First Guaranty Bancshares, Inc. - Annual Report: 2010 (Form 10-K)

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

 

 

 

 

 

 

 

 

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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 o  Accelerated filer  o  Non-accelerated filer  o  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).

 

 

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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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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    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."

    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.

    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.

    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.

    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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    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.

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.

    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.

    The Company is a one-bank holding company with First Guaranty Bank as its subsidiary.

 

    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.”

    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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    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.

    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.

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    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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         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 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.

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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    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.

    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.

    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).

    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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    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.

    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.

 

    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.

    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.

    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.

 

 

 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.

 

 

 

- 13 -

 

 

    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.

 

 

 

- 14 -

 

 

(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.

          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.

 

          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:

 

 

- 16 -

 

If the allowance for loan losses is not sufficient to cover actual loan losses, earnings could decrease.

 

- 17 -

 

 

  

 

 

 

 

 

 

 

 

 

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

 - 22 -

 

 

    

		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

 

- 23 -

 

 

 

- 24 -

 

 

		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.

 

 

 

		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 - 

 

 

 

    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.

 

 

		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