds sold
    17       316  
    Total Interest Income
    10,974       12,723  
                 
Interest Expense:
               
  Demand deposits
    434       968  
  Savings deposits
    41       56  
  Time deposits
    3,592       3,582  
  Borrowings
    62       109  
    Total Interest Expense
    4,129       4,715  
                 
Net Interest Income
    6,845       8,008  
Provision for loan losses
    648       202  
Net Interest Income after Provision for Loan Losses
    6,197       7,806  
                 
Noninterest Income:
               
  Service charges, commissions and fees
    980       1,013  
  Net gains on sale of securities
    -       3  
  Net gains on sale of loans
    79       83  
  Other
    278       343  
    Total Noninterest Income
    1,337       1,442  
                 
Noninterest Expense:
               
  Salaries and employee benefits
    2,826       2,601  
  Occupancy and equipment expense
    683       699  
  Net cost from other real estate & repossessions
    110       42  
  Other
    2,215       2,330  
    Total Noninterest Expense
    5,834       5,672  
                 
Income Before Income Taxes
    1,700       3,576  
Provision for income taxes
    590       1,250  
Net Income
  $ 1,110     $ 2,326  
                 
                 
Per Common Share:
               
  Earnings
  $ 0.20     $ 0.42  
  Cash dividends paid
  $ 0.16     $ 0.16  
                 
Average Common Shares Outstanding
    5,559,644       5,559,644  
                 
                 
See Notes to Consolidated Financial Statements
               

 
- 3 -

 



FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
(dollars in thousands, except per share data)
 
                               
                     
Accumulated
       
   
Common
               
Other
       
   
Stock
         
Retained
   
Comprehensive
       
   
$1 Par
   
Surplus
   
Earnings
   
Loss
   
Total
 
                               
Balance December 31, 2007
  $ 5,560     $ 26,459     $ 35,578     $ (335 )   $ 67,262  
Net income
    -       -       2,326       -       2,326  
Change in unrealized loss
                                       
  on available for sale securities,
                                       
  net of reclassification adjustments and taxes
    -       -       -       (169 )     (169 )
Comprehensive income
                                    2,157  
Cash dividends on common stock ($0.16 per share)
    -       -       (889 )     -       (889 )
Balance March 31, 2008 (unaudited)
  $ 5,560     $ 26,459     $ 37,015     $ (504 )   $ 68,530  
                                         
Balance December 31, 2008
  $ 5,560     $ 26,459     $ 37,769     $ (3,158 )   $ 66,630  
Net income
    -       -       1,110       -       1,110  
Change in unrealized loss
                                       
  on available for sale securities,
                                       
  net of reclassification adjustments and taxes
    -       -       -       (2,145 )     (2,145 )
Comprehensive income
                                    (1,035 )
Cash dividends on common stock ($0.16 per share)
    -       -       (890 )     -       (890 )
Balance March 31, 2009 (unaudited)
  $ 5,560     $ 26,459     $ 37,989     $ (5,303 )   $ 64,705  
                                         
                                         
See Notes to Consolidated Financial Statements
                                       

 
- 4 -

 


FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
(in thousands)
 
             
   
Three Months Ended March 31,
 
   
2009
   
2008
 
Cash Flows From Operating Activities
           
Net income
  $ 1,110     $ 2,326  
Adjustments to reconcile net income to net cash
               
  provided by operating activities:
               
    Provision for loan losses
    648       202  
    Depreciation and amortization
    351       365  
    Amortization of discount on investments
    (233 )     (298 )
    Gain on call of securities
    -       (3 )
    Gain on sale of assets
    (78 )     (83 )
    ORE writedowns and loss on disposition
    82       15  
    FHLB stock dividends
    (2 )     (17 )
    Net (increase) decrease in loans held for sale
    (56 )     3,122  
    Change in other assets and liabilities, net
    (386 )     2,677  
Net Cash Provided By Operating Activities
    1,436       8,306  
                 
Cash Flows From Investing Activities
               
Proceeds from maturities and calls of HTM securities
    4,597       1,954  
Proceeds from maturities, calls and sales of AFS securities
    438,825       244,909  
Funds invested in AFS securities
    (563,251 )     (229,861 )
Proceeds from sale of Federal Home Loan Bank stock
    -       505  
Proceeds from maturities of time deposits with banks
    2,715       2,089  
Net decrease (increase) in loans
    13,919       (16,577 )
Purchase of premises and equipment
    (192 )     (97 )
Proceeds from sales of other real estate owned
    56       84  
Net Cash (Used In) Provided By Investing Activities
    (103,331 )     3,006  
                 
Cash Flows From Financing Activities
               
Net increase (decrease) in deposits
    131,450       (18,428 )
Net increase (decrease) in federal funds purchased and short-term borrowings
    8,715       (968 )
Repayment of long-term borrowings
    (2,484 )     -  
Dividends paid
    -       (889 )
Net Cash Provided By (Used In) Financing Activities
    137,681       (20,285 )
                 
Net Increase (Decrease) In Cash and Cash Equivalents
    35,786       (8,973 )
Cash and Cash Equivalents at the Beginning of the Period
    78,017       58,677  
Cash and Cash Equivalents at the End of the Period
  $ 113,803     $ 49,704  
                 
Noncash Activities:
               
  Loans transferred to foreclosed assets
  $ 290     $ -  
                 
Cash Paid During The Period:
               
  Interest on deposits and borrowed funds
  $ 2,936     $ 4,154  
  Income taxes
  $ 1,700     $ -  
                 
                 
See Notes to Consolidated Financial Statements
               

 
- 5 -

 


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements and the footnotes of First Guaranty Bancshares, Inc. (the “Company”) thereto should be read in conjunction with the audited financial statements and note disclosures for the Company previously filed with the Securities and Exchange Commission in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2008.
The consolidated financial statements include the accounts of First Guaranty Bancshares, Inc. and its wholly owned subsidiary, First Guaranty Bank.  All significant intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the consolidated financial statements. Those adjustments are of a normal recurring nature. The results of operations for the three-month periods ended March 31, 2009 and 2008 are not necessarily indicative of the results expected for the full year.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are susceptible to significant change in the near term are the allowance for loan losses, valuation of goodwill, intangible assets and other purchase accounting adjustments.

Note 2. Fair Value
Effective January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” for financial assets and liabilities. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Valuation techniques use certain inputs to arrive at fair value. Inputs to valuation techniques are the assumptions that market participants would use in pricing the asset or liability. They may be observable or unobservable. SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs – Unadjusted quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds or credit risks) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value follows, as well as the classification of such instruments within the valuation hierarchy.
Securities Available for Sale.  Securities classified as available for sale are reported at fair value utilizing Level 1, Level 2 and Level 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, market yield curves, prepayment speeds, credit information and the instrument’s contractual terms and conditions, among other things.
Impaired Loans.  Certain financial assets such as impaired loans are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The fair value of impaired loans was $6.7 million at March 31, 2009. The fair value of impaired loans is measured by either the obtainable market price (Level 1), the fair value of the collateral as determined by appraisals or independent valuation (Level 2), or the present value of expected future cash flows discounted at the effective interest rate of the loan (Level 3).
Certain non-financial assets and non-financial liabilities are measured at fair value on a non-recurring basis including assets and liabilities related to reporting units measured at fair value in the testing of goodwill impairment, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

- 6 -


   
Fair Value Measurements at
   
March 31, 2009, Using
   
Quoted
   
   
Prices In
   
   
Active
   
   
Markets
Significant
 
 
Assets/Liabilities
For
Other
Significant
 
Measured at Fair
Identical
Observable
Unobservable
 
Value
Assets
Inputs
Inputs
(Dollars in thousands)
March 31, 2009
(Level 1)
(Level 2)
(Level 3)
         
Securities available for sale
 $ 235,816 
 $ 132,568 
 $ 103,248 
 $      -  
         

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

         
Other
 
   
Noninterest
   
Comprehensive
 
   
Income
   
Income
 
   
(in thousands)
 
             
Total gains included in earnings
    -       -  
  (or changes in net assests)
               
                 
Increase in unrealized losses relating to assets
    -       2,145  
  still held at March 31, 2009
               

The Company did not record any assets or liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis during the three months ended March 31, 2009.

Note 3. Loans and Allowance for Loan Losses
Loans, net of unearned income, totaled $591.5 million at March 31, 2009 and $606.4 million at December 31, 2008. The Company also held $56,000 in loans held for sale at March 31, 2009. No loans were held for sale at December 31, 2008.  The loan portfolio is the largest component of assets with total loans, net of allowance for loan losses, accounting for 58.6% and 69.6% of total assets as of March 31, 2009 and December 31, 2008, respectively.  The loan portfolio consists solely of domestic loans.
           Total loans at March 31, 2009 (unaudited) and December 31, 2008 were as follows:

- 7 -

    

   
March 31,
   
December 31,
 
   
2009
   
2008
 
         
As % of
         
As % of
 
   
Balance
   
Category
   
Balance
   
Category
 
   
(dollars in thousands)
 
Real estate
                       
   Construction & land development
  $ 85,450       14.4 %   $ 92,029       15.2 %
   Farmland
    15,396       2.6 %     16,403       2.7 %
   1-4 Family
    72,778       12.3 %     79,285       13.1 %
   Multifamily
    10,691       1.8 %     15,707       2.6 %
   Non-farm non-residential
    288,381       48.7 %     261,744       43.0 %
      Total real estate
    472,696       79.8 %     465,168       76.6 %
                                 
Agricultural
    16,988       2.9 %     18,536       3.0 %
Commercial and industrial
    86,024       14.5 %     105,555       17.4 %
Consumer and other
    16,573       2.8 %     17,926       3.0 %
        Total loans before unearned income
    592,281       100.0 %     607,185       100.0 %
Less: unearned income
    (808 )             (816 )        
        Total loans after unearned income
  $ 591,473             $ 606,369          
                                 

    The following table sets forth the maturity distribution of the loan portfolio and the allocation of fixed and floating rate loans:
 
   
March 31, 2009
 
   
Fixed
   
Floating
   
Total
 
   
(in thousands)
 
                   
One year or less
  $ 159,769     $ 193,573     $ 353,342  
One to five years
    160,134       29,729       189,863  
Five to 15 years
    23,034       208       23,242  
Over 15 years
    17,924       -       17,924  
  Subtotal
    360,861       223,510       584,371  
Nonaccrual loans
                    7,102  
  Total loans after unearned income
  $ 360,861     $ 223,510     $ 591,473  
                         

           The allowance for loan losses is reviewed by Management on a monthly basis and additions thereto are recorded in order to maintain the allowance at an adequate level.  In assessing the adequacy of the allowance, Management considers a variety of internal and external factors that might impact the performance of individual loans.  These factors include, but are not limited to, economic conditions and their impact upon borrowers’ ability to repay loans, respective industry trends, borrower estimates and independent appraisals.  Periodic changes in these factors impact Management’s assessment of each loan and its overall impact on the adequacy of the allowance for loan losses.
The allowance for loan losses totaled $6.4 million or 1.09% of total loans at March 31, 2009 and $6.5 million or 1.07% of total loans at December 31, 2008.  Changes in the allowance for loan losses for the three months ended March 31, 2009 (unaudited) and the year ended December 31, 2008 are as follows:

   
March 31,
   
December 31,
 
   
2009
   
2008
 
   
(in thousands)
 
             
Balance beginning of period
  $ 6,482     $ 6,193  
Provision charged to expense
    648       1,634  
Loans charged-off
    (738 )     (1,613 )
Recoveries
    52       268  
  Allowance for loan losses
  $ 6,444     $ 6,482  
                 

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

 
- 8 -

 

   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2009
   
2008
 
   
(in thousands)
 
             
Balance at beginning of period
  $ 6,482     $ 6,193  
                 
Charge-offs:
               
Real estate loans:
               
One- to four- family residential
    (153 )     -  
Non-farm non-residential
    (356 )     -  
Commercial and industrial loans
    (50 )     (180 )
Consumer and other
    (179 )     (104 )
Total charge-offs
    (738 )     (284 )
                 
Recoveries:
               
Real estate loans:
               
Construction and land development
    1       1  
Farmland
    1       -  
One- to four- family residential
    10       4  
Commercial and industrial loans
    3       4  
Consumer and other
    37       54  
Total recoveries
    52       63  
                 
Net charge-offs
    (686 )     (221 )
Provision for loan losses
    648       202  
                 
Balance at end of period
  $ 6,444     $ 6,174  
                 
Ratios:
               
Net loan charge-offs to average loans
    0.11 %     0.04 %
Net loan charge-offs to loans at end of period
    0.12 %     0.04 %
Allowance for loan losses to loans at end of period
    1.09 %     1.04 %
Net loan charge-offs to allowance for loan losses
    10.65 %     3.58 %
Net loan charge-offs to provision charged to expense
    105.82 %     109.19 %

During the first quarter of 2009, charged off one-to-four family residential real estate loans totaled $0.2 million and comprised of several small loans.
During the same period, charged off non-farm non-residential loans totaled $0.4 million and was the result of one loan secured by commercial real estate.  The performance of this loan was primarily supported by the cash flows of the business. The borrower of the commercial loan is a lumber milling and distributing company that had been in business for many years. The loan performed in accordance with its terms until the death of its owner. The distress of the lumber loan resulted from a decrease in lumber prices during 2007 which adversely and significantly affected the borrower’s business.  In January 2008, the Company was able to liquidate receivables and repay a portion of the lumber loan reducing the principle balance from approximately $1.0 million to $0.8 million. The property has been liquidated and the balance of the loan has been fully charged off.
 In some instances, loans are placed on nonaccrual status. All accrued but uncollected interest related to a loan is deducted from income in the period the loan is assigned a nonaccrual status. During the period a loan is in nonaccrual status, any cash receipts are first applied to the principal balance. Once the principal balance has been fully recovered, any residual amounts are applied to expenses resulting from the collection of the payment and to the recovery of any reversed interest income and interest income that would have been due had the loan not been placed on nonaccrual status.  As of March 31, 2009 and December 31, 2008 the Company had loans totaling $7.1 million and $9.1 million, respectively, on which the accrual of interest had been discontinued.
 
Note 4. Goodwill and Other Intangible Assets
    The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests in accordance with the provision of SFAS No. 142. Other intangible assets continue to be amortized over their useful lives. Goodwill was $2.0 million at March 31, 2009 and December 31, 2008.
 
- 9 -

Mortgage servicing rights totaled $41,000 and core deposit intangibles totaled $8.0 million at March 31, 2009. The mortgage servicing rights and core deposit intangibles are both subject to amortization. The core deposits reflect the value of deposit relationships, including the beneficial rates, which arose from the purchase of other financial institutions and the purchase of various banking center locations from one single financial institution. The following table summarizes the Company’s purchased accounting intangible assets subject to amortization.
 

   
As of March 31, 2009
   
As of December 31, 2008
 
   
Gross Carrying
   
Accumulated
   
Net Carrying
   
Gross Carrying
   
Accumulated
   
Net Carrying
 
   
Amount
   
Amortization
   
Amount
   
Amount
   
Amortization
   
Amount
 
   
(in thousands, unaudited)
 
                                     
Core deposit intangibles
  $ 7,997     $ 6,025     $ 1,972     $ 7,997     $ 5,948     $ 2,049  
Mortgage servicing rights
    41       6       35       32       3       29  
  Total
  $ 8,038     $ 6,031     $ 2,007     $ 8,029     $ 5,951     $ 2,078  
                                                 

Note 5. Borrowings
During the first quarter of 2009, total assets increased to the extent that it resulted in a reduction of regulatory capital ratios. As a result, in March 2009 the Company borrowed $6.0 million on its available line of credit and injected the $6.0 million into the First Guaranty Bank to enhance capital. The interest rate on the line of credit is a floating rate and is set at prime less 100 basis points with a floor of four percent (4.00%). The Company intends to repay the debt in full by December 31, 2009. Long term borrowings decreased in 2009 to $5.9 million from $8.4 million at December 31, 2008.
The Company is in default of one covenant imposed on its line of credit. The covenant requires the Company to maintain a return on average assets (“ROAA”) of 0.60%. As of March 31, 2009, the Company’s ROAA was 0.47%. The Company will request a waiver of this covenant but has currently not received approval.

Note 6. Income Taxes
The Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN48) clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attribute for the consolidated financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company does not believe it has any unrecognized tax benefits included in its consolidated financial statements. The Company has not had any settlements in the current period with taxing authorities, nor has it recognized tax benefits as a result of a lapse of the applicable statute of limitations.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in noninterest expense. During the quarters ended March 31, 2009 and 2008, the Company has not recognized any interest or penalties in its consolidated financial statements, nor has it recorded an accrued liability for interest or penalty payments.
At this time, no tax years are under examination. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations for years before 2005.

Note 7.  Recent Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (FSP) 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction; includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market is inactive; eliminates the presumption that all transactions are distressed unless proven otherwise requiring an entity to base its conclusion on the weight of evidence; and requires an entity to disclose a change in valuation technique resulting from application of the FSP and to quantify its effects, if practicable. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company has not chosen to adopt FSP 157-4 early.  The Company is assessing the provisions of FSP 157-4, but does not expect the impact to be material to the Company’s financial condition or results of operations.
In April 2009, the FASB issued FSP 115-2 and FSP 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP changes existing guidance for determining whether an impairment is other than temporary to debt securities; replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis; requires that an entity recognize noncredit losses on held-to-maturity debt securities in other comprehensive income and amortize the amount over the remaining life of the security in a prospective manner by offsetting the recorded value of the asset unless the security is subsequently sold or there are credit losses; requires an entity to present the total other-than-temporary impairment in the statement of earnings with an offset for the amount recognized in other comprehensive income; and at adoption, requires an entity to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income if the entity does not intend to sell the security and it is more likely than not that the entity will be required to sell the security before recovery. FSP 115-2 and FSP 124-2 are effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company has chosen not to adopt FSP115-2 and FSP 124-2 early. We anticipate the adoption of FSP 115-2 and FSP 124-2 will not have a significant impact to the Company’s financial condition or results of operations.
 
- 10 -

In April 2009, the FASB issued FSP 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. Under this FSP, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, an entity shall disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. FSP 107-1 and APB 28-1 are effective for interim periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company is assessing the provisions of FSP 107-1 and APB 28-1, but does not expect the impact to be material to the Company’s financial condition or results of operations.
In February 2009, the FASB issued FSP 141(R)-a, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies, amends provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination. The FSP is effective for all business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact on the Company’s financial condition or results of operations is dependent on the extent of future business combinations.

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

The following management discussion and analysis is intended to highlight the significant factors affecting the Company's financial condition and results of operations presented in the consolidated financial statements included in this Form 10-Q. This discussion is designed to provide readers with a more comprehensive view of the operating results and financial position than would be obtained from reading the consolidated financial statements alone. Reference should be made to those statements for an understanding of the following review and analysis. The financial data for the three months ended March 31, 2009 and 2008 have been derived from unaudited consolidated financial statements and include, in the opinion of management, all adjustments (consisting of normal recurring accruals and provisions) necessary to present fairly the Company's financial position and results of operations for such periods.
 
Special Note Regarding Forward-Looking Statements
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This act provides a safe harbor for such disclosure, which protects us from unwarranted litigation, if actual results are different from Management expectations. This discussion and analysis contains forward-looking statements and reflects Management’s current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of factors and uncertainties, which could cause our actual results and experience to differ from the anticipated results and expectations, expressed in such forward-looking statements.

First Quarter Overview
Financial highlights for the first quarter of 2009 compared with the first quarter of 2008 are as follows:
·  
For the first quarter of 2009, the Company had net income totaling $1.1 million. Net income totaled $2.3 million for the first quarter of 2008.
·  
Net interest income for the first quarter of 2009 and 2008 was $6.8 million and $8.0 million, respectively.  Net interest income decreased primarily as a result of the decline in market interest rates, as both our net interest margin and net interest spread were lower during the three months ended March 31, 2009 compared to the same period in 2008. The net interest margin was also impacted by the sudden significant increase in volume of interest-bearing liabilities and the ability to redeploy these monies in higher interest-earning assets in a timely fashion. The net interest margin was 3.1% for the first quarter 2009 and 4.3% for the first quarter 2008.
·  
The provision for loan losses for the first quarter of 2009 was $0.6 million compared to $0.2 million for the first quarter of 2008. The increase in the provision was primarily a result of increased charge-offs during the first quarter of 2009 when compared to the same period of 2008.
·  
Total assets as of March 31, 2009 were $1.0 billion, an increase of $137.5 million or 15.8% when compared to $871.4 million at December 31, 2008 with the largest increases in cash and cash equivalents and investment securities, partially offset with decreases in interest-earning time deposits with banks and net loans.
·  
Cash and cash equivalents totaled $113.8 million at March 31, 2009, an increase of $35.8 million when compared to $78.0 million at December 31, 2008. The increase in cash and cash equivalents was a result of additional cash from increases in deposits.
 
- 11 -

 
·  
Investment securities totaled $256.0 million at March 31, 2009, an increase of $116.8 million when compared to $139.2 million at December 31, 2008. The increase in securities was a result of deploying additional cash from increases in deposits. At March 31, 2009, available for sale securities, at fair value totaled $235.8 million, an increase of $121.4 million when compared to December 31, 2008. Held to maturity securities, at cost, totaled $20.2 million, a decrease of $4.6 million when compared to $24.8 million at December 31, 2008.
·  
The net loan portfolio at March 31, 2009 totaled $585.0 million, a decrease of $14.9 million or 2.5% from the December 31, 2008 level of $599.9 million. Net loans reflect a reduction for the allowance for loan losses which totaled $6.4 million for March 31, 2009 and $6.5 million for December 31, 2008.
·  
Total deposits increased $131.5 million or 16.8% in 2009 when compared to December 31, 2008. Individual and business deposits increased by $32.4 million and deposits from public fund deposits increased by $99.1 million.
·  
Stockholders’ equity totaled at $64.7 million at March 31, 2009, a decrease of $1.9 million when compared to December 31, 2008. The decrease in equity resulted from the change in accumulated other comprehensive income of $2.1 million and dividends paid on common stock totaling $0.9 million, partially offset by net income of $1.1 million.
·  
As of March 31, 2009, the year-to-date return on average assets (“ROAA”) and return on average equity (“ROAE”) were 0.47% and 6.75% respectively. The year-to-date ROAA and ROAE were 1.18% and 13.74% for the same period in 2008.
·  
The Company’s Board of Directors declared cash dividends of $0.16 per common share for the first quarter in 2008 and 2009.

Financial Condition

Changes in Financial Condition from December 31, 2008 to March 31, 2009

General. Total assets as of March 31, 2009 were $1.0 billion, an increase of $137.5 million or 15.8% when compared to $871.4 million at December 31, 2008. The increase in assets resulted from increases in cash and cash equivalents and investment securities, with decreases in interest-earning time deposits with banks and loans. Other assets also increased in 2009.  The increases in cash and cash equivalents and securities reflects management’s intent to forego higher yielding, longer term investments during the current low interest recessional economy.  Management believes the composition of assets will provide the Company with the flexibility to take advantage of market opportunity once the economic recovery begins.

Cash and Cash Equivalents. Cash and cash equivalents at March 31, 2009 totaled $113.8 million, an increase of $35.8 million when compared to $78.0 million at December 31, 2008. Cash and due from banks decreased $59.1 million, interest-earning demand deposits with banks increased $45.2 million and federal funds sold increased $49.7million.

Investment Securities. Securities classified as available for sale are measured at fair market value and securities classified as held to maturity are measured at book value. The Company obtains fair value measurements from an independent pricing service to value securities classified as available for sale. 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.
 Investment securities at March 31, 2009 totaled $256.0 million, an increase of $116.8 million when compared to $139.2 million at December 31, 2008.  The net change in securities was primarily a result of the Company investing cash received from increased deposits into investment securities.
The securities portfolio consisted principally of U.S. Government agency securities, mortgage-backed obligations, asset-backed securities, corporate debt securities and mutual funds or other equity securities. The securities portfolio provides us with a relatively stable source of income and provides a balance to interest rate and credit risks as compared to other categories of assets.
At March 31, 2009, $130.1 million or 50.7% of securities (including Federal Home Loan Bank of Dallas stock) and mutual funds and other equity securities were scheduled to mature in less than one year. This includes $123.5 million in discount notes that are being used solely for pledging purposes. When excluding these securities, only 2.6% of securities mature in less than one year. Securities with maturity dates over 15 years totaled 2.1% of the total portfolio. The average maturity of the securities portfolio was 2.6 years.
At March 31, 2009, securities totaling $235.8 million were classified as available for sale and $20.2 million were classified as held to maturity, compared to $114.4 million classified as available for sale and $24.8 million classified as held to maturity at December 31, 2008.  Management periodically assesses the quality of our investment holdings using procedures similar to those used in assessing the credit risks inherent in the loan portfolio. At March 31, 2009, management analyzed the investment portfolio for impairment on securities that had an amortized cost greater than their recoverable value and concluded that no charge was needed for the first quarter of 2008.
Average securities as a percentage of average interest-earning assets were 24.7% for the three-month period ended March 31, 2009 and 16.8% for the same period in 2008. All securities held at March 31, 2009 qualified as pledgeable securities, except $79.1 million of debt securities and $0.8 million of equity securities. Securities pledged at March 31, 2009 totaled $175.8 million.

Mortgage Loans Held for Sale. Loans held for sale totaled $56,000 at March 31, 2009.  We had no loans held for sale at December 31, 2008.

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Loans. The origination of loans is our primary use of our financial resources and represents the largest component of earning assets. Total loans accounted for 58.6% of total assets at March 31, 2009, compared to 69.6% of total assets at December 31, 2008. There are no significant concentrations of credit to any borrower or industry. As of March 31, 2009, 79.8% of our loan portfolio was secured primarily or secondarily by real estate. The largest portion of our loan portfolio is non-farm non-residential loans secured by real estate, which accounts for 48.7% of our total portfolio.
Our net loan portfolio at March 31, 2009 totaled $585.0 million, a decrease of approximately $14.9 million from the December 31, 2008 level of $599.9 million. Net loans include $42.6 million in assignments purchased on non-real estate commercial and industrial loans and real estate secured loans, net of paydowns. The loan assignments purchased meet the same underwriting criteria used when making in-house loans. Net loans include the reduction for the allowance for loan losses which totaled $6.4 million at March 31, 2009 and $6.5 million at December 31, 2008. Fixed rate loans increased from $309.6 million or 51.05% of the total loan portfolio at December 31, 2008 to $360.9 million, or 61.0% of the total loan portfolio at March 31, 2009. Loan charge-offs totaled $0.7 million during the first three months of 2009, compared to $0.3 million during the same period of 2008.  Recoveries totaled $0.1 million during the first three months of 2009 and 2008.

Nonperforming Assets. Nonperforming assets consist of loans on which interest is no longer accrued, certain restructured loans where the interest rate or other terms have been renegotiated and real estate acquired through foreclosure (other real estate).
The accrual of interest is discontinued on loans when management believes there is reasonable uncertainty about the full collection of principal and interest or when the loan is contractually past due ninety days or more and not fully secured. If the principal amount of the loan is adequately secured, then interest income on such loans is subsequently recognized only in periods in which actual payments are received.
The table below sets forth the amounts and categories of our non-performing assets at March 31, 2009 (unaudited) and December 31, 2008.  At the dates indicated we had no troubled debt refinancing.

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March 31,
   
December 31,
 
   
2009
   
2008
 
   
(in thousands)
 
Non-accrual loans:
           
Real estate loans:
           
Construction and land development
  $ 2,149     $ 1,644  
Farmland
    110       182  
One- to four- family residential
    1,516       1,445  
Non-farm non-residential
    2,270       5,263  
Non-real estate loans:
               
Commercial and industrial
    868       275  
Consumer and other
    189       320  
Total non-accrual loans
    7,102       9,129  
                 
Loans 90 days and greater delinquent
               
and still accruing:
               
Real estate loans:
               
Construction and land development
    259       -  
One- to four- family residential
    260       185  
Non-real estate loans:
               
Commercial and industrial
    -       17  
Consumer and other
    2       3  
Total loans 90 days greater
               
delinquent and still accruing
    521       205  
                 
Total non-performing loans
    7,623       9,334  
                 
Real estate owned:
               
Real estate loans:
               
Construction and land development
    259       89  
One- to four- family residential
    331       223  
Non-farm non-residential
    130       256  
Total real estate owned
    720       568  
                 
Total non-performing assets
  $ 8,343     $ 9,902  
                 
Ratios:
               
Non-performing assets to total loans
    1.41 %     1.63 %
Non-performing assets to total assets
    0.83 %     1.14 %

Nonperforming assets totaled $8.3 million or 0.8% of total assets at March 31, 2009, a decrease of $1.6 million from December 31, 2008.  Management has not identified additional information on any loans not already included in the nonperforming asset total that indicates possible credit problems that could cause doubt as to the ability of borrowers to comply with the loan repayment terms in the future.
Nonaccrual loans decreased $2.0 million from December 31, 2008 to March 31, 2009, largely due to a decrease in non-farm non-residential and partially offset with increases in nonaccrual construction and land development real estate loans and nonaccrual commercial and industrial loans.
 Non-farm non-residential nonaccrual loans decreased $3.0 million from December 31, 2008 to March 31, 2009. The decrease was primarily the result of the loan secured by real estate. The borrowers were able to put together a viable plan which was confirmed by a bankruptcy trustee. The borrower had been making adequate protection payments to the Company for several months prior to the plan being confirmed. The Company also received a lump sum payment totaling $50,000 to apply toward the indebtedness upon confirmation of the plan. Monthly amortization payments began immediately after confirmation and are being paid as agreed.
The increase in nonaccrual construction and land development loans is related to one loan for $522,000 secured by a subdivision development. The Company is currently in foreclosure and does not anticipate any loss.
 
- 14 -

Non-real estate commercial and industrial nonaccrual loans increased $0.6 million from December 31, 2008 to March 31, 2009. This increase was primarily the result of three loans. The first loan had a balance of $123,000 and is secured by account receivables. The borrower had a construction contract that he was not able to collect and is currently in litigation to resolve the issue. The Company is currently working to obtain real estate to secure this loan. The second loan had a balance of $197,000 and is secured by the guarantor’s ownership interest in a real estate development project. The Company is currently in negotiations with the guarantor to work out an arrangement.  The third loan had a balance of $158,000 and is secured by equipment. The Company is currently in the process of seizing and liquidating the equipment.

Allowance for Loan Losses. The Company maintains its allowance for loan losses at a level it considers sufficient to absorb potential losses embedded in the loan portfolio. The allowance is increased by the provision for anticipated loan losses as well as recoveries of previously charged-off loans and is decreased by loan charge-offs. The provision is the necessary charge to current expense to provide for current loan losses and to maintain the allowance at an adequate level commensurate with Management's evaluation of the risks inherent in the loan portfolio. Various factors are taken into consideration when the Company determines the amount of the provision and the adequacy of the allowance. These factors include but are not limited to:
§ Past due and nonperforming assets;
§ Specific internal analysis of loans requiring special attention;
§ The current level of regulatory classified and criticized assets and the associated risk factors with each;
§ Changes in underwriting standards or lending procedures and policies;
§ Charge-off and recovery practices;
§ National and local economic and business conditions;
§ Nature and volume of loans;
§ Overall portfolio quality;
§ Adequacy of loan collateral;
§ Quality of loan review system and degree of oversight by its Board of Directors;
§ Competition and legal and regulatory requirements on borrowers;
§ Examinations and review by the Company's internal loan review department, independent accountants and third-party independent loan review personnel; and
§ Examinations of the loan portfolio by federal and state regulatory agencies.

The data collected from all sources in determining the adequacy of the allowance is evaluated on a regular basis by Management with regard to current national and local economic trends, prior loss history, underlying collateral values, credit concentrations and industry risks. An estimate of potential loss on specific loans is developed in conjunction with an overall risk evaluation of the total loan portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect Management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
  Provisions are necessary to maintain the allowance at an adequate level based on loan risk factors and the levels of net loan charge-offs. The provisions made in the first three months of 2009 were taken to provide for current loan losses, including net charge-offs, and to maintain the allowance at an adequate level commensurate with Management’s evaluation of the risks inherent in the loan portfolio. Provisions made pursuant to these processes totaled $0.6 million in the first three months of 2009 as compared to $0.2 million for the same period in 2008. The increase in the provision was primarily a result of increased charge-offs. Total charge-offs were $0.7 million for first three months of 2009 as compared to total charge-offs of $0.3 million for the same period in 2008. Recoveries were $0.1 million for the first three months of 2009 and 2008.
The allowance at March 31, 2009 was $6.4 million or 1.09% of total loans and 77.2% of nonperforming assets. Management believes that the current level of the allowance is adequate to cover losses in the loan portfolio given the current economic conditions, expected net charge-offs and nonperforming asset levels.
Other information relating to loans, the allowance for loan losses and other pertinent statistics follows.

- 15 -

 

 
 
March 31,
 
   
2009
   
2008
 
   
(in thousands, unaudited)
 
Loans:
           
  Average outstanding balance
  $ 597,607     $ 581,108  
  Balance at end of period
  $ 591,473       591,612  
                 
Allowance for Loan Losses:
               
  Balance at beginning of year
  $ 6,482     $ 6,193  
  Provision charged to expense
    648       202  
  Provision from acquisition
    -       0  
  Loans charged-off
    (738 )     (284 )
  Recoveries
    52       63  
  Balance at end of period
  $ 6,444     $ 6,174  
                 

      Deposits.  Managing the mix and pricing the maturities of deposit liabilities is an important factor that affects our ability to maximize the net interest margin. The strategies used to manage interest-bearing deposit liabilities are designed to adjust as the interest rate environment changes.  In this regard, management regularly assesses our funding needs, deposit pricing and interest rate outlooks.  From December 31, 2008 to March 31, 2009, total deposits increased $131.5 million, or 16.8%, to $911.8 million at March 31, 2009 from $780.4 million at December 31, 2008. During 2009, consumer deposits increased $33.8 million, public fund deposits increased $99.2 million and business deposits decreased $1.5 million. Noninterest-bearing demand deposits decreased by $0.2 million and interest-bearing deposits increased by $131.7 million. As of March 31, 2009, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $305.0 million.
Average noninterest-bearing deposits decreased to $116.3 million for the three-month period ended March 31, 2009 from $118.7 million for the three-month period ended March 31, 2008. Average noninterest-bearing deposits represented 13.5% and 16.7% of average total deposits for the three-month periods ended March 31, 2009 and 2008, respectively.
As we seek to maintain a strong net interest margin and improve our earnings, attracting core non-interest bearing deposits will remain a primary emphasis. Core deposits are internally defined as total deposits less public fund deposits. Management will continue to evaluate and update our product mix in its efforts to attract additional core customers.  We currently offer a number of noninterest-bearing deposit products that are competitively priced and designed to attract and retain customers with primary emphasis on core deposits. We have also offered several different time deposit promotions in an effort to increase our core deposits and to increase liquidity.  At March 31, 2009, our core deposits totaled $586.9 million or 64.4% of total deposits.
The following table sets forth the composition of the Company’s deposits at March 31, 2009 (unaudited) and December 31, 2008.


   
March 31,
   
December 31,
   
Increase/(Decrease)
 
   
2009
   
2008
   
Amount
   
Percent
 
   
(dollars in thousands)
 
Deposits:
                       
  Noninterest-bearing demand
  $ 118,008     $ 118,255     $ (247 )     -0.2 %
  Interest-bearing demand
    247,042       180,230       66,812       37.1 %
  Savings
    42,873       41,357       1,516       3.7 %
  Time
    503,899       440,530       63,369       14.4 %
    Total deposits
  $ 911,822     $ 780,372     $ 131,450       16.8 %
                                 

Borrowings. The Company maintains borrowing relationships with other financial institutions as well as the Federal Home Loan Bank on a short- and long-term basis to meet liquidity needs. At March 31, 2009, short term borrowings totaled $18.5 million compared to $9.8 million at December 31, 2008.  Short-term borrowings included $12.5 million in repurchase agreements at March 31, 2009 and $9.8 million in repurchase agreements at December 31, 2008.
During the first quarter of 2009, total assets increased to the extent that it resulted in a reduction of regulatory capital ratios. As a result, in March 2009 the Company borrowed $6.0 million on its available line of credit and injected the $6.0 million into the First Guaranty Bank to enhance capital. The interest rate on the line of credit is a floating rate and is set at prime less 100 basis points with a floor of four percent (4.00%). The Company intends to repay the debt in full by December 31, 2009. Long term borrowings decreased in 2009 to $5.9 million from $8.4 million at December 31, 2008.
The Company is in default of one covenant imposed on its line of credit. The covenant requires the Company to maintain a return on average assets (“ROAA”) of 0.60%. As of March 31, 2009, the Company’s ROAA was 0.47%. The Company will request a waiver for this covenant.
 The average amount of total borrowings for the three months ended March 31, 2009 was $21.6 million, compared to $10.9 million for the three months ended March 31, 2008. At March 31, 2009, the Company had $165.0 million in Federal Home Loan Bank letters of credit outstanding obtained solely for collateralizing public deposits.
 
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Equity. Total equity decreased to $64.7 million as of March 31, 2009 from $66.6 million as of December 31, 2008. The change in equity resulted from net income of $1.1 million for the three months ended March 31, 2009 less $2.1 million for the increase in unrealized loss on available for sale securities and $0.9 million in quarterly dividend payments on common stock. Cash dividends paid were $0.16 per share for the three-month periods ending March 31, 2009 and 2008.

Results of Operations for the Three Months Ended March 31, 2009

    Net income. For the quarter ending March 31, 2009, First Guaranty Bancshares, Inc. had consolidated net income of $1.1 million, a $1.2 million decrease from the $2.3 million of net income reported for the first quarter of 2008.  The decrease in net income was primarily attributable to the decrease in net interest income, with a $1.7 million decrease in interest income and a $0.6 million decrease in interest expense.  Net interest income decreased primarily as a result of the decline in market interest rates, as both our net interest margin and net interest spread were lower during the three months ended March 31, 2009 compared to the same period in 2008. The net interest margin was also impacted by the sudden significant increase in volume of interest-bearing liabilities and the ability to redeploy these monies in higher interest-earning assets in a timely fashion. Noninterest income decreased $0.1 million during the first three month of 2009 compared to the same period in 2008. Noninterest expense increased $0.2 million due primarily to an increase in salaries and employee benefits during the first three month of 2009 compared to the same period in 2008.

        Net interest income. Net interest income is the largest component of our earnings. It is calculated by subtracting the cost of interest-bearing liabilities from the income earned on interest-earning assets and represents the earnings from our primary business of gathering deposits and making loans and investments.  Our long-term objective is to manage our net interest income to provide the largest possible amount of income while balancing interest rate, credit and liquidity risks.
    A financial institution’s asset and liability structure is substantially different from that of an industrial company, in that virtually all assets and liabilities are monetary in nature. Accordingly, changes in interest rates, which are generally impacted by inflation rates, may have a significant impact on a financial institution’s performance. The impact of interest rate changes depends on the sensitivity to change of our interest-earning assets and interest-bearing liabilities.
    Net interest income for the quarter ended March 31, 2009 was $6.8 million, a decrease of $1.2 million when compared to $8.0 million for the first quarter in 2008.  The decrease in net interest income reflected a decrease in net interest spread and net interest margin as the yield on our interest-earning assets decreased more than the cost of our interest-bearing liabilities.
    The net interest margin shown below in the average balance sheet is calculated by dividing net interest income by average interest-earning assets and is a measure of the efficiency of the earnings from balance sheet activities. It is affected by changes in the difference between interest on interest-earning assets and interest-bearing liabilities and the percentage of interest-earning assets funded by interest-bearing liabilities (leverage). Leverage for the three months ending March 31, 2009 was 84.3%, compared to 80.6% for the same period in 2008.
    The following table sets forth average balance sheets, average yields and costs, and certain other information for the three months ended March 31, 2009 and 2008, respectively. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields earned and rates paid set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

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Three Months Ended March 31,
 
   
2009
   
2008
 
   
Average
         
Yield/
   
Average
         
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
   
(dollars in thousands)
 
Assets
                                   
Interest-earning assets:
                                   
  Interest-earning deposits with banks
  $ 42,137     $ 225       2.2 %   $ 880     $ 9       4.0 %
  Securities (including FHLB stock)
    224,576       2,074       3.7 %     125,792       1,519       4.9 %
  Federal funds sold
    45,640       17       0.2 %     39,080       316       3.3 %
  Loans held for sale
    139       1       3.4 %     1,090       21       7.7 %
  Loans, net of unearned income
    597,607       8,657       5.9 %     581,108       10,858       7.5 %
    Total interest-earning assets
    910,099       10,974       4.9 %     747,950       12,723       6.8 %
                                                 
Noninterest-earning assets:
                                               
  Cash and due from banks
    19,788                       25,682                  
  Premises and equipment, net
    16,240                       16,150                  
  Other assets
    9,073                       4,973                  
    Total
  $ 955,200                     $ 794,755                  
                                                 
Liabilities and Stockholders' Equity
                                         
Interest-bearing liabilities:
                                               
  Demand deposits
  $ 229,394       434       0.8 %   $ 205,050       968       1.9 %
  Savings deposits
    41,323       41       0.4 %     45,929       56       0.5 %
  Time deposits
    474,532       3,592       3.1 %     340,797       3,582       4.2 %
  Borrowings
    21,594       62       1.2 %     10,907       109       4.0 %
    Total interest-bearing liabilities
    766,843       4,129       2.2 %     602,683       4,715       3.1 %
                                                 
Noninterest-bearing liabilities:
                                         
  Demand deposits
    116,258                       118,713                  
  Other
    5,458                       5,281                  
    Total liabilities
    888,559                       726,677                  
  Stockholders' equity
    66,641                       68,078                  
    Total
  $ 955,200                     $ 794,755                  
Net interest income
          $ 6,845                     $ 8,008          
Net interest rate spread (1)
                    2.7 %                     3.7 %
Net interest-earning assets (2)
  $ 143,256                     $ 145,267                  
Net interest margin (3)
                    3.1 %                     4.3 %
                                                 
Average interest-earning assets to
                                         
     interest-bearing liabilities
                    118.7 %                     124.1 %
                                                 

                                                                                                                                                                                                                                                                                              
(1) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.


 
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       Provision for Loan Losses.  Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as deemed appropriate in order to maintain an adequate allowance for loan losses. Increases to the allowance are made to the provision as loan losses and charged against income.
    Provisions are necessary to maintain the allowance at an adequate level based on loan risk factors and the levels of net loan charge-offs. The provisions made in the first three months of 2009 and 2008 were taken to provide for current loan losses, including net charge-offs, and to maintain the allowance at an adequate level commensurate with Management’s evaluation of the risks inherent in the loan portfolio. Provisions made pursuant to these processes totaled $0.6 million for the quarter ended March 31, 2009, an increase of $0.4 million when compared to the same quarter in 2008.  This increase in provision was primarily a result of increased charge-offs. Total charge-offs were $0.7 million for the first three months of 2009 as compared to $0.3 million for the same period in 2008. Recoveries were $0.1 million for the first three months of 2009 and 2008.

       Noninterest Income. Noninterest income includes deposit service charges, return check charges, bankcard fees, other commissions and fees, gains and/or losses on sales of securities and loans, and various other types of income.
Noninterest income for the first quarter 2009 was $1.3 million, down $0.1 million when compared to the same period in 2008. This decrease in noninterest income resulted primarily from decreases in service charges, commissions and fees and in other income.

       Noninterest Expense.  Noninterest expense includes salaries and employee benefits, occupancy and equipment expense, net cost from other real estate and repossessions and other types of expenses. Noninterest expense for the first quarter in 2009 totaled $5.8 million, an increase of $0.2 million from the same period in 2008. The largest increases in noninterest expense were reflected in salaries and employee benefits and in net cost from other real estate and repossessions. The $0.2 million increase in salaries and employee benefits resulted from an increase in the number of employees in 2009 when compared to the same period in 2008.  At March 31, 2009, our full time equivalent employees were 228.5, compared to 222 full time equivalent employees during the same period of 2008. Net cost of other real estate and repossessions increased $68,000 when comparing the three month periods ending 2009 and 2008. Other noninterest expense reflects a decrease of $115,000 when comparing the three month periods ended 2009 and 2008.
    The table below presents the components of other noninterest expense as of the three months ended March 31, 2009 and 2008.


   
Three Months Ended March 31,
 
   
2009
   
2008
 
   
(in thousands)
 
Other noninterest expense:
           
Legal and professional fees
  $ 291     $ 436  
Data processing
    439       496  
Marketing and public relations
    195       279  
Regulatory assessment
    228       87  
Insurance
    103       54  
Taxes - sales and capital
    163       172  
Operating supplies
    121       137  
Travel and lodging
    94       110  
Other
    581       559  
  Total other expense
  $ 2,215     $ 2,330  
                 

       Income Taxes. The provision for income taxes totaled $0.6 million and $1.3 million for the quarters ended March 31, 2009 and 2008, respectively. The decrease in the provision for income taxes reflected lower income during the first quarter 2009, primarily due to a reduction in net interest income. In each of the three months ended March 31, 2009 and 2008, the income tax provision approximated the normal statutory rate.  The effective rates were 34.7% and 35.0%, respectively.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability Management and Market Risk

       Asset/LiabilityManagement. Our asset/liability management (ALM) process consists of quantifying, analyzing and controlling interest rate risk (IRR) to maintain reasonably stable net interest income levels under various interest rate environments. The principal objective of ALM is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintain adequate levels of liquidity.

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    The majority of our assets and liabilities are monetary in nature. Consequently, one of our most significant forms of market risk is interest rate risk. Our assets, consisting primarily of loans secured by real estate, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee, which consists of executive Management and other bank personnel operating under a policy adopted by the Board of Directors, meets as needed to review our asset/liability policies and interest rate risk position.
    The interest spread and liability funding discussed below are directly related to changes in asset and liability mixes, volumes, maturities and re-pricing opportunities for interest-earning assets and interest-bearing liabilities. Interest-sensitive assets and liabilities are those which are subject to being re-priced in the near term, including both floating or adjustable rate instruments and instruments approaching maturity. The interest sensitivity gap is the difference between total interest-sensitive assets and total interest-sensitive liabilities. Interest rates on our various asset and liability categories do not respond uniformly to changing market conditions. Interest rate risk is the degree to which interest rate fluctuations in the marketplace can affect net interest income.
    To maximize our margin, we attempt to be somewhat more asset sensitive during periods of rising rates and more liability sensitive during periods of falling rates. The need for interest sensitivity gap management is most critical in times of rapid changes in overall interest rates. We generally seek to limit our exposure to interest rate fluctuations by maintaining a relatively balanced mix of rate sensitive assets and liabilities on a one-year time horizon. The mix is relatively difficult to manage. Because of the significant impact on net interest margin from mismatches in re-pricing opportunities, the asset-liability mix is monitored periodically depending upon Management’s assessment of current business conditions and the interest rate outlook. Exposure to interest rate fluctuations is maintained within prudent levels by the use of varying investment strategies.
    We monitor interest rate risk using an interest sensitivity analysis set forth on the following table. This analysis, which we prepare monthly, reflects the maturity and re-pricing characteristics of assets and liabilities over various time periods. The gap indicates whether more assets or liabilities are subject to re-pricing over a given time period. The interest sensitivity analysis at March 31, 2009 reflects an asset-sensitive position with a positive cumulative gap on a one-year basis.


   
Interest Sensitivity Within
 
   
3 Months
   
Over 3 Months
   
Total
   
Over
       
   
Or Less
   
thru 12 Months
   
One Year
   
One Year
   
Total
 
   
(dollars in thousands)
 
Earning Assets:
                             
  Loans (including loans held for sale)
  $ 306,152     $ 98,975     $ 405,127     $ 186,402     $ 591,529  
  Securities (including FHLB stock)
    125,690       4,458       130,148       126,773       256,921  
  Federal funds sold
    50,533       -       50,533       -       50,533  
  Other earning assets
    45,230       18,766       63,996       -       63,996  
    Total earning assets
    527,605       122,199       649,804       313,175     $ 962,979  
                                         
Source of Funds:
                                       
Interest-bearing accounts:
                                       
    Demand deposits
    185,987       -       185,987       61,055       247,042  
    Savings
    10,718       -       10,718       32,155       42,873  
    Time deposits
    176,139       185,478       361,617       142,282       503,899  
    Short-term borrowings
    12,482       6,000       18,482       -       18,482  
    Long-term borrowings
    -       5,871       5,871       -       5,871  
Noninterest-bearing, net
    -       -       -       144,812       144,812  
    Total source of funds
    385,326       197,349       582,675       380,304     $ 962,979  
Period gap
    142,279       (75,150 )     67,129       (67,129 )        
Cumulative gap
  $ 142,279     $ 67,129     $ 67,129     $ -          
                                         
Cumulative gap as a
                                       
 percent of earning assets
    14.77 %     6.97 %     6.97 %                
                                         

Liquidity and Capital Resources

       Liquidity. Liquidity refers to the ability or flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available to meet customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. Liquid assets include cash and due from banks, interest-earning demand deposits with banks, federal funds sold and available for sale investment securities. Including securities pledged to collateralize public fund deposits, these assets represent 34.7% and 22.1% of the total liquidity base at March 31, 2009 and December 31, 2008, respectively. In addition, the Company maintained borrowing availability with the Federal Home Loan Bank totaling $221.8 million and $226.5 million at March 31, 2009 and December 31, 2008, respectively.  As of March 31, 2009, the net availability at the Federal Home Loan Bank was $51.0 million, compared to $63.1 million at December 31, 2008 with the decrease resulting from a drop in blanket lien availability of $5.4 million, the increase of $10.0 million in letters of credit used solely to pledge to public fund deposits partially offset with the decrease in outstanding advances. We also maintain federal funds lines of credit at three other correspondent banks with borrowing capacity of $78.2 million at March 31, 2009 and December 31, 2008. As of March 31, 2009, the Company had $6.0 million outstanding on these lines of credit. At December 31, 2008, the Company did not have an outstanding balance on these lines of credit. Management believes there is sufficient liquidity to satisfy current operating needs.
 
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    During the first quarter of 2009, total assets increased to the extent that it resulted in a reduction of regulatory capital ratios. As a result, in March 2009 the Company borrowed $6.0 million on its available line of credit and injected the $6.0 million into the Bank to enhance capital. The interest rate on the line of credit is a floating rate and is set at prime less 100 basis points with a floor of four percent (4.00%). The Company intends to repay the debt in full by December 31, 2009.  As a result of this additional debt, the Company’s interest expense will likely increase in future periods.

       Capital Resources.  The Company’s capital position is reflected in stockholders’ equity, subject to certain adjustments for regulatory purposes. Further, our capital base allows us to take advantage of business opportunities while maintaining the level of resources we deem appropriate to address business risks inherent in daily operations.
    Stockholders’ equity ended at $64.7 million at March 31, 2009, a decrease of $1.9 million when compared to December 31, 2008. The change in equity resulted from 2009 net income of $1.1 million, which was offset by the change in accumulated other comprehensive income of $2.1 million and dividends paid on common stock totaling $0.9 million.
 
       Regulatory Capital. Risk-based capital regulations adopted by the FDIC require banks to achieve and maintain specified ratios of capital to risk-weighted assets.  Similar capital regulations apply to bank holding companies.  The risk-based capital rules are designed to measure “Tier 1” capital (consisting of common equity, retained earnings and a limited amount of qualifying perpetual preferred stock and trust preferred securities, net of goodwill and other intangible assets and accumulated other comprehensive income) and total capital in relation to the credit risk of both on and off balance sheet items. Under the guidelines, one of its risk weights is applied to the different on balance sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk weighting. All bank holding companies and banks must maintain a minimum total capital to total risk weighted assets ratio of 8.00%, at least half of which must be in the form of core or Tier 1 capital. These guidelines also specify that bank holding companies that are experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels.
    At March 31, 2009, we satisfied the minimum regulatory capital requirements and were “well capitalized” within the meaning of federal regulatory requirements.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
    As defined by the Securities and Exchange Commission in Exchange Act Rules 13a-14(c) and 15d-14(c), a company’s “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within time periods specified in the Commission’s rules and forms. The Company maintains such controls designed to ensure this material information is communicated to Management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decision regarding required disclosure.
    Management, with the participation of the CEO and CFO, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, the CEO and CFO have concluded that the disclosure controls and procedures as of the end of the period covered by this quarterly report are effective. There were no changes in the Company’s internal control over financial reporting during the last fiscal quarter in the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


 
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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings
    The Company is subject to various other legal proceedings in the normal course of business and otherwise. It is management's belief that the ultimate resolution of such other claims will not have a material adverse effect on the Company's financial position or results of operations.

Item 1A.  Risk Factors
    There have been no other material changes in the risk factors disclosed by the Company in its Annual Report filed on Form 10-K with the Securities and Exchange Commission.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
    Item 2 is non-applicable and is therefore not included.

Item 3.  Defaults Upon Senior Securities
    Item 3 is non-applicable and is therefore not included.

Item 4.  Submission of Matters to a Vote of Security Holders
    Item 4 is non-applicable and is therefore not included.

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

Item 6.  Exhibits
    1. Consolidated financial statements
    The information required by this item is included as Part I herein.
 
    2. Consolidated financial statements schedules
    The information required by this item is not applicable and therefore is not included.
 
    3. Exhibits
 
 
 Exhibit Number  Exhibit
  31.1
 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
  31.2
 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
  32.1
 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
  32.2
 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 


 


 
- 22 -

 






SIGNATURES




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



FIRST GUARANTY BANCSHARES, INC.
 
 


Date:                      May 15, 2009                                                   By: /s/ Michael R. Sharp
Michael R. Sharp
President and
Chief Executive Officer
 
 
Date:                      May 15, 2009                                                   By: /s/ Michele E. LoBianco
Michele E. LoBianco
Chief Financial Officer
Secretary and Treasurer

 
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